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Index
ad valorem; see Flat fee regulation of, 7±9
Alternative Trading Systems (ATSs), 106, 109, reasons for regulation, 7
112±15, 122, 123, 125, 133 relation between regulation and information
Autoriteit FinancieÈle Markten (AFM), 109, asymmetry, 7±8
110, 111 regulatory protection, application of, 14±15
`relevant market' condition, 52±3
Benchmark calculation, 34±40 restructuring the obligation, 55±6
flexibility, 35±80 execution arrangements, review of, 56
practicality, 38±9 information on firms' execution
Bentson, George J., 11 arrangements, 56
Best execution: monitoring execution quality, 56
assessing execution, 15 single or multiple markets, 17
Board Notice 542, 53 technology, 17
certainty of execution, 19±20 soft commissions, bundling and the misaligned
markets with, 20 incentives, 26±8
markets without, 20 state or self-regulation, 9±11
competition issues, 70±3 FSMA, 10
`conceptual' or `prescriptive'approach, 15±16 NASD, 10
pros and cons of, 16 SEC, 10
counterparty risk limits, 21±3 SRO, 10
central counterparties model, 21 state regulation, 11±12
effective policy, elements of, 31±40 principal/agent conflict, 11
calculating benchmark, 34±40 statistical disclosure of execution
determining benchmark, 33 quality, 28±9
enforceability, 31±2 in the United Kingdom, 51
flexibility dilemma, 32 in the United States, 2, 41±50
visibility and clarity, 32±3 disclosure (Rules 11Ac1±5 and 11Ac1±6), 48
factors constituting, 17±18 enforcement and guidance, 49±50
fiduciary responsibility and `shingle order handling (Rules 11Ac1±4 and 11Ac1±1),
theory', 66 46±7
cases and decisions, 67±9 price improvement, 49
FSA's statutory requirements, 57±9 regulatory environment, 41±6
FSMA and the Conduct of Business treatment of soft commissions and payment
Sourcebook, 53±5 for order flow, 48
ICE securities, 69±70 use of waiver, 36±7, 39, 94
introduction, 5 Best execution process, 75±93
legal approach, 66±73 net price calculation, 80±3
limit orders, 26 order routing, 83±93
limitations, 70 cost of implementation, 90±1
market impact, 20 CQS/CTS, 87±8
non-price factor, 20 integration, 86±7
multiple exchange environment, 51±2 ITS/CAES, 84±5
non-standard settlement, 21 ``message switch'', 84±5; see also TraderServe
in the United Kingdom, 21 study
order routing vs price matching, 24 portal technology, 85±6
in other European countries, 59±60 regulation, role of, 91±3
other issues, 23±30 price consolidation, 75±7
policies, 1, 20, 24, 36, 41, 51, 60 anonymity of venue, 80
price and non-price dimensions, 18±19 bandwidth and processing speed, 77
price improvement, 24±5 depth of the display, 78

157
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158 Index

Best execution process (continued ) Federation of European Securities Exchanges

raw vs net prices, 79±80 (FESE), 110, 111, 137
selection and participation of execution Financial Services Action Plan (FSAP), 127, 132,
venues, 78±9 135, 136, 138, 148
synchronisation, 77 Financial Services and Markets Act 2000 (FSMA),
summary/conclusions, 94±6 10, 53, 54, 58
Block trade provision, 20 Financial Services Authority (FSA), 9, 10, 11, 12,
Blue chips, 99 16, 24, 27, 28, 53±60, 66, 69±72
Blundell, John, 9 Flat fee, 18, 80
Flawed programming logic or inaccurate
data, 29
Central Limit Order Book (CLOB), 123, 124
Central Settlement Depository (CSD), 117 Forum of European Securities Commissions
Committee of European Securities Regulators (FESCO), 61, 71, 114, 146
(CESR), 59, 61, 64, 114, 137, 145, 146
Compliance Report Cards, 29, 48 Giovannini Group, 119
Concept Release, 42, 47, 113, 122, Graham-Leach-Bliley-Act, 44
123, 124
Hallam, Nicholas, 81
national limit±order book, 47
issues of fragmentation and market
linkages, 47 Idelson, Nick, 81
see also Market integration; Securities and Information asymmetry, 7, 8, 14, 15, 28, 37, 57, 58
Intermarket Trading System, 89, 107
Exchange Committee
Conceptual approach, 16, 35, 39, 64 see also Market integration
Consolidated Quotation System (CQS), 43, 68, 80, Internalisation, 23±4, 107±109
best price defined in, 23
87, 88, 89, 113, 114, 120, 125, 132
Consolidated Tape Service, 88 European Commission's review, 23
Consolidated Transaction System impact on markets, 24
(CTS), 120 micro-markets, 108
pros and cons, 108±109
Consumer protection tool, 9, 57
see also Best execution International Central Securities Depositories, 116
Core standard, 39, 94 Investment Services Directive (ISD), 60±1, 63,
104, 107±108, 110±11, 115, 130, 132, 145

