Brokers Face Higher ‘Best Ex’ Bar


Whether attached to interrogation or vetting, the adjective ‘enhanced’ has developed a negative connotation. And if the US Securities and Exchange Commission decides to eliminate Regulation NMS’ Order Protection Rule, brokers could face enhanced best execution responsibilities as a result.

“Every thread you pull on OPR will lead to an enhanced best execution obligation, which I think is the concern that the retail brokers face and who bears that burden,” said Shane Swanson, a director at electronic market maker Citadel Securities, during a conference call hosted by the Security Traders Association.

Swanson reasoned that by removing the OPR requirement, which acts as a backstop or safety net for retail order, that the SEC would need mandate an enhanced best execution requirement to maintain retail investor confidence in the markets.

And when seeking an objective definition for a subjective concept like “best execution,” it is never easy.

“It’s not a simple answer,” he said. “It’s not one, two, three, and we have taken care of it. It is very intricate.”

If the SEC eliminates the National Best Bid and Offer trade-through protection, it would do away with one of the objective metrics of best execution.

The regulatory focus would then fall on analyzing the process that brokers would employ to obtain the best execution for clients.

Firms would need greater guidance from the SEC in a post-OPR environment in which brokers could choose not to route orders to exchanges with minimal liquidity or access fees that they deem are too high, according to Swanson.

If the SEC decides that best execution would be in the eye of the beholder, it would lead the US markets into a principles-based regulatory world like MiFID, he added. “I doubt that the US market will ever go that way, but it is a possibility.”

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