I was chatting with a few work colleagues last Friday about best execution
and derivatives. They confidently asserted that without real fungibility (i.e.
the ability to trade the same instrument on different venues), price comparison
is not possible and so any notion of best-ex was pretty meaningless.
By coincidence, I was later looking at the wording in the best-ex policy of
my own broker (and yes, it was a slow afternoon). Interestingly though, it
reminded me that best-ex is a much broader concept than just price comparison – it needs to take into account the liquidity, tradability and reputation of any
venue, together with an assessment of my own sophistication/naivety.
So imagine how the concept of best-ex could extend into the rapidly
converging OTC and exchange traded markets. Agreed futures, swap futures, CMFs and other OTC products are not strictly fungible, but they are certainly
economically equivalent. If that’s the case then maybe my broker needs to
explain why they traded a future rather than a swap future or OTC contract in
order to hedge my risk. Also, any decision would need to include their
obligation to make best use of my scarce capital by minimising my margin
So maybe the idea of best-ex does have a real place in derivatives markets –
if so, then expect a whole range of tools to come out to help the derivatives
industry achieve and measure it.