Davies, Howard, 11, 71 Keenan, Denis, 7, 66

critiques of state regulation, 11
Deutsche BoÈrse, 111, 118, 126 Lamfalussy Committee, 131, 136, 145
Lamfalussy process, 61
Electronic Communications Networks (ECNs), Large institutional investors, 20
49, 68, 86, 88, 90 Laura Unger (SEC Commissioner), 46
Euro-SEC, 136, 137, 145, 146 Less-than-best execution, 8, 26
European case, 129±40 Levitt, Arthur, 72
constructing market system, 132±3 Limit Order Display Rules, 46
consolidated price montage, 132±3 Liquid assets, 99
consolidated tape, 133 London Stock Exchange (LSE), 38, 51±5, 111, 127
order routing, 133
Treaty of Rome, 129±32 Market, 2, 26, 41, 104
co-decision process, 130±1 evolution and the regulation of, 1±3
European Central Bank (ECB), 85, 103, 134 imperfection, 11, 12, 143, 144, 146
European Union regulation, 59±62 Market integration, 97, 139±40
best execution in other European countries, alternative trading systems (ATSs), 112±15
59±60 attempts to integrate markets, 120±8
Exchange Act, 42, 44, 66, 70, 116 in the US markets, 120±21
Execution quality, 9, 28, 29, 46, 48, 49, 50, 55, 56, Pan-European markets, 126±8
94, 123 Rules, 121±6
statistics, 9, 55±6 best execution as an element of, 134±5
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clearing and settlement arrangements, 116±19 Jiway, 126

horizontal and vertical models, 118±19 Norex, 127
fragmentation and concentration, 106±15 Virt-x, 118, 127
rules in Europe and the United States, 106±15 Payment for order flow, 26, 46, 48±50, 122
liquidity, 99±100 Post-trade transparency, 109, 114, 120, 121, 133
breaking the law of one price, 102±104 Pre-trade transparency, 109, 114, 133
challenge to the assumption, 104±106 Prescriptive approach, 16, 39, 95, 125
fragmentation, 102 Price, 18, 59
price formation process, 100±102 disadvantage of, 18
making integration work, 141 Professional investors, 12, 14±15
market imperfection, 143, 144, 146 deals with trade, 14
standardisation/co-ordination, 144
state vs market, 143±6 Regular and rigorous review, 46, 47, 50
`super-regulator' needs, 135±8 see also Best execution process
Marketing approaches, comparison of, 41±65 Regulatory environments and approaches,
Myners Report, 26 comparison of, 63
Regulatory lag, 1, 94, 145
NASDAQ supermontage, 89±90 Retail investor protection, 14±15
National Association of Securities Dealers, Inc. see also Best execution
(NASD), 10, 29, 44, 45±51, 87±9, 116, 120, 124 Riches, Sarah, 7, 66
and SEC, 10, 29, 44, 45, 48, 49 Robinson, Colin, 9
National Best Bid and Offer (NBBO), 43, 45, 47,
49±50, 58, 64, 67, 68, 125 Securities and Exchange Act, 44
National Linkage System (NLS), 123 Securities and Exchange Committee (SEC), 8, 10,
National Market System (NMS), 2, 12, 41, 42, 43, 12, 25, 27, 29, 35, 42±50, 66±70, 72, 74, 85,
47, 72, 87, 91, 92, 105, 113, 116, 120±4, 136, 87±9, 92, 106, 107, 113, 120±5, 135±6, 145
144, 145, 148, 149 Seligman commitee, 42, 91, 99, 124±5
data dissemination, 124 inevitable interconnectedness, 42, 99
in the United States, 2, 72, 87, 90 Securities and Futures Authority (SFA), 52±3, 69
National Securities Clearing Corporation Securities and Investments Board (SIB), 52
(NSCC), 116 Self-Regulatory Organisations (SROs), 10, 44, 52,
Net price, 7, 75±6, 79, 80±4, 87, 92 124, 144
New York Stock Exchange (NYSE), 29, 87, 88, 107, Shingle theory, 66±7, 69±70
116, 120±4 Shopping bots, 85
Newton case, 16, 67 Soft commission, 26, 48, 81
see also Best execution Soft dollars; see Soft commission
Newton vs Merrill Lynch, 66±7 Speed of execution, 19, 20, 84
Third Circuit Court of Appeal, 66 Stock Exchange Automated Quotation (SEAQ)
see also Shingle theory System, 52, 53
Non-price factors, 19±23, 29, 34±5, 55, 91, 94, 124 Stock Exchange Trading System (SETS), 53±6, 58,
drafting languages in policies, 21 64, 68, 70, 88, 147
Non-professional investors; see Retail investor
protection Technology, role of, 74±95
see also Marketing approaches, comparison of
Order book, 47, 53, 54, 86, 100±102 Three A's test, 93
Order execution: Tradepoint Investment Exchange, 51
process, 75 see also Virt-x exchange limited
Rules, 46, 74 TraderServe study, 84±91
breaking down best execution, 76 basic order routing ``execution strategy'', 84
discussing the state of technology, 80 ``smart'' order routing±generic
interoperability and affordability, 75 and client-specific, 84

Pan-European markets, 126±8 Unger Report, 46±7

EASDAQ, 126 United Kingdom:
Euronet, 127 benchmark standard, 58
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160 Index

United Kingdom (continued ) firms in, 25, 84

best execution, 51, 59, 62, 63, 70±1 intermarket bench standard, 25
block trade provision in, 20 internalisation, 23
financial regulation in, 10 market integration in, 97
financial services industry, 53 Newton and Geman, 25
FSA consultation paper, 58 NMS, 12, 72, 87, 136, 148
multiple market standards, 64 pre- and post-trade information, 105
non-standard settlement, 21 securities market, 2
soft commission, 26±7 `shingle theory', 66
stock exchange in, 51±2 soft commission, 26, 81
trade-by trade regulation, 28 trade-by-trade regulation, 28
United States: Unlisted Trading Privileges, 107
clearing and settlement structures, see also Market integration
116
concentration rules in, 106±15 Virt-x, 118, 127