MiFID II Best Execution Requirements

MiFID II—the Markets in Financial Instruments Directive 2014/65/EU—imposes a binding obligation on investment firms to execute client orders on terms that are most favorable for the client. Best execution under MiFID II is not simply the lowest price; it includes timing, likelihood of settlement, and costs, all weighed according to the client’s stated instructions and the nature of the order.

What “best execution” means under MiFID II

Contrary to popular belief, best execution does not mean lowest price. If a broker executes a large equity order at the lowest visible price but it takes three days and eats into the market spread, that may not be best execution for a client who needs to reposition the portfolio urgently. Conversely, paying a slightly higher price to settle immediately and with certainty could be best execution for that same client.

MiFID II defines best execution as the overall most favorable result for the client, measured across:

• Price
• Costs (commissions, fees, borrowing charges, spreads)
• Speed of execution
• Likelihood of execution and settlement
• Size and nature of the order
• Any other relevant consideration

The weight given to each factor depends on the client’s profile, the urgency and characteristics of the order, and the available venues. A retail investor buying £2,000 of a blue-chip stock may prioritize simplicity and cost; an asset manager executing a 500,000-share block may prioritize market impact and certainty of settlement.

The execution policy framework

Firms must publish a written execution policy detailing how they achieve best execution. This policy must cover:

• Which venues (stock exchanges, alternative trading systems, market makers) the firm accesses
• How it selects venues and brokers
• How it monitors venue quality and broker performance
• What happens if a client’s instructions conflict with best execution
• Specific policies for different asset classes and client types

The policy must be clear enough that a client can understand it and must be made available before a client gives an order. If a firm uses a broker or other intermediary to execute, it must ensure that intermediary also maintains a best-execution policy and is subject to equivalent standards.

Firms must also be transparent about what fees or rebates they receive. If a firm is paid by a venue (rebates) or pays to use a venue (fees), the client should know, because this can create a conflict of interest when choosing where to send an order.

How firms choose execution venues

Under MiFID II, firms typically route orders to multiple venues—stock exchanges, alternative trading systems, and even bilateral over-the-counter (OTC) deals with market makers—and compare likely outcomes. A large European equity order might be routed to the primary listing exchange, MTF platforms like CBOE Europe, or direct to a market maker who can absorb the block.

Firms conduct execution quality monitoring at least quarterly, analyzing:

• Arrival price versus execution price
• Time from order submission to execution
• Market impact
• Completed orders versus rejected orders
• Venues’ order-to-trade ratios and fee structures

This data feeds back into the next review of the execution policy. If a venue consistently underperforms—say, it has wide spreads or frequently rejects large orders—the firm must justify continuing to use it or stop directing orders there.

Best execution and client instructions

If a client explicitly instructs a firm to execute an order in a particular way—route it only to the London Stock Exchange, use only a certain broker, or prioritize speed over cost—the firm must follow those instructions, even if they seem suboptimal. In such cases, the firm is not in breach of best execution, because the client has overridden it.

However, firms must still inform clients if an instruction is likely to prevent them from achieving best execution. A client who says “route my order only to the LSE” on a stock that trades more tightly on an alternative trading system should be warned. If the client insists anyway, the firm documents the instruction and proceeds.

Conflicts of interest in execution

A frequent challenge under MiFID II is venue conflict. A firm may own a stake in an alternative trading system and earn higher rebates there, creating an incentive to route orders there even if another venue offers a better price or faster execution. Or a firm may receive a commission from a market maker for directing orders its way.

Firms must have policies to manage these conflicts. Common approaches include:

• Routing orders without regard to rebates
• Splitting orders across venues to minimize any single venue’s influence
• Disclosing the conflict to clients and obtaining informed consent
• Auditing routes to verify they align with best execution principles

National regulators (like the French AMF or the U.K. FCA) audit execution quality and pursue firms that route orders to venues for commercial benefit rather than client benefit.

Monitoring and disclosure

Firms must disclose, upon request and at least annually, information about execution quality. This includes data on the venue and broker used, prices obtained, and measures taken to minimize implicit costs (market impact, slippage).

Some firms publish detailed execution statistics. Others provide them only on demand. The level of detail varies by client type: retail clients receive simpler summaries, while institutional clients often receive granular data to assess whether the firm is meeting its obligations.

If a firm’s execution quality falls below expectations—if clients systematically receive worse prices or experience more rejections than competitors—regulators can sanction it, impose fines, or require compensation to affected clients.

Best execution across asset classes

Equities are the most straightforward: multiple venues, transparent pricing, and clear liquidity metrics make execution quality easy to measure. For bonds, derivatives, and currencies, the picture is more complex.

In the corporate bond market, trading is often bilateral and prices are opaque. A firm executing a large corporate bond order may have only a handful of relevant market makers, making true price comparison difficult. MiFID II acknowledges this by asking firms to obtain prices from a sample of dealers and execute at the best terms available, rather than requiring execution at a single “market price.”

For derivatives and structured products, best execution may prioritize likelihood of execution and clarity of terms over micro-movements in price, because these products are complex and liquidity can evaporate.

See also