| Arthur Levitt, Chairman emeritus of the SEC, said at | | | | institutional investors and large orders. Considering |
| an SIA conference in Boca Raton in November 1999: | | | | that large orders are often worked over multiple |
| Best execution encompasses a number of factors | | | | days, and the value of the definition dwindles. |
| starting with the price of the execution and the | | | | Additionally, consider market volatility in context with |
| opportunity for price improvement. Other factors | | | | daily VWAP (volume weighted average price, a price |
| include speed and likelihood of execution. For | | | | point few institutional traders want to exceed in |
| institutional investors, anonymity and liquidity might be | | | | trading); today's worst price can be much better than |
| overriding concerns. In any case, the quality of | | | | tomorrow's best price. Therefore, the definition |
| execution must always be viewed from the | | | | mentioned earlier lacks validity in today's environment. |
| customer's perspective, not the firm's. | | | | Due to the sheer number of variables present in any |
| This paper discusses the concept of best execution | | | | market it is difficult, if not impossible, to show that |
| in that light, the regulatory environment in which it is | | | | the best possible execution is actually achieved. Many |
| defined, and examines a number of approaches for | | | | firms quote best execution as a marketing tool to sell |
| the investor to obtain the best execution possible. | | | | their products and services; however no firm will |
| Best Execution | | | | guarantee that best execution is ever achieved. |
| Best execution means different things to different | | | | The number of firms who advertise best execution |
| people. To some it means attaining the inside price of | | | | has grown significantly over the past few years, |
| the best quoted bid or offer for an order. To others, | | | | primarily as the number of participants within the |
| notably institutional investors or traders, it means | | | | capital markets arena has grown. As trading volume |
| working a large order without moving the market in | | | | has increased so has the number of execution |
| an adverse manner. | | | | venues (in conjunction with a loosening of financial |
| Traditionally, one would assume that achieving the | | | | regulations). The increase in competition and number |
| best execution is the same as finding the best price | | | | of execution venues has lead to increasingly |
| for a trade at the time the trade needs to be made. | | | | fragmented pools of liquidity and the necessity for |
| This seems reasonable at first glance, but upon closer | | | | development of algorithms to discern ways of |
| inspection, one might find that the time horizon | | | | achieving optimal execution within this environment. |
| considered here is too short, particularly for | | | | |