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Daniel Safarik
Daniel Safarik
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What Is 'Best Execution'?

Though traders are required to strive for best execution, it has not been definitively defined. Fortunately, new tools can help firms identify good trades.

Rating Broker Relationships
The SEC's recent guidance on soft dollars and commission-sharing arrangements [see related article, "The Buy-Side Dilemma: Research vs. Execution,"] also makes it more likely that committees will be using broker-voting, research-consolidation and commission-management platforms, such as those offered by Cogent Consulting and BNY-ConvergEx.

"A broker providing us research was always a secondary consideration to best execution [in terms of allocating order flow]," Stephenson says. "The fact that the SEC has blessed the use of client commissions for the payment of qualified research along with more-liberal options, such as a commission-sharing type of arrangement, means that there will be more flexibility in the mechanism for paying for research; it will make it easier for buy-side firms to operate in a best-ex environment and still receive best-of-breed research."

To provide a better system for evaluating its several-hundred brokerage relationships, Franklin Templeton is moving from an Excel spreadsheet-based broker evaluation system to an integrated system from Cogent, Stephenson relates.

Another player in the space, Financial Sockets, offers software that allows buy siders to quantitatively evaluate the quality of broker research and suggestions, and monetize the value of that research, according to company founder Ellen Hunt. Financial Sockets has found good traction with European [trade-oversight] committees, Hunt says, noting that the U.K. Financial Services Authority essentially has forced the unbundling of commissions and executions, and the rest of Europe seems to be following suit.

In the U.S., however, best-execution committees still favor Excel, since it has worked for some time and doesn't represent an added cost, says Celent analyst Denise Valentine. She points out that about 82 percent of firms interviewed by Celent use Excel for commission management.

Several traders interviewed for this article, however, expressed the desire for an integrated execution management and TCA system. While most of the prevalent TCA systems can be linked with most of the popular EMS and OMS offerings, a single offering has yet to materialize.

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