The vagaries of best execution

I'm not an overly philosophical person – in fact I'd go one step further and describe myself as somewhat philosophically and spiritually barren. But at the risk of sounding marginally philosophical, I feel I must quote a pretty universal truism related to this month's feature: so much in life boils down to an issue of interpretation and semantics. Nowhere is this more evident than in the financial services industry when it comes to the nebulous concept of best execution.

The problem is that best execution is anything but an absolute; it tends to mean different things to different organisations depending on the nature of the organisation – a long-only asset manager, a hedge fund, a regulator, or a broker/dealer – and the nature of the organisation's business, including trading/investment strategies, the markets it operates in, and the asset classes it typically trades/invests in. This makes it nigh-on impossible for buy-side firms to prove that a universally accepted understanding of what best execution is has in fact taken place. What further exacerbates the issue is the fact that the two foremost global regulators, the Securities and Exchange Commission in the US and the Financial Services Authority in the UK, have to date not been able to arrive at a final definition of what exactly constitutes best execution. But thankfully this is set to change in the foreseeable future, with the introduction and adoption of Mifid – due to come into effect in November 2007, although European sell- and buy-side firms are currently grappling with the issues of what Mifid will mean in terms of practical and operational implications – and other regulations associated with best execution.

This month's feature, which starts on page 13, deals with the joint issues of client reporting and best execution, addressing investor demands, the way buy-side firms view best execution, and the technology available to the market that allows accurate and granular client reports to be generated so that investors are better able to assess the levels of service they are getting from their managers.