Order Handling, Execution, and Best Execution Obligations
Handling client orders
Know the duties: execute on the client's terms promptly and fairly, avoid front-running, apply consistent order priority, and prevent misuse of client order information. Understand aggregation and allocation rules - aggregated orders must be allocated fairly and promptly, and the firm must not favour its own account. Know how to handle client instructions that override the firm's execution policy: a specific instruction may discharge best execution for the aspects it covers.
Best execution
Best execution is a process obligation, not a guarantee of the best possible result on every trade. The firm must maintain and disclose an execution policy, take all sufficient steps, consider price, cost, speed, likelihood of execution and settlement, size and nature of the order, and monitor and review execution quality. Retail clients get the total consideration emphasis.
Traps
- Confusing best execution with a promise of the best price.
- Forgetting that a client's specific instruction shifts responsibility for that element.
- Allocating a favourable fill to the firm's own book or to a favoured client.
- Assuming the execution policy is a marketing document rather than a binding framework.
- Missing the monitoring and review obligation - a good policy unmonitored is a breach.
Worked example
An aggregated buy of 100,000 shares fills at prices from 10.00 to 10.10. Allocate the average price (or a fair method disclosed in advance) pro rata, never give the lowest-priced fills to one account and the highest to another. Rule of thumb: fairness is judged by the method and its disclosure, not by the outcome.