Buy-side warned best ex does not mean best price

Common misconception about best execution laid bare by panellists in Boston.

Experts have warned the buy-side that achieving best execution does not necessarily mean trading at the best available price. 

It is a common misconception, but there are a multitude of variables for buy-siders to take into account when trying to achieving best execution, a panel agreed at the Fixed Income Leaders Summit. 

Pete Eggleston chief executive officer at BestEx told delegates best execution is about achieving “the best possible result” for the end client. 

He said: “It doesn’t mean best price – the buy-side need to think about the variables such as cost, speed and size of the trade and the nature of liquidity.” 

Anthony Perrotta, partner and head of global research at TABB Group added there is this idea, particularly in the US, that the best price means traders have achieved best execution.

He explained: “There’s a notion in the US that if you go to the marketplace and gain a certain number of quotes, then you have fulfilled your obligation of best execution.

“Globally, you have processes in place which touch a multitude of variables, and you have to demonstrate you achieved the best result in light of those variables for the end investor.”

Eggleston said the very nature of fixed income markets means best execution can’t be based just on price.

A question from the audience posed the idea that relationships are often facilitated by trading despite not necessarily having the best price in the market, and the panellists agreed regulators are not interested in delving into the relationships for best execution.

Perrotta, who has regularly spoken with regulators about this particular point, told delegates that regulators understand there can be a variety of reasons for traders deciding to fill an order, one of those reasons being relationships.

He said: “If explained properly, I would have thought it would be fine. However, the buy-side need to record this as it’s on a trade by trade basis. It’s all about workflow.”