Best Execution

This document (the "Execution Policy") sets out the approach taken by Charles Schwab, U.K., Limited ("CSUK") in seeking to ensure that the best outcome is obtained for its clients on consistent basis when executing client orders or receiving and transmitting orders to third parties for execution. It takes into account the requirements of the second Markets in Financial Instruments Directive (2014/65/EU) ("MiFID II") and associated rules and guidance published by the European Securities and Markets Authority ("ESMA") and the Financial Conduct Authority (the "FCA").

Should you have further queries on CSUK's policies and arrangements for ensuring best execution, please contact CSUK’s Compliance Officer:

The Best Execution obligation

FCA rules place a high-level obligation on firms such as CSUK to ensure that client orders are executed on terms that are most favourable to that client, which is referred to as the 'best execution obligation'. MiFID II has further enhanced this standard, by requiring that firms take 'all sufficient steps' to obtain the best possible result for its clients on a consistent basis when executing orders.

Scope of this Execution Policy

MiFID II best execution requirements apply in relation to financial instruments as defined in MiFID II (see Appendix 1 for an overview of the financial instruments traded by CSUK). CSUK is also subject to a general regulatory obligation to treat clients fairly as well as to manage any conflict of interest, and as such we endeavour to deliver the best result to clients in all transactions.

CSUK Execution Model

CSUK has entered into an agreement with its affiliate Charles Schwab & Co Inc., ("CS&Co") pursuant to which CSUK delegates order execution to CS&Co. Given CSUK's focus of trading US financial instruments, CS&Co is uniquely positioned to arrange execution in the US market. 

Accordingly, CSUK relies on, seeks recourse to and monitors CS&Co policies and procedures in relation to order routing and order execution in framing its Execution Policy and seeking to achieve best execution for clients. 

CS&Co considers a number of factors in evaluating execution quality among markets and firms, including execution price and opportunities for price improvement, market depth and order size, the trading characteristics of the security, speed and accuracy of executions, the availability of efficient and reliable order handling systems, liquidity and automatic execution guarantees, the likelihood of execution when limit orders become marketable and service levels and the cost of executing orders at a particular market or firm. 

Execution Factors

CSUK is obliged to seek the best possible result for its client in relation to each trade. What constitutes the best possible result however may vary depending on the situation, and this may not always equate to obtaining the best price or the lowest cost. 

CSUK is therefore required to consider and assess the relative importance of relevant 'Execution Factors' in respect of each class of financial instrument for which it arranges execution. The Execution Factors are defined in Chapter 10 of the FCA conduct of business sourcebook (COBS) rules and are summarised below by CSUK, as follows:

  • Price: This is the price at which a transaction is executed. Where the price has varied across the transaction the blended average price should be considered.
  • Costs: This includes explicit external costs such as custodial, exchange or clearing fees, as well as implicit costs such as spreads and slippage. This should be restricted to costs borne by the client and should not include CSUK's internal costs relating to trading. 
  • Speed: This refers to the amount of time that elapses between the trade order and the successful execution of that trade. 
  • Likelihood of execution and settlement: This refers to CSUK's estimation of the probability that the trade order will be successfully completed either in whole or in part. 
  • Size: For large orders or illiquid instruments only a partial fill may be received and this may vary between venues. Where the whole trade order is unlikely to be filled, the size of the potential fill will increase in importance.
  • Nature of the order and any other relevant considerations: This is a broad category that covers any other factor not listed in the regulations that firms may wish to prioritise in order to achieve the best result for its clients. 

Because of the various different constraints and limitations that apply dependent upon the specific nature of a financial instrument or client order, CSUK will take into consideration all of the relevant Execution Factors listed above with the key objective being obtaining the best possible outcome for its clients. 

Execution Criteria

FCA rules also set out the "Execution Criteria" that CSUK must take into account when executing a trade for a client. These are the particular characteristics of each trade order which need to be taken into account before applying CSUK's execution process, when seeking to achieve the best possible result for the client andwhere the 'best result' is defined by reference to CSUK's prioritisation of the Execution Factors as set out above. The Execution Criteria will vary potentially from client to client and from trade to trade and will therefore need to be assessed on a continual basis. The Execution Criteria are summarized by CSUK, as follows;

  • The characteristic of the client: For example whether a client has been classified as retail or professional and whether they are a natural person, institutional investor or a fund. The level of sophistication, trading frequency and size of portfolio may also be relevant; 
  • The characteristic of the client order: Factors such as the type of financial instrument, size and urgency of the order are likely to be relevant here. In some cases, the client order may also come with specific instructions from the client. 
  • The characteristics of the financial instrument: Intrinsic differences in the behaviour and attributes of different financial instruments mean that they will need to be treated differently. Market conditions should also be considered, such as whether there is liquidity at the size of order being contemplated, and whether there is significant volatility in the market; 
  • The characteristics of the execution venues: Relevant considerations here might be the reputation and reliability of the venue, whether the order will be subject to pre- and post-trade transparency, and the types of counterparty that the order is likely to be executed against.

The Execution Process-Equities

In terms of the relative importance attached to the Execution Factors, CSUK has a general view and process which it adapts based on the particular characteristics (i.e. the Execution Criteria) of each trade.

