The Best There Is?
� An Inquiry into Best Execution Rules
   
 
Författare:Ordeberg Thomas
Titel:The Best There Is? � An Inquiry into Best Execution Rules
Utgivningsår:2013
Omfång:647 sid.
Förlag:Stockholms universitet
ISBN:891552013
Typ av verk:Akademisk avhandling
Ämnesord:Associationsrätt och värdepappersrätt , EU-rätt , Ekonomi
Pris: 795 SEK exkl. moms

 

Best execution obligations weigh on brokers when they execute orders to trade in shares for clients. These obligations have been seen as an outflow of general agency duties, and have been complemented by regulatory requirements related to best execution, dissemination of trading data, the handling of client orders and – in the United States – an obligation to execute at the best publicly available price or better (price protection).

Here, different sets of real-world rules are analyzed with regard to transactional efficiency. Economic analyses are used to compare the effects of different rules, and are underpinned by a detailed analysis of relevant rules in the United States, the European Union, France, Sweden and England & Wales.

Several normative conclusions can be drawn. Best execution rules that impose an agency duty on brokers do not seem to contribute in a discernible way to increased transactional efficiency. In contrast, disclosure rules that require both brokers and trading venues to provide ex post information about execution quality, and about how client orders have been routed, may contribute to mitigating the information asymmetry between brokers and clients. The compliance costs associated with such rules are outweighed by the positive effects on transactional efficiency.

Lastly, a solution such as the US National Market System, which entails consolidated collection and dissemination of market data as well as price protection, can deliver significant efficiency gains through the virtual consolidation of trading venues. It also allows for more detailed regulations on different aspects of order execution, allow order execution regulations to function better, and is conducive to deeper integration of trading. However, creating such a system entails large initial investments. In the end, the choice whether to create a tightly-knit market system or not has wide-ranging implications for market structure, the design of regulatory rules and market integration.



