Legal and economic aspects of best execution in the context of the Markets in Financial Instruments Directive (MiFID)

Abstract

This paper explores the implications for investment firms and clients that arise out of an interpretation of the Market in Financial Instruments Directive (MiFID) best execution requirements from a law and economics perspective. While best execution is often framed as a matter of investor protection, research on market microstructure suggests that there is, in fact, an efficiency rationale (and not only a distributional rationale) for having some degree of best execution regulation. In terms of the specific rules of MiFID, the analysis reveals that an investment firm's best execution policy will play a central role. MiFID's best execution concept is process- based, ie investment firms need to show that they took measures leading to best execution in expectation; actual best execution is not required. The paper also discusses current issues such as the form of the execution policy and the appropriate number of execution venues.