FAQ's on the Duties of Best Execution
I am an introducing broker/dealer. My clearing broker does all or most of the order routing for me.
Do I need to have an independent means of judging the quality of my customers' executions?
- Yes, you do. You cannot delegate your own regulatory responsibility to your clearing broker. Your firm and your compliance people must make your own best efforts.
All of our clients tell me where to route my orders. We just follow their orders. Do we have to measure the quality of those client-routed transactions?
- Yes, you do. You are a fiduciary agent with long standing "common law" duties of best execution.
"The National Association of Securities Dealers, Inc. is issuing this Notice to reiterate the best execution obligations that apply to member firms when they receive, handle, route for execution, or execute customer orders, and to provide guidance to members concerning a broker/ dealer's obligation, as articulated on numerous occasions by the Securities and Exchange Commission (SEC), to regularly and rigorously examine execution quality likely to be obtained from the different markets or market makers trading a security."
But I am not a market maker or a market center. I don't have any duty to report, do I?
- You don't have an 11Ac1-5 duty. But you do have an 11Ac1-6 duty. And your duty does not end by simply making available the proportion of orders that go to each market center. You have to have examined the pattern of order flow and you have to have made pro-active efforts to make sure that the executions you are receiving is, indeed, "best efforts". Simply relying on whatever procedure your clearing broker may have in place is clearly not sufficient.
What is the minimum service that I can sign up for?
- As a bare minimum, you should subscribe to the Compare and Contrast tool. This convenient database allows you to compare the efficiencies of the market centers to which your orders are routed. If you find that
those market centers are deficient in some way, you can intelligently direct your criticism to those responsible for your order routing.
How can I improve my execution quality if I am not the organization making the routing decisions?
- By using our real-time, Trade Sentry service, you can immediately detect a trade that requires improvement. By making a timely call to your executing broker, you will be on the road to improving the quality of your customer executions. Furthermore, you'll be demonstrating to the regulators that you are not passive in the face of your best efforts obligations.
Does your Trade Sentry service help me fulfill my duties of best execution?
- There is no other system that more "regularly and rigorously" reviews order execution quality. Trade Sentry finds problems as soon as they occur. No other system allows broker/dealer to be on top of all of their order-handling responsibilities.
How do I document my best efforts to achieve high quality executions?
- Our annotated Memo Exception database tool allows you to follow up on all problem trades, to record the work you have done, and to record the response of the executing broker. This database is linked to the original exception report. You can make daily, weekly, or monthly reports to demonstrate your "best efforts".