CSUK should prioritise price and cost together in order to achieve the best financial result for the client in terms of total consideration for the trade. This should include the CSUK's own costs, to the extent that they are passed on to the client, which means that in most cases CSUK is obliged to select the execution method, venue that minimises the costs passed on to the client. 

The exception to this would be where the selection of a more expensive method of execution leads to a demonstrably better outcome in terms of total consideration for the trade due to an improved price being received.

The other Execution Factors however, including speed, size and likelihood of execution can and should still be considered, where relevant, and particularly where price and costs are distributed in a narrow range between the available execution options. It may also be necessary in extreme circumstances to prioritise the speed and probability of execution, for example in situations where the imminent failure of a counterparty may cause the total loss of the client's investment. In this situation delaying the transaction to prioritise achieving a better price/cost for the trade is not justifiable as it is likely to lead to worse overall financial outcome for the client.

In relation to elective professional clients, the first execution factor to consider is the probability of execution. The priority here will be to assess which execution venues are capable of executing the order on the required terms. In normal market conditions however this is should be a relatively straightforward exercise that should produce a range of equally ranked execution options for further consideration under the remaining execution factors. 

Following this, and assuming a range of execution options exist, the highest priority factor is to obtain the best result for the client in terms of the total consideration for the trade, defined as the total price obtained minus any costs or fees. This will either be the highest total price or the lowest total price (net of costs and fees) depending on the direction of the trade. In most situations this will be determined predominantly by the price achieved, although where the price offered by two or more venues are identical or within a narrow range, or cannot be reliably determined in advance, then the one with the lowest overall cost of execution will be chosen. This analysis will include the implicit costs of the trade, such as slippage and market impact.

Where CSUK considers that it is able to take steps to reduce the costs of execution, and therefore improve the total consideration for the trade as defined above, then it expects to do so.

The other Execution Factors do not typically determine the way a trade is executed, although on occasion where there are specific relevant circumstances these factors may be escalated in prioritisation.

The Execution Process-Fixed Income

In arranging for the execution of fixed income orders on CSUK's behalf, CS&Co seeks out industry-leading execution services and access to the best performing markets.  The centerpiece of the Schwab fixed income trading operation is the Schwab Bond Source System ("SBS").  SBS provides CS&Co representatives and customers with access to bond quotes (bids & offers) from participating fixed income Alternative Trading System ("ATS") networks and various bond dealers, including CS&Co.  It is also the primary system used by our fixed income traders for managing requests-for-quotes ("RFQs"). 

SBS is designed to seek best execution using quotes available to Schwab based upon the specified quantity and order type/terms for any particular issue at the time a quote is searched and during electronic order routing.  CS&Co may also trade on a principal basis if it is holding the bonds in its inventory or to provide clients with additional liquidity.  While many fixed income trades are "straight-thru-processed" and electronically executed by SBS, CS&Co fixed income traders also manually review certain orders that exceed a pre-determined size threshold or variance in pricing from trades previously reported to either  the Trade Reporting and Compliance Engine ("TRACE") or the Municipal Securities Rulemaking Board ("MSRB") prior to routing for execution.  Schwab reserves the right to modify its order review criteria as it determines necessary.  Sell orders for bonds may be handled as RFQs and executions may take longer to complete.  

The Fixed Income Trading Department also maintains written policies and procedures that dictate its traders use "reasonable diligence" in ascertaining the best market for each security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.  CS&Co also utilizes various pre-trade systematic filters and checks on quotes and proposed trades which are designed to assist in providing best execution.

Execution Venues

As noted above, CSUK utilizes services provided by its US affiliate CS&Co when trading to client in securities (including equities, fixed income and listed options). CS&Co arranges execution through third party execution venues as described below.

CSUK will ensure that its list of approved execution venues contains at least two possible choices for each class of instrument traded. 

The only exception to this will be where there is only a single venue available in the market that is able to execute the class of instrument in question. In this situation, CSUK will rely on this entity for execution but will monitor the market for the emergence of other entities that can provide a similar function.

Consequences of executing orders outside a trading venue

In certain circumstances, firms such as CSUK are permitted to deal otherwise than on a regulated market t may be difficult or impossible to liquidate an existing position, to assess the value, to determine a fair price or to assess the exposure to risk. For these reasons, these transactions may involve increased risks. Off-exchange transactions may be less regulated or subject to a separate regulatory regime. Before you undertake such transactions, you should familiarise yourself with applicable rules and attendant risks.

Specific client instructions

If CSUK receives an order from a client that includes specific instructions in relation to the handling and execution of the order (such as requesting a particular execution venue, specifying a particular price or time or requesting the use of a particular strategy) then, subject to our legal and regulatory obligations, CSUK will execute the client's order in accordance with these specific instructions. 

Warning: Clients should be aware that where they provide any specific instructions, this may prevent CSUK from following this policy and obtaining the best possible result for the execution of the order in respect of the elements that are covered by the specific instruction.

Disclosure of inducements, conflicts and fees

CSUK is required to maintain a Conflicts of Interest Policy identifying the circumstances that constitute or may cause a conflict of interest