Order Handling, Best Execution and Client Obligations
Key Concepts
- Order handling: Duty of care, prompt execution, and proper trade allocation. Know the rules on order priority and customer orders vs. proprietary trading.
- Best execution: Obligation to seek the best terms for clients, considering price, speed, likelihood of execution, and cost. Not necessarily the best price alone.
- Client obligations: Suitability (now largely replaced by Reg BI for retail), know-your-customer (KYC), and fiduciary duties for advisers.
- Conflicts of interest: Disclosure and management, especially in order routing and payment for order flow.
- Recordkeeping: Requirements for order tickets and trade records.
Traps
- Assuming best execution means always getting the lowest price.
- Forgetting that Reg BI applies to recommendations to retail customers, not just suitability.
- Overlooking the need to disclose conflicts like payment for order flow.
Worked Example / Rule of Thumb
Rule of thumb: Best execution = best overall terms, not just price. Example: A broker routes an order to a venue that offers a slightly worse price but faster execution and higher fill probability. This may still satisfy best execution if the overall terms are best for the client.