Best Execution in a Crisis: Impacts of the COVID-19 Outbreak on Trade Execution

Banks and brokers are required to take all reasonable steps to obtain the best possible result when executing client orders. Due to COVID-19, financial markets declined abruptly and systemically across asset classes.

The market volatility confused investors and led to significant and unexpected losses, even in well diversified portfolios. The circumstances are likely to have impacted firms’ abilities to conduct desired trades, as well as to determine whether they are achieving best execution in an objective and timely fashion.

Best execution can be assessed ex-ante. Although an ex-ante assessment does not provide certainty on the outcome of the execution, it allows for notifying clients if certain factors are likely to jeopardise the execution, ensuring they can make informed decisions. Such an assessment would include consideration of the challenges for trade execution arising from COVID-19-driven operational constraints and disruptions.

Best execution can also be assessed ex-post, using the information available before and during the execution. Such an assessment in the context of COVID-19 would include consideration of forced liquidations, automated trades and trading data.

Following a market dislocation, the substantial losses experienced by certain investors, together with the challenges associated with defining and meeting applicable best execution standards, increase the risk of disputes over execution quality.

The role of expert evidence in such disputes varies according to the specific case and transactions involved, though often involves opining on quantum and damages calculations, the market context and market practice applying to the specific situation, and causality in the patterns of execution.