Best Execution Policies (MiFID II & SEC)
Best execution policies are regulatory frameworks that require investment firms to take all sufficient steps to obtain the best possible result when executing client orders. These policies, mandated by both MiFID II in Europe and the SEC in the United States, establish specific criteria for evaluating execution quality and ensuring fair treatment of investor orders.
Understanding best execution requirements
Best execution obligations require firms to consider multiple factors when executing trades, including:
- Price
- Cost
- Speed
- Likelihood of execution
- Size of order
- Nature of order
- Market impact
Investment firms must establish clear procedures for trade execution quality monitoring and demonstrate they consistently achieve optimal results for their clients.
MiFID II best execution framework
MiFID II significantly enhanced best execution requirements in Europe by:
- Requiring firms to publish detailed execution quality reports
- Mandating comprehensive documentation of execution venue selection
- Establishing stricter monitoring and review processes
- Requiring disclosure of the top five execution venues
SEC best execution requirements
The SEC's approach focuses on:
- Transaction cost modeling and analysis
- Broker-dealer execution quality reporting
- Order handling disclosures
- Regular review of execution arrangements
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Best execution monitoring systems
Modern best execution systems utilize advanced analytics to:
- Capture tick data for price reconstruction
- Calculate execution benchmarks like VWAP
- Monitor slippage and implementation shortfall
- Generate regulatory compliance reports
Venue analysis and selection
Firms must regularly evaluate execution venues considering:
- Liquidity profiles
- Market impact costs
- Technology infrastructure
- Fee structures
- Latency characteristics
Documentation and reporting requirements
Both MiFID II and SEC frameworks require:
- Detailed execution policies
- Regular execution quality reports
- Evidence of best execution monitoring
- Documentation of venue selection decisions
- Client disclosures
Best execution in algorithmic trading
For firms employing algorithmic trading, additional considerations include:
- Algorithm selection methodology
- Parameter optimization
- Performance monitoring
- Risk controls
Impact on market structure
Best execution requirements have influenced:
- Market fragmentation
- Development of Smart Order Routers
- Growth of execution analytics
- Evolution of Alternative Trading Systems
Technology implications
Meeting best execution obligations requires robust technology infrastructure:
- Real-time market data processing
- Advanced analytics capabilities
- Comprehensive audit trails
- Performance measurement systems
Best execution policies continue to evolve with market structure changes and technological advancement, requiring firms to maintain flexible and sophisticated monitoring systems while adapting to new regulatory requirements.