MiFID II And Best Execution

The US ties best execution to a single, mechanical test: did this trade avoid a worse price than what was displayed elsewhere at that instant, the NBBO from Regulation NMS. Europe's MiFID II framework, covering the UK and EU, takes a broader and more subjective approach. It requires a firm to take "all sufficient steps" to obtain the best possible result for a client, but defines "best" using several factors together — price, cost, speed, likelihood of execution and settlement, size, and nature of the order — rather than one number tied to one moment in time.

What "all sufficient steps" actually requires

A firm has to have an execution policy explaining, for each type of instrument it trades, which venues and counterparties it uses and why it believes that combination delivers the best result "on a consistent basis" for clients. It has to be able to show — with data, not just a policy document — that its routing choices actually achieve what the policy claims. This is deliberately more holistic than a trade-through check: a slightly worse headline price on a venue that fills reliably and settles cleanly can, under MiFID II, still count as best execution if speed and certainty were more important for that particular order.

A worked comparison

Say a broker is filling a client's order to sell a mid-cap European stock. Two venues are available:

Venue	Price	Likelihood of full fill	Settlement risk
Venue A (large lit exchange)	€20.00	High	Low
Venue B (smaller MTF)	€20.02	Low — partial fills common, order often left exposed	Higher

Venue B shows a nominally better price, €0.02 higher. Under a pure price-only test, that would look like the obvious choice. But MiFID II asks the firm to weigh the whole picture: if Venue B is unlikely to fill the full order and carries more settlement risk, routing there anyway just to chase the two-cent price improvement may not satisfy the "best possible result" standard once cost, likelihood of execution, and risk are weighed together — and a firm choosing Venue A needs to be able to document that reasoning.

Where the practical bite is

Firms must monitor execution quality on an ongoing basis and periodically review whether their chosen venues are still delivering the best outcomes, not just set a policy once and forget it. This produced a whole layer of infrastructure — transaction cost analysis, venue-quality reporting, and formal reviews — that exists specifically to generate the evidence a regulator would ask for. It's also the reason large brokers publish, or used to be required to publish, "top five venues" reports disclosing exactly where client orders were routed and why.

Two related MiFID II mechanics extend this framework: MiFID II Waivers And Dark Volume Caps governs when trading is allowed to happen away from pre-trade transparency requirements (dark trading) and caps how much of it can occur, and Systematic Internalisers covers the category of firm that deals against its own book instead of routing to a venue, which best-execution rules must account for.

Instrument classes make the duty stricter or looser

MiFID II does not apply the same intensity of scrutiny everywhere. For liquid, exchange-traded instruments with plenty of comparable venues and continuous public prices, the "all sufficient steps" standard leans heavily on quantitative evidence — a firm can point to concrete price and cost comparisons across venues to justify its routing. For illiquid over-the-counter instruments, where a genuinely comparable public price often doesn't exist at all, the same legal duty still applies, but the evidence a firm can reasonably produce looks very different: how many dealers were asked for a quote, how that compares with the firm's own historical execution data for similar trades, and whether the process itself was reasonable given what was actually knowable at the time. This is one reason MiFID II is described as principles-based rather than rules-based — the underlying question, "did the client get a fair outcome," stays constant, but what counts as evidence of that outcome shifts with how transparent the instrument's market is to begin with.

Retail and professional clients are also treated differently under the framework: a retail client's best execution is judged primarily on total consideration — price plus all explicit costs combined — while a professional or institutional client's order may reasonably prioritize speed or certainty of execution over the last basis point of price, since the firm is presumed to understand and have chosen that trade-off itself.