Best Execution – MiFID Rules
Article 21 contains the “best execution rule” for MiFID and consists of six lengthy paragraphs. The first paragraph states the basic rule:
Member States shall require that investment firms take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Nevertheless, whenever there is a specific instruction from the client the investment firm shall execute the order following the specific instruction
Recital 33 adds,
It is necessary to impose an effective ‘best execution’ obligation to ensure that investment firms execute client orders on terms that are most favourable to the client. This obligation should apply to the firm which owes contractual or agency obligations to the client.
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The best execution duty is an elaboration of principal/agency rules and the general obligation of due diligence. Retail and professional clients are covered as Article 44 of Directive 2006/73/EC makes clear. In an elaborate analysis of the “best execution rule” and adopting a UK perspective, Paul Nelson correctly observes that the rule applies to all covered instruments. He also provides from a practitioner’s point of view how, under certain circumstances, the rule may be difficult to apply, or may not apply at all if the other party is deemed an Eligible Counterparty (Nelson, supra at 391-407). The bottom line is that the “best possible result shall be determined in terms of total consideration”. Application of that standard will vary depending on circumstances and is further complicated by what the Directive calls “internalisation”.
The Directive lacks the punch of an “order protection rule”. Informed observers note:
“A fortiori it would seem that the search for the best reference price is at the core of an internaliser’s obligation to best execution. Taking the principle of best execution seriously, investment firms that internalise customer orders should automatically execute orders at the national best bid or offer [NBBO] irrespective of their own quotations. Indeed they should refer to a European [Euro zone] best bid or offer [that is technically feasible]. However, it is no less clear that MiFID Article 27(1)(3) does not require such best execution proper. The soft obligation to ‘reflect the prevailing market conditions’ neither requires benchmarking, let alone reference to the best available quote." (Johannes Kondgen and Erik Theissen, Internalisation under the MIFID: Regulatory Overreaching or Landmark in Investor Protection, in Investor Protection in Europe, supra note 37 at 271, 289)
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Under existing circumstances, the obligation to seek out diverse venues to fulfil the best execution duty would not appear to survive a cost/benefit analysis. MiFID acknowledges this burden by providing that firms do not have to be connected to a variety of venues if that comes at a disproportionate cost. However, it is unclear whether “internalisation” is the customer or broker’s gain. In addition, MiFID allows “price improvements” in transactions with professional clients under Article 27(3)(4). “This is rather discrete language for a business practice which expressly allows of price discrimination” (Ibid at 287).
Moreover, the EU consists of 27 Member States, only 15 of which have adopted the EURO, thereby imposing currency transaction fees on cross-border transactions outside the Euro zone. Further, several new Member States are ill equipped to meet the requirements of the Directive. The Directive appears to be predicated upon the infrastructure of financial markets in the few developed money centres of Europe.
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