Best Execution

FINRA Rule 5310 imposes an obligation on broker-dealers to obtain the best execution of their customers’ orders. The rule requires that, in any transaction, a member and associated persons use reasonable diligence to ascertain the best market for a security and buy or sell in such market so that the price to the customer is as favorable as possible under prevailing market conditions.

Key factors in determining whether a broker-dealer has used “reasonable diligence” are as follows:

  • The character of the market for the security (e.g., volatility, price, liquidity, etc.).
  • Size and type of transaction.
  • Number of markets checked.
  • Accessibility of the quotation.
  • The terms and conditions of the order. 

Best execution obligations apply when firms receive, handle, route, or execute customer orders in equities, options, and fixed income securities.

The Duty of Best Execution

Regulatory Notice 15-46 sets forth that a broker-dealer's obligation to obtain the best execution of a customer's order is partly based on the common law agency duty of loyalty. That is, an agent is obligated to act exclusively in the principal’s best interest. Any broker-dealer acting as a customer’s agent in a transaction is under a duty to exercise reasonable care to obtain the most favorable terms for the customer. Best execution duties also arise when a broker-dealer is trading as principal for its own account.

The best execution analysis generally involves the following factors: 

  • Size of the order.
  • Trading characteristics of the security.
  • Availability of accurate information regarding most favorable market center for execution and availability of technological aids to process the information.
  • Cost and difficulty associated with achieving an execution in a particular market center.

Firms must make every effort to fully and promptly execute a marketable customer order that they receive.

Regular and Rigorous Review for Best Execution

FINRA requires that broker-dealers regularly and rigorously examine execution quality likely to be obtained from the different markets trading a security. “Regular and rigorous” review includes the speed of execution, price improvement, and the likelihood of execution of limit orders. 

When routing or internally executing larger-sized orders in any security, regular and rigorous review alone may not be sufficient to satisfy a firm’s best execution requirements. Order-by-order review may be more appropriate in executing larger-size orders requiring more judgment as to the capital commitment and market timing.

Firms that do not conduct an order-by-order review for some orders are required to have procedures to ensure that they periodically conduct a regular and rigorous review of execution quality for those orders. Periodic reviews of execution quality must be conducted on a security-by-security, type-of-order basis. 

Firms conducting a “regular and rigorous” review must conduct the reviews, at a minimum, on a quarterly basis.

Payment for Order Flow

Payments from trading firms in exchange for a broker-dealer sending customers’ orders to those firms for execution is known as “payment for order flow.”

Broker-dealers offering “commission-free” trading have been subject to fines in the past due to unusually high payment for order flow rates, which resulted in customer orders being executed at prices that were inferior to other brokers’ prices. This conduct is a clear violation of a broker-dealer’s duty of best execution. A broker-dealer’s receipt of payment for order flow should not interfere with a broker-dealer's duty of best execution. 

A broker-dealer that routes all of its order flow to another broker-dealer without conducting an independent review of execution quality would also violate the duty of best execution.

Directed v. Non-Directed Orders

Directed order flow occurs when a customer’s order to buy or sell a security is given specific instructions for the order to be routed to a particular exchange or venue for execution. Though a broker-dealer is not obligated to accept directed orders, once it does, it is required to process the customer’s order promptly and in accordance with the order’s terms. Non-directed orders are those in which the client does not specify a particular venue to execute their order.

Extreme Market Conditions

Extreme market conditions can impact fixed income securities trading. Examples include liquidity shortages and divergent prices during periods of significant interest rate or rating changes. In such scenarios, FINRA has stated that broker-dealers should consider implementing procedures designed to preserve the continued execution of customers’ orders in a way that is consistent with the firm’s best execution obligations while limiting the exposure of the firm to extraordinary market risk. 

Client Reviews
August Iorio is a wonderful, very competent attorney. He helped me through a very complicated financial situation to a result that benefitted me greatly. He is responsive, efficient, and very accommodating to my personal situation. I highly recommend him. Christine L.
I was impressed with August Iorio's directness and clarity in explaining the claim process and how it might work out. I also appreciated his promptness in getting back to me when I had questions or other concerns. Iorio Altamirano LLP is very good at what it does. Art H.
August Iorio was the lead on our case. His professional demeanor, partnered with his responsiveness to our questions, suggestions, and ideas made us feel as if we were a team with a common goal. He always kept us updated and informed and gave us realistic expectations which resulted in a timely, fair, and suitable settlement. We highly recommend the law firm of Iorio Altamirano LLP. EB & SB
August, I truly appreciate all you have done for me! Thank you. Carol P.
We had a wonderful experience with Mr. Jorge Altamirano, who is an excellent and competent lawyer. He took care of our case with high effectiveness and professionalism. Mr. Altamirano is always available to answer any questions from his clients and always provided us the appropriate follow-up in our case. It was an honor to have his professional services. Ana & Rolando M.
My experience in the past with attorney Jorge Altamirano, was excellent. He was highly competitive and professional. He was attentive, communicative, respectful, and kind from beginning to the end of resolution of my case. One of the most impressive attributes of this gentleman was his empathetic demeanor towards me, his calmness throughout all the process of my case. Dr. Mayra R.
The professional and outstanding guidance and assistance that Jorge Altamirano provided during my case was a key element towards a favorable negotiation. He was always vigilant of the case deadlines. I would work with him again in the future. Johnny M.
In our case, Mr. Altamirano showed integrity and professionalism, which without a doubt will help your future outcome. Ciso C.
Mr. Altamirano is very knowledgeable, responsible and reliable. I am very satisfied and grateful with the outcome of my case. Elsie D.
People who are the victims of broker fraud have to go through a complicated arbitration process which requires them to trust their attorney and take a lot on faith. August Iorio worked with me and my wife navigate the process, helping us get all the information his firm needed for what turned out to be a successful outcome. He was understanding and professional every time we dealt with his firm. Mitchell & Irene F.