Market participants agree on the principle of best execution in trades. But how they define best execution is another story.
For some, it's the best price for a trade; others see it as the overall trade value; others look at the time it takes to conduct a trade; still others consider it commissions; and yet others see it as avoiding implementation shortfall. It's those differences that make creating a single prescriptive definition of best execution difficult.
Those different views can be costly to market participants - from asset owners to brokers to money managers — who might focus on one aspect of best execution while ignoring others that lead to inefficient trades.
And if differing definitions aren't enough of a problem, add in the fact that that institutional and retail investors have “very different” views about best execution, said Steven Glass, president and CEO of Zeno Consulting Group LLC, Washington, a trading consultant to pension funds.
Mr. Glass noted that for institutional investors, what matters is: “At the end of the day, what trading process maximized the value of their portfolio?”
“Looking at best execution through microstructure may not be in asset owners' best interest. On the retail side, their issues are being looked at” by the Securities and Exchange Commission's Equity Market Structure Advisory Committee. “Their orders are small. They don't have the same challenges that institutions have,” he said.
“But unfortunately, markets are for everyone, large and small.”
Added William Moriarty, president and CEO of University of Toronto Asset Management, Toronto: “Every trade has to be put in context, what (trades) are liquidity providing or liquidity demanding. You cannot define best execution in an absolute sense. You can create a framework that's more principle-based than prescriptive.”
UTAM manages C$6.5 billion ($5.4 billion) in assets for the University of Toronto, including C$3.7 billion for its defined benefit funds and its C$2.5 billion endowment. Mr. Moriarty is a former chairman of Market Regulation Services, a self-regulating organization that oversaw Canadian exchanges and automated trading systems. It was combined in 2008 with the Investment Dealers Association of Canada to form the Investment Industry Regulatory Organization of Canada.