ESMA clarifies best execution expectations

Among other things, the new guidance specifies the criteria for establishing firms’ policies on order execution, and distinguishing between orders executed for retail and professional investors.  

For instance, the guidance specifies that retail executions should determine best execution based on the total costs of the trade, including the price of the financial instrument and the execution costs, “which must include all expenses incurred by the client which are directly relating to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order.”

Additionally, in a multi-market environment, best execution for retail investors must also factor in investment firms’ own commissions and the costs of executing the order on each of the eligible trading venues, it said.

The guidance also sets expectations for firms’ procedures and criteria to monitor and regularly review the effectiveness of their order execution arrangements and policies.

Separately, ESMA also published a series of proposed trading rule standards, which includes requirements on circuit breakers and operational resilience at trading venues, including how those trading circuit breakers are calibrated and disclosed.  

“The overall objective is to ensure that the rules … are applied consistently, with simplification and burden reduction as the guiding principle,” it said.  

Those proposals have been sent to the European Commission, which has three months to determine whether to endorse the proposed standards or not.