Table of Contents
Preface .................................................................................................................................... 5
Abstract .................................................................................................................................. 8
Table of Contents ................................................................................................................... 9
Chapter 1 – Introduction .......................................................................................................... 15
1.1 The Scope of the Investigation ....................................................................................... 15
1.2 The Environment ............................................................................................................ 18
1.2.1 Introduction ............................................................................................................. 18
1.2.2 Share Trading: Venues, Actors, Processes .............................................................. 18
1.2.3 Regulating Trades: Legislators, Regulators, Adjudicators ...................................... 22
Chapter 2 – Method and Demarcations ................................................................................ 28
2.1 Objects of Inquiry ........................................................................................................... 28
2.1.1 The Object: Execution of Orders to Trade in Shares .............................................. 28
2.1.2 The Laws: Best Execution Rules and Agency Law in Two Federal Jurisdictions and Several States ................................................................................................................... 30
2.1.3 Demarcations ........................................................................................................... 32
2.2 Methods Employed ........................................................................................................ 40
2.2.1 Introduction ............................................................................................................. 40
2.2.2 Identification of the Object Studied ........................................................................ 41
2.2.3 Description of Extant Laws and Regulations: the Contextual Approach ................ 44
2.2.4 Comparative Analysis ............................................................................................. 50
2.2.5 Comparative Efficiency Analysis ............................................................................ 50
2.3 Coda: Why and How ...................................................................................................... 53
Chapter 3 The Economics of Securities Trading ..................................................................... 55
3.1 Introduction .................................................................................................................... 55
3.1.1 The Structure of this Chapter .................................................................................. 55
3.1.2 Necessary Preconditions: Investors, Intermediaries, Markets................................. 57
3.1.3 Agency Orders ......................................................................................................... 58
3.1.4 Buyers and Sellers ................................................................................................... 60
3.2 General Background ....................................................................................................... 60
3.2.1 Introduction: Efficient Markets and Transaction Costs .......................................... 61
3.2.2 Why Organize Securities Trading? The Economic Rationale for Organized Trading in Securities ...................................................................................................................... 63
3.3 Market Microstructure .................................................................................................... 68
3.3.1 Introduction ............................................................................................................. 68
3.3.2 Price Formation in Securities Markets .................................................................... 70
3.3.3 Market Transparency and Trading Transparency ................................................... 82
3.3.4 Inter-Venue Competition ......................................................................................... 84
3.3.5 Summing-Up: Some Observations ........................................................................ 100
3.4 Agency Transactions: The Economics of Intermediated Execution of Orders ............ 103
3.4.1 Introduction ........................................................................................................... 103
3.4.2 Economic Analyses of Best Execution Rules ....................................................... 103
3.4.3 Transaction Costs Associated with Order Execution ............................................ 122
3.4.4 Summing-Up: Some Observations ........................................................................ 126
3.5 The Nuts and Bolts of Securities Trading .................................................................... 127
3.5.1 Introduction ........................................................................................................... 127
3.5.2 Everyman Investor: John Doe Enters the Market ................................................. 128
3.5.3 A Trade Like Any Other: The Doe Pension Fund Realigns Its Portfolio ............. 130
3.5.4 John Doe and the Doe Pension Fund: Trading on the Same Terms? .................... 133
3.6 What Does Best Execution Mean? Different Views of the Cathedral ......................... 136
3.6.1 Introduction ........................................................................................................... 136
3.6.2 The Rationale(s) for Introducing Best Execution Rules ....................................... 136
3.6.3 Different Definitions of What Constitutes Best Execution ................................... 138
3.7 Coda: Real-World Rules on Best Execution ................................................................ 145
Chapter 4 – Legal Context ................................................................................................ 147
4.1 Introduction ............................................................................................................. 147
4.2 The Different Aspects of a Legal Framework ......................................................... 148
4.2.1 The General Environment ................................................................................ 148
4.2.2 Administrative Authorities ............................................................................... 149
4.2.3 Sources of Law ................................................................................................. 149
4.3 The United States ..................................................................................................... 151
4.3.1 The General Environment ................................................................................ 151
4.3.2 Administrative Authorities ............................................................................... 157
4.3.3 Sources of Law ................................................................................................. 159
4.4 The European Union ................................................................................................ 163
4.4.1 General Environment ....................................................................................... 163
4.4.2 Administrative Authorities ............................................................................... 172
4.4.3 Sources of Law ................................................................................................. 174
4.5 France ...................................................................................................................... 177
4.5.1 General Environment ....................................................................................... 177
4.5.2 Administrative Authorities ............................................................................... 183
4.5.3 Sources of Law ................................................................................................. 186
4.6 Sweden ..................................................................................................................... 192
4.6.1 General Environment ........................................................................................ 192
4.6.2 Administrative Authorities ................................................................................ 199
4.6.3 Sources of Law ................................................................................................. 200
4.7 England ................................................................................................................. 206
4.7.1 General Environment ........................................................................................ 206
4.7.2 Administrative Authorities ................................................................................. 211
4.7.3 Sources of Law ................................................................................................. 213
Chapter 5 Order Execution Rules in US Law ................................................................... 221
5.1 Introduction ............................................................................................................. 221
5.2 Order Execution Rules in the US: Introduction ........................................................ 223
