Achieving Market Integration

The applicability of the ICE case is somewhat limited by the circumstances surrounding

the trading. The fact that the shares were not publicly quoted, for example, obviates any

reference to the SETS price or any multiple market benchmark. Nonetheless, it does provide

insight into the application of fiduciary duty (and to a degree the shingle theory) to best

execution in the United Kingdom. There have been few recent cases in the United Kingdom

in which best execution is the central issue, and so future cases under the revised regula-

tions will be of particular importance in gaining insight into how the rules will be inter-

preted and applied in practice.

6.4 Limitations

The foregoing review of recent decisions is useful in providing insight into the reasoning

which underlies the interpretation of best execution. By understanding the logic behind the

interpretation, we gain a better understanding of the practical application of the regula-

tions. This examination does not, however, imply that best execution is fundamentally a

legal issue which can be solved through redress in the civil courts. As was noted in Chapter 2,

civil remedies are only useful, indeed are only available, when the customer knows (and can

show) that he has not received best execution. This is likely to be rare, given the customer's

inherent dependence on his broker and trader, and the three cases described above are as

noteworthy in this respect as they are for their legal value.

6.5 Competition issues

The facilitation of competition in the marketplace is of such importance in financial

regulation that it is often enshrined in legislation. In discharging its duties, the FSA is

required by statute to have regard to, amongst other things, the ``desirability of facilitating

innovation in connection with regulated activities''

17

and the ``desirability of facilitating

competition between those who are subject to any form of regulation by the Authority''.

18

In the United States, a similar imperative appears in the Exchange Act. Section 23(a) of the

Act requires the SEC to consider the impact on competition of the rules it promulgates.

19

In an environment characterised by competing exchanges, the application of best

execution policy inherently impacts upon competition and innovation within the market-

place. The performance of an exchange is often considered in terms of its liquidity, the flow

of orders which interact with one another. It is in this respect that best execution touches on

market fragmentation and market structure.

Put simply, fragmentation potentially occurs when a security trades simultaneously in

more than one venue (exchange, alternative trading system, or other organised venue).

Fragmentation is not necessarily a bad thing as long as the benefits of a consolidated

market are preserved, as a report by the London School of Economics has indicated.

20

17

FSMA 2000, Section 2(3)(d).

18

FSMA 2000, Section 2(3)(f).

19

Securities and Exchange Act of 1934, Section 23(a)(2).

20

Board, John, Charles Sutcliffe and Stephen Wells. Market Regulation in a Dynamic Environment,

London School of Economics, September 2002, p. 9.

70 Part I: Best Execution