Best execution in securities trading not implemented in best interests of investors

by Finanzplatz München Initiative

Munich, July 8, 2008 – Forming part of the MiFID financial markets directive, the EU Commission’s best execution requirements were enacted to ensure investors of having optimal access to securities traded on exchanges. Munich Financial Center Initiative (fpmi) considers these EU-wide regulations as not having achieved this objective. The regulations have, instead, led to distortions of competition. These in turn have been to the detriment of investors. To be expected is that the current practices of implementation of the directive will also in the long run encumber the operations of exchanges primarily serving their regions. Much of their clientele, in turn, stems from the private investor segment. These encumbrances will therefore foster situations in which a single exchange holds a quasi-monopoly on securities trading in its country of operation.

MiFID’s best execution requirements were implemented in Germany by the enacting of the Securities Trading Act. The requirements’ key provision is the stipulation that securities dealers – an example would be a bank – have to take measures ensuing their clients of achieving the best possible results when engaging in the sale or purchase of securities on exchanges. To this end, the dealers have to take into consideration the following indicators:
  1. the security’s stock exchange quote
  2. trading fees – the costs arising from the security’s purchase/sale
  3. the speed of execution on the exchange of the client’s order
  4. the degree of completion of execution – the question whether or not the order can be completely or only partially executed.
Contrary to the legislators’ intentions, the dealers have narrowed down their best execution practices to focusing nearly exclusively on trading fees. They thereby disregard other indicators.

The divergences shown in models of calculating them notwithstanding, the fees actually levied for the trading in securities on exchanges are usually pretty much the same. The differences amount as a rule to less than one tenth of one percent. Unless an investor explicitly demands otherwise, banks automatically relay customer orders to the exchange ostensibly charging the lowest fees for securities trading – despite the fact that other exchanges guarantee greater speeds or volumes of execution, and are thus offering packages which, viewed as a whole, are much more advantageous to investors. This practice is causing distortions in the competition for business among exchanges. For investors, this practice translates into greater costs of trading.

This practice is also countervailing a beneficial trend. The introduction of such packages by such region-serving exchanges as Munich and Stuttgart over the last few years unleashed a highly productive and intense competition for business among Germany’s exchanges. The packages also enabled the regional exchanges to establish themselves as platforms offering private investors attractive conditions. This productive competition is now being impaired by the best execution policies being implemented by a large number of credit institutes. According to fpmi, the ultimate effect of these policies could be the fostering of a monopoly in Germany on the securities trading market. This would, however, contravene the thrusts of the best execution directive, as a lack of competition among securities exchanges would give rise to disadvantageous developments of trading fees, of order processing speeds and of services provided to private investors. The realism of this scenario has been borne out in the large number of countries in which such monopolies exist. Urgently required to protect the interests of private investors is an implementation by securities dealers of the best execution requirements in their entirety. This would entail their relinquishing of the mistaken assumption that the each of the exchanges offers the same quality of services, and that the only difference among them is that of fees. This assumption is actually a converse of the real situation.

Further information

> Best Execution Overview (PDF, 56kB)
> MiFID Performance Report (PDF, 24kB)
> Baader BZ Gastbeitrag MiFID (PDF, 20kB)
> Legal Foundations (PDF, 24kB)

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