5.3 Early Traces of Order Execution Obligations ............................................................ 224
5.3.1 Introduction: Fiduciary Duties .............................................................................. 224
5.3.2 The Fiduciary Duties of Agents: An Overview .................................................... 225
5.3.3 Early Traces of a Best Execution Obligation in the United States ........................ 226
5.4 The Securities Exchange Act of 1934 .......................................................................... 231
5.5 The Duties of Agents in the Restatement (Third) of Agency ...................................... 234
5.5.1 Introduction ........................................................................................................... 234
5.5.2 Agency Obligations: General Principles ............................................................... 234
5.5.3 The Duty of Loyalty .............................................................................................. 235
5.5.4 The Duty of Care ................................................................................................... 238
5.5.5 Sanctions for Breach of Fiduciary Duties ............................................................. 240
5.5.6 The Possibility to Contract Out of Fiduciary Duties ............................................. 241
5.6 Acting as a Fiduciary: Case Law after 1934 ................................................................ 242
5.7 The Shingle Theory ...................................................................................................... 246
5.8 A New Wave of Securities Regulation: The 1975 Amendment to the Securities Exchange Act of 1934 ........................................................................................................ 247
5.8.1 The SEC Special Study on the Securities Markets ............................................... 247
5.8.2 Securities Market Developments .......................................................................... 248
5.8.3 House and Senate Studies of the Securities Markets ............................................ 251
5.8.4 The Content of the 1975 Amendments ................................................................. 252
5.9 Order Execution Rules Enacted by the SEC under the ‘34 Act ................................... 255
5.9.1 Introduction ........................................................................................................... 255
5.9.2 The SEC Release on Development of a National Market System ........................ 255
5.9.3 Rule 11Ac1-1 ........................................................................................................ 257
5.9.4 The SEC Release on Payment for Order Flow ...................................................... 258
5.9.5 The SEC Release on Order Execution Obligations ............................................... 260
5.9.6 The SEC Release on Disclosure of Order Execution and Routing Practices ........ 264
5.9.7 Regulation NMS .................................................................................................... 266
5.10 Best Execution Rules Enacted and Enforced by Self-regulatory Organizations........ 275
5.10.1 Introduction ......................................................................................................... 275
5.10.2 NASD/FINRA Rules and Notices on Best Execution ........................................ 275
5.10.3 Enforcement of the NASD/FINRA Best Execution Rule ................................... 279
5.10.4 Enhanced Quotation Standards for Market Makers ............................................ 281
5.11 Brokers’ Duties in post-1975 Case Law .................................................................... 282
5.11.1 General Fiduciary Duties of Brokers: Disclosure and Loyalty ........................... 282
5.11.2 Mark-ups and Interpositioning: New Developments .......................................... 286
5.11.3 Payment for Order Flow ...................................................................................... 287
5.11.4 The Significance of Trading Technology ............................................................ 291
5.11.5 Failure to Obtain Price Improvement .................................................................. 293
5.11.6 Class Actions in Best Execution Cases ............................................................... 298
5.12 Summing-Up: Material Order Execution Obligations in the US ............................... 301
5.12.1 Introduction ......................................................................................................... 301
5.12.2 The Sources of Order Execution Obligations ..................................................... 302
5.12.3 Material Order Execution Obligations: The General Framework ....................... 307
5.12.4 Order Execution Obligations in Different Contexts ............................................ 318
5.13 Earlier Economic Analyses of US Rules .................................................................... 330
Chapter 6 Order Execution Rules in EU Law ........................................................ 339
6.1 Introduction .................................................................................................................. 339
6.2 The Development of Order Execution Rules in the EU ............................................... 341
6.2.1 Early Statements by the Commission Regarding Order Execution ...................... 341
6.2.2 Binding European Rules for Financial Intermediaries: the 1993 Investment Services Directive and Beyond ...................................................................................... 346
6.2.3 ISD Article 11 Under Scrutiny: the FSAP and the Commission’s 2000 Communication .............................................................................................................. 350
6.2.4 The Lamfalussy Report ......................................................................................... 353
6.2.5 The Overhaul of the ISD and the Advent of MiFID ............................................. 354
6.3 The Best Execution Provisions in MiFID .................................................................... 368
6.3.1 Introduction ........................................................................................................... 368
6.3.2 Investment Firms’ Best Execution Obligations .................................................... 369
6.4 Other Order Execution Obligations in MiFID ............................................................. 377
6.4.1 Introduction ........................................................................................................... 377
6.4.2 Rules Concerning Order Handling and Transparency .......................................... 377
6.5 Analysis ........................................................................................................................ 394
6.5.1 Introduction: Earlier Analyses of MiFID’s Order Execution and Transparency Rules ............................................................................................................................... 394
6.5.2 The Nature of the MiFID Obligations ................................................................... 394
6.5.2 Fragmentation: Execution in Different Types of Venues ..................................... 396
6.5.3 Consolidation of Data ............................................................................................ 402
6.5.4 The Material Content of the Rules ........................................................................ 404
6.5.5 Advocates and Critics of the MiFID Rules ........................................................... 408
6.6 Empirical Analyses of Post-MiFID EU Markets ......................................................... 410
6.6.1 Introduction ........................................................................................................... 410
6.6.2 Fragmentation of Trading ...................................................................................... 410
6.6.3 Trading Structure ................................................................................................... 412
6.6.4 Trading Costs, Liquidity and Price Discovery ...................................................... 413
6.6.5 Consolidation of Market Data ............................................................................... 416
6.6.6 Execution Quality, Routing and Trade-Throughs ................................................. 418
6.7 Analysis of the Best Execution, Order Handling and Transparency Obligations under MiFID ................................................................................................................................. 422
6.7.1 Introduction ........................................................................................................... 422
6.7.2 The Best Execution Regime .................................................................................. 422
6.7.3 Order Handling Rules ............................................................................................ 424
6.7.4 Transparency Requirements .................................................................................. 426
6.8 Future Developments ................................................................................................... 427
6.8.1 Introduction ........................................................................................................... 427
6.8.2 The Commission’s MiFID Review Proposal ........................................................ 427
Chapter 7 Order Execution Rules in France, Sweden and the United Kingdom ........... 432
7.1 Introduction ................................................................................................................ 432
