CMFAS RES 2B Ethics, Codes & Standards for Derivatives Dealing question: execution practices

CMFAS RES 2BEthics, Codes & Standards for Derivatives Dealing

A client's derivatives order was executed at a price that was not the best price available at that moment. Which statement is correct under the guide's best execution practices?

A Not necessarily a breach: cost, speed and likelihood count too, and may come first for large illiquid orders or stop-losses
B This is a breach unless the client is an accredited investor who has waived best execution
C This is a breach only if the client complains in writing within seven days of the trade
D This is automatically a breach of best execution, whatever the circumstances of the order

Show the answer and explanation

Answer: A. Not necessarily a breach: cost, speed and likelihood count too, and may come first for large illiquid orders or stop-losses

Section 5.5.1: not executing at the best possible price does not by itself violate best execution; price has high priority but the licence holder may prioritise speed and likelihood of execution when critical, such as large orders in illiquid shares or triggered stop-losses. Takeaway: best execution is a holistic judgement, reviewable on the process.

Common mistake

Best price at one instant is not the standard.

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Study note: Ethics, Codes & Standards for Derivatives Dealing CMFAS RES 2Bpractice questions & mock exams

Related CMFAS RES 2B questions

Which statements about conflicts of interest are CORRECT?A hedge fund routes most of its commission-heavy trades through one brokerage because the senior executives of the two firms are close, even though the brokerage charges higher commissions than others. In return the brokerage absorbs some of the fund's overhead expenses. According to the guide this arrangement A hedge fund's stop-loss on a commodity future is triggered at 2.15pm in a fast, thin market. The dealer fills the whole order immediately at an average price eight ticks worse than the best bid shown a moment earlier, rather than working it for a better price. The client complains that the firm breached its best execution duty. How should the compliance officer assess the complaint?

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