Quick Answer
Best execution requires reasonable diligence to find the best market for a customer order and seek the most favorable price under prevailing conditions. A broker-dealer acts as an agent for a customer or as a principal for itself. A stated-price quotation must be honored under its stated conditions, unless the member immediately revises the size after completing an in-progress transaction.
Order handling, capacity disclosure, and quotation practices each answer a different question about a transaction.
What Does Best Execution Require?
- Best execution requires reasonable diligence to ascertain the best market for a customer order.
- The member then buys or sells in that market so the resulting price is as favorable as possible under prevailing market conditions.
- Order-entry and execution practices govern how orders are entered and executed.
Exam Tip: Gotchas
- Best execution is a diligence standard, not a price guarantee. The member must use reasonable diligence to ascertain the best market and make the price as favorable as possible under prevailing market conditions. A worse price is not automatically a violation.
Is the Broker-Dealer Acting as Agent or Principal?
Trading capacity identifies the role the broker-dealer takes in the transaction.
| Capacity | Broker-dealer role |
|---|---|
| Agent capacity | Executes a transaction on behalf of a customer. |
| Principal capacity | Buys or sells for the broker-dealer's own account. |
Think of it this way: An agent is a messenger carrying out the customer's transaction. A principal is one of the transaction's parties because the firm is trading from its own account.
What Must a Firm's Quotation Represent?
| Requirement | What it means |
|---|---|
| Stated-price offer | A member offering to buy or sell at a stated price must be prepared to trade at that price and under those stated conditions, unless the member immediately revises the size after completing an in-progress transaction. |
| Published transaction report | The member must believe the reported transaction was a bona fide purchase or sale. |
| Published quotation | The member must have reasonable cause to believe the quotation is bona fide, is not fictitious, and has no fraudulent, deceptive, or manipulative purpose. |
| Quotation definition | A quotation includes any bid or offer. It also includes a formula, such as "bid wanted" or "offer wanted," designed to induce a person to make or submit a bid or offer. |
| Multiple quotation mediums | Real-time priced quotations for an OTC equity security must be the same in each real-time medium used, unless the customer-limit-order exception applies. |
- Members may change inter-dealer quotations in the ordinary course of trading. At the time of an offer, the member must be prepared to trade at the stated price and conditions.
- A member that is already effecting a transaction in the quoted security when an order arrives may communicate a revised quotation size immediately after that transaction. The member is then not obligated to trade beyond the revised size.
Exam Tip: Gotchas
- Best execution concerns handling a customer order. A stated-price offer concerns the firmness of the firm's own quotation.
- Transaction reports and quotations use different publication standards. The member must believe a reported transaction was a bona fide purchase or sale. A quotation requires reasonable cause to believe it is bona fide, not fictitious, and free of any fraudulent, deceptive, or manipulative purpose.
- A quotation can be more than a displayed price. Any bid, offer, or formula designed to induce a bid or offer is a quotation.
- Ordinary quotation changes do not erase firmness. Members may change inter-dealer quotations during ordinary trading, but each offer must be firm at its stated price and conditions.
- Firmness has one size exception. A member already effecting a transaction in the quoted security may communicate a revised quotation size immediately after that transaction. The member then owes only the revised size, not the earlier one.
- The customer-limit-order exception applies only to quotation alignment. The same-quotation requirement has a narrow customer-limit-order exception; it is not permission to publish inconsistent proprietary quotations.
What Should You Check on Exam Day?
- Identify whether the firm acts for the customer or for its own account.
- Require a stated-price offer to be firm under its stated conditions, unless the member communicates a revised size immediately after completing a transaction already in progress.
- Distinguish ordinary-course inter-dealer quotation changes from a failure to honor the terms stated when an offer was made.
- Require reasonable cause to believe a quotation is bona fide, not fictitious, and has no fraudulent, deceptive, or manipulative purpose.
- Align real-time OTC equity quotations across mediums unless the customer-limit-order exception applies.