Best Execution

This section covers what "reasonable diligence" means in practice, the rule that defines it, and how payment for order flow interacts with the obligation.

What Factors Determine Whether a Firm Exercised Reasonable Diligence?

The best-execution rule lists the factors used to judge whether a firm exercised reasonable diligence:

• The character of the market for the security (price, volatility, relative liquidity, pressure on available communications)
• The size and type of the transaction
• The number of markets checked
• The accessibility of the quotation
• The terms and conditions of the order as communicated to the firm

What Are the Key Best-Execution Rules?

• A firm cannot delegate its best execution obligation to another broker-dealer
• Firms must conduct regular and rigorous reviews of execution quality
• Payment for order flow arrangements do not alter best execution obligations

Exam Tip: Gotchas

• Best execution does not mean the absolute best price on every trade. It means the firm used reasonable diligence to obtain the most favorable terms under the circumstances. The exam tests the "reasonable diligence" standard vs. a guarantee of the best price.
• Payment for order flow (PFOF) creates a conflict of interest with best execution, but does not automatically violate it.

What Should You Check on Exam Day?

• Best execution is a reasonable diligence standard, not a guarantee of the absolute best price on every trade
• The five reasonable-diligence factors: character of the market, size and type of the transaction, number of markets checked, accessibility of the quotation, and terms and conditions of the order
• A firm cannot delegate its best execution obligation to another broker-dealer
• Firms must run regular and rigorous reviews of execution quality
• PFOF does not automatically violate best execution, but a firm must not let it override the duty of reasonable diligence