7.2 Order Execution Rules in France ................................................................................ 434
7.2.1 Introduction ........................................................................................................... 434
7.2.2 General Agency Law ............................................................................................. 434
7.2.3 The Advent of Regulation: The ISD and the Introduction of Order Execution Rules ............................................................................................................................ 442
7.2.4 MiFID: New Statutory Provisions on Order Execution ........................................ 445
7.2.5 Enforcement of Order Execution Obligations ....................................................... 453
7.2.6 The Interplay between Statutory Order Execution Rules and Agency Law ......... 459
7.2.7 Analysis ................................................................................................................. 461
7.3 Best Execution Obligations in Sweden ........................................................................ 462
7.3.1 Introduction ........................................................................................................... 462
7.3.2 Early Fiduciary-Type Rules: from the 1734 Commercial Code to the 1914 Commission Act ............................................................................................................. 464
7.3.3 Laws, Regulations and Case Law on Brokers’ Conduct of Business ................... 469
7.3.4 Current Laws and Regulations on Best Execution: the 2007 Securities Market Act ......................................................................................................................... 482
7.3.5 The 2009 Commission Act .................................................................................... 490
7.3.6 The Interplay between the 2007 Securities Market Act and the 2009 Commission Act .................................................................................................................................. 496
7.3.7 Analysis of Swedish Law on Best Execution ........................................................ 501
Chapter 7.4 Best Execution Obligations in England and Wales ........................................ 510
7.4.1 Introduction ........................................................................................................... 510
7.4.2 Fiduciary Duties of Agents in General .................................................................. 511
7.4.3 Statutory and Regulatory Rules: the 1986 Financial Services and Markets Act and Beyond ........................................................................................................................... 518
7.4.4 A Thorough Analysis of the Relationship between Fiduciary Duties and Regulatory Rules: the Law Commission .......................................................................................... 521
7.4.5 The Transposition of MiFID: New Regulatory Rules ........................................... 525
7.4.6 Recent Developments in Case Law ....................................................................... 534
7.4.7 Analysis ................................................................................................................. 538
7.5 Synthesis: National Law Rules and MiFID Order Execution Obligations .................... 547
7.5.1 Introduction ........................................................................................................... 547
7.5.2 Too Many Duties? Obligations under MiFID and National Agency Law .................. 547
Chapter 8 A Comparison of Different Order Execution Rules .............................................. 551
8.1 Introduction .................................................................................................................. 551
8.2 The Interrelation between Order Execution Rules and Agency Rules ......................... 551
8.3 The Labels of Statutory Rules in the US and the EU ................................................... 553
8.3.1 Best Execution, Order Protection, Order Handling; Different Names, Similar Obligations ..................................................................................................................... 553
8.3.2 Execution Rules as Obligations of Means and Disclosure .................................... 554
8.4 The Scope of Order Execution Rules in the US and the EU ........................................ 555
8.4.1 The Scope of Statutory Order Execution Rules .................................................... 555
8.4.2 The Scope of Best Execution Duties in Agency Law ........................................... 556
8.4.3 The Limits of Agency Law and Best Execution Obligations: Direct Market Access 557
8.5 The Material Content of Order Execution Rules in the US and the EU ......................... 557
8.5.1 Introduction ........................................................................................................... 557
8.5.2 Material Order Execution Obligations in the US and the EU ............................... 558
8.6 Material Order Execution Obligations in Select EU Member States ........................... 563
8.6.1 France .................................................................................................................... 563
8.6.2 Sweden .................................................................................................................. 564
8.6.3 England & Wales .................................................................................................. 566
8.7 Mandatory and Non-Mandatory Best Execution Rules ............................................... 568
8.7.1 Introduction ........................................................................................................... 568
8.7.2 Agency Law Obligations ....................................................................................... 568
8.7.3 Statutory and Regulatory Order Execution Obligations........................................ 569
8.8 Best Execution Rules and Market Structure in the US and the EU ............................. 570
8.8.1 Introduction ........................................................................................................... 570
8.8.2 The Trade-Through Rule and Other Obligations Imposed on Venues ................. 570
8.8.3 Pre-Trade Transparency Rules with and without Consolidated Data ................... 574
8.9 Sanctions ...................................................................................................................... 575
8.10 Conclusions ................................................................................................................ 576
Chapter 9 The Relative Efficiency of Different Rules ........................................................... 579
9.1 Introduction .................................................................................................................. 579
9.2 Analysis of US Rules ................................................................................................... 583
9.2.1 Introduction ........................................................................................................... 583
9.2.2 Federal Regulations ............................................................................................... 583
9.2.3 The Best Execution Duty in Case Law ................................................................. 589
9.3 Analysis of EU Rules ................................................................................................... 591
9.3.1 Introduction ........................................................................................................... 591
9.3.2 The Best Execution Regime: Article 21 ................................................................ 592
9.3.3 Order Handling Rules ............................................................................................ 599
9.3.4 Transparency Rules ............................................................................................... 600
9.4 Conclusions .................................................................................................................. 601
Bibliography ..................................................................................................................... 617
Books and Articles ........................................................................................................... 617
Legislative and Regulatory Proposals ................................................................................ 636
Cases ............................................................................................................................... 640
United States .................................................................................................................. 640
European Union .............................................................................................................. 644
France ............................................................................................................................. 644
Sweden ........................................................................................................................... 645
England & Wales ........................................................................................................... 646
United Kingdom ............................................................................................................. 647
Other jurisdictions .......................................................................................................... 647
 
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