“BEST EXECUTION” (STUDY SESSION 14) B) DISCUSS THE PROBLEMS IN DEFI...

5. “Best Execution” (Study Session 14) b) discuss the problems in defining best execution; c) evaluate the usefulness of the two benchmarks widely used by traders to measure best execution. 2006 Level III Guideline Answers Morning Session - Page 31

Guideline Answer: Part A Template for Question 11-A Calculate each component cost and total Trading cost Describe how each of the following four trading cost for this OTS component components of trading costs is measured investment on a per share basis i. Commission Explicit fee charged by brokers to execute listed trades $0.05The cost of immediate execution being the $0.25difference between the average execution ii. Price impact price and the price at the time the order is $15.75 – $15.50placed with the broker The cost associated with seeking liquidity as $0.50measured by the price change between the iii. Trader timing time the order goes to the trade desk and $15.50 – $15.00when it is placed with the broker The cost of failing to complete the trade or of $1.20failing to find liquidity as measured by the Calc for $1.20: iv. Opportunity fifteen-day return for unexecuted shares ($18–$15)×40,000/100,000(cancelled trades) Total trading cost $2.00Part B There are two widely used methods of benchmarking: