If Best Execution Is a Process, What Does That Process Look Like?

Abstract

The CFA Institute defines Best Execution for securities trading as a process, not an outcome. For many, this is a disquieting definition, for it does not lead to easy yes/no answers. Instead, it leads to an active modeling and analysis of what goes into trading. We apply the work of Peter Drucker to the execution process, with an emphasis on: 1] establishing goals (typically to increase returns by lowering costs), 2] defining the process (including the roles of the portfolio manager, broker, and commission directing clients), 3] analyzing the data (measuring costs, but with context) to identify problems, 4] proposing solutions. This is not a simple exercise, for the process is both complex and filled with nuance. But it takes the random element out of the measurement of best execution. More importantly, it also leads to improved results over time.