The term duty of best execution refers to the legal responsibility of a broker to provide the most favorable terms when executing an order on behalf of an investor. Factors a broker should consider under their duty of best execution include price, speed, and likelihood of execution.
The duty of best execution is a requirement under the jurisdiction of the Securities and Exchange Commission (SEC). This requirement mandates a broker to seek out the most favorable terms of execution reasonably available to their clients. These terms include securing the best possible price, executing the order as quickly as possible, and evaluating the likelihood an order will be filled. This is accomplished by assessing opportunities in competing markets, and understanding if the order would secure more favorable terms by routing it to a market maker or an electronic communications network.
The SEC monitors compliance with the duty of best execution through a series of reports. Brokers are required to provide quarterly data indicating the routing of their clients' orders as well as monthly reports that reveal the quality of execution such as payment flow.