4. Were you executed well, and what protects you

Costs 3: Where your order really goes

After three modules on who ends up with your money, the practical question remains: how do you check. Execution quality is measurable, the industry measures it daily with standard methodologies, and part of that measurement is within reach of a private investor with a spreadsheet and a little discipline.

The yardstick: the midpoint at the moment of arrival

The industry standard does not compare your price with the day's close, nor with what you would have liked to pay. It compares it with the midpoint of the spread at the instant your order reached the system, the so-called arrival price. The logic: at that moment the best bid and the best offer bracket the consensus value, and their midpoint is the best available estimate of the fair price, with no reward or punishment for whichever side you happen to be on.

From there the central measure is built, the effective spread: twice the distance between your execution price and that midpoint. It is doubled to make it comparable with the quoted spread, which covers both sides. An example: the share is at 20.00 by 20.04 when your order arrives, the midpoint is 20.02 and you buy at 20.03. Your effective spread is 2 cents against a quoted 4, a ratio of 50%. That percentage, aggregated over thousands of trades, is the number that separates a good executing firm from a bad one.

The other measures the industry uses

With the effective spread on its own you can fool anybody, so it comes accompanied by two more:

• Price improvement rate and amount. What percentage of orders execute inside the published spread and how much is saved on average on each. It measures apparent generosity.
• Realized spread. It compares your price with the midpoint a few seconds or minutes later. It measures how much the counterparty really keeps once the price has revealed where it was heading. A low effective spread with a high realized one means whoever executed you made money even though your fill looked good.
• Fill rate and speed. What proportion of orders is completed and how long it takes. An excellent price on 60% of your orders is worse than it looks if the remaining 40% forces you to chase the market.

What the best execution obligation really demands

European regulation requires firms to take all sufficient steps to obtain the best possible result for the client. Three clarifications that are constantly misread:

• It is not an obligation of result, but of process. Nobody guarantees that your particular trade is the best of the day. What can be demanded is that the firm has a policy, applies it and reviews it.
• Price is not the only factor. Total cost, speed, likelihood of execution and of settlement, size and nature of the order all enter the weighting. That said, for a retail client the law pins the criterion down: the best result is determined by total consideration, the price of the instrument plus all associated costs. That leaves little room to justify a bad price by appealing to other factors.
• You have the right to ask for explanations. You can require the firm to demonstrate that it executed in line with its policy, and it is obliged to answer.

What reports exist and how much use they are

In the United States there are two useful obligations. Execution venues publish periodic quality statistics, with effective and realized spreads by size range, and brokers publish quarterly routing reports declaring which destinations they send orders to and how much they are paid per hundred shares. That second report is public, free and little read: it lets you check, in cents, whether your broker is paid for your flow and who pays it. In Europe the road has been bumpier, and where it ended up is the case this module closes with.

What a private investor can do, in practice

You do not need professional infrastructure to form a reasonable picture:

• Record the instant. Before sending the order, note the time and the best bid and offer, and work out the midpoint.
• Measure afterwards. Compare your price with that midpoint and express the difference in basis points of the amount. That is your implicit cost.
• Repeat before concluding. One trade says nothing; twenty begin to say something. The variability of a single fill is enormous.
• Compare in parallel. With two brokers, send equivalent orders at similar moments over a period of weeks. It is the only thing that isolates the executing firm.
• Use limit orders. They turn price risk into the risk of not being filled, which is usually the less damaging of the two.
• Avoid the bad minutes. The open and the close concentrate wide spreads and erratic prices.
• Ask for the execution policy, and ask questions. The answer, or its absence, is information.

A real case: the transparency nobody read

The European attempt to impose execution transparency is worth recounting because it ended badly and teaches something. From 2018 execution venues had to publish exhaustively detailed quarterly quality reports, and every firm an annual report with its five main destinations. Thousands of files with millions of rows were generated.

Almost nobody used them. The formats were not comparable, the sheer volume made analysis unfeasible for a private investor, and the regulators themselves concluded that they gave no useful information either to investors or to the market. In 2021 an emergency reform suspended the venue reports, and the review approved in 2024 abolished the annual report on the five main destinations outright.

The lesson is an uncomfortable one: publishing data is not the same as creating transparency. A regime that produces millions of unreadable rows protects you less than a single comparable, well-defined figure. Until that figure exists in standard form, checking execution quality seriously remains, to a large extent, in the hands of whoever takes the trouble to measure their own trades.