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What is best execution and how can you achieve it?
27 January 2022
Best execution is one of the most commonly used terms in foreign exchange (FX) and across other financial markets. If your firm has an FX exposure, there is a high probability that you have come across ‘ best execution'.
Despite all the controversy and regulatory intervention relating to FX best execution in recent years, many still don’t understand its full definition and how to achieve it.
So, what actually is best execution?
Best execution is a regulatory requirement that investment services firms, executing orders on behalf of customers, take all sufficient steps to obtain the best possible results for their clients.
There are many factors to take into consideration in the quest for FX best execution:
- Price and cost
- Speed and likelihood of execution and settlement
- Size, nature and other factors directly related to the execution of the order
Best execution is covered by various market principles and regulation originating from the FCA Conducts of Business Sourcebook and Principles of Business, the FX Global Code of Conduct and, most notably, MiFID II.
Combined, they stipulate that investment firms should:
- Treat customers fairly
- Deal with market participants in a consistent and appropriately transparent manner
- Take all sufficient steps to obtain the best possible result for the client when executing orders
How new technology can help you to achieve best execution
Achieving best execution is not easy and in our last blog on the hidden costs of FX we highlighted some obstacles to achieving best execution. The biggest obstacle is the operational complexity involved with managing multiple FX counterparty relationships. Many investment firms may also suffer from a lack of transparency over costs.
There are a number of ways we believe you could overcome these obstacles, and technology is key:
Transaction Cost Analysis
- Transaction Cost Analysis (TCA) enables firms to understand how much they are being charged for the execution of their FX transactions
- It goes hand in hand with best execution, serving as an ongoing audit of FX practices
- TCA can enable firms to gain a competitive advantage when trading FX but also potentially to comply with a best execution policy that is reported back to partners and investors alike
- Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.
End to end execution services
- New multi-bank FX marketplaces, such as MillTechFX, enable firms to see quotes from multiple liquidity providers in real-time, enabling them to compare the best rates
- They deliver full transparency at each stage of the execution process, offer real-time reporting and independent TCA, providing complete visibility of their FX execution costs and enabling them to demonstrate best execution.
- This type of multi-bank price streaming and execution process was previously the exclusive domain of the largest trading institutions, but is now available to smaller firms too.
- Research published by the investment consultant Russell Investments “Still Overpaying for FX” analysed 173,000 FX trades conducted on assets totalling approximately $76 billion.
- It concluded that for an average $1 billion fund, savings of $330,000 per annum would have been achievable from the adoption of an agency approach where FX trading is outsourced to a third-party specialist. In some cases, funds could have saved much more.
- The Russell study explicitly suggested the consideration of a model whereby a third-party specialist agent is appointed to manage FX trades and pursue competition among a panel of counterparties to achieve the best possible price.
How MillTechFX can help
MillTechFX by Millennium Global is the FinTech affiliate of Millennium Global Investments, one of the largest specialist currency managers globally.
Our multi-bank marketplace helps asset managers and corporates to significantly reduce both FX costs and operational burden associated with FX execution and rolling hedging requirements.
We provide access to a transparent marketplace for comparative FX execution from up to 10+ counterparty banks, while harnessing a unique and significant pricing efficiency for our clients.
Get in touch to find out how we can help you achieve best execution: contact us.