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.
Order handling, capacity disclosure, and quotation practices each answer a different question about a transaction.
Best Execution and Order Handling
- 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.
Trading Capacity
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.
Quotations
| 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. |
| Quoted information | A published transaction or quotation cannot be fictitious or misleading. |
| Multiple quotation mediums | Priced quotations displayed in multiple quotation mediums remain subject to applicable quotation-display requirements. |
Exam Tip: Gotchas
- Best execution concerns handling a customer order. A stated-price offer concerns the firmness of the firm's own quotation.
- Seeking a favorable customer execution does not permit a firm to back away from a quotation it made at a stated price.