The future of best execution
I was chatting with a few work colleagues last Friday about
best execution and derivatives. They confidently asserted that without real
fungibility (i.e. the ability to trade the same instrument on different
venues), price comparison is not possible and so any notion of best-ex was
pretty meaningless.
By coincidence, I was later looking at the wording in the
best-ex policy of my own broker (and yes, it was a slow afternoon).
Interestingly though, it reminded me that best-ex is a much
broader concept than just price comparison, it needs to take into account the
liquidity, tradability and reputation of any venue, together with an assessment
of my own sophistication/naivety.
So imagine how the concept of best-ex could extend into the
rapidly converging OTC and exchange traded markets.
Agreed futures, swap futures, CMFs and other OTC products
are not strictly fungible, but they are certainly economically equivalent.
If that’s the case then maybe my broker needs to explain why
they traded a future rather than a swap future or OTC contract in order to
hedge my risk.
Also, any decision would need to include their obligation to
make best use of my scarce capital by minimising my margin requirement.
So maybe the idea of best-ex does have a real place in
derivatives markets, if so, then expect a whole range of tools to come out to
help the derivatives industry achieve and measure it.
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