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May 31, 2002

Regulator Looks Again At Best Execution: Buysiders Grapple With a Difficult Standard

By Gregory Bresiger

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  • Regulator Looks Again At Best Execution: Buysiders Grapple With a Difficult Standard

It's a difficult thing to define.

But one will know it when one sees it.

The comments of a U.S. Supreme Court Justice who couldn't put into simple, clear English a complicated legal doctrine?

No. That's how many trading professionals define a common best execution standard. Best execution, say many buyside trading professionals, is in the eye of the beholder.

"Best execution is just about the hottest issue out there right now," said Jamie Atwell, head trader at Nicholas-Applegate in San Diego, California. And, traders say, one of the most difficult to fathom.

"There is certainly no one simple standard and it certainly can't be established on a trade by trade basis. One has to establish it over the sum total of a group of trades," according to Brian Pears, head of equity trading for Victory Capital Management in Cleveland, Ohio.

Some clients want speed. Others expect the lowest cost. Others demand that their trades minimally move the market. How can all these at times conflicting client demands be satisfied in an increasingly fragmented market with more and more pools of liquidity?

"It means something different for everyone," added Tony Ives, director of trading for Jurika & Voyles in Oakland, California. "The SEC itself is still working on this and there is a broad area for firms to operate if they have established reasonable policies."

Added Nicholas-Applegate's Atwell: "The problem is that I'm not sure that the SEC exactly knows what the standard is when you're dealing with so many different firms that have so many different situations."

Fragmentation, penny spreads and the lack of a clear standard are problems that traders are grappling with on a daily basis. Officials of various buyside firms say these pressures have led them to seek more executions through ECNs because of price pressures and the need to hide trades.

"Quite frankly, today I must make institutional trades look like retail trades in order to survive in this environment," said an official of one firm, who declined to be named. The other problem for trading officials is a regulatory one.

SEC Mission

Officials in the Securities and Exchange Commission's Division of Enforcement warned that trading firms must periodically examine their techniques to ensure that they are staying current with new technology. "The opportunity for price improvement can contribute to providing customer orders with enhanced execution," SEC officials wrote in a recent opinion.

Yet SEC officials concede that finding which orders can qualify for price improvement is often a dicey business.

The regulators - who have decreed that every reasonable effort must be made to obtain best execution for investors - are making a renewed push to clarify what best execution is.

"Best execution has become a very significant area of priority for us," according to Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations. The SEC is making a new effort to find a clearer standard, officials of the commission say. And where is the SEC most likely to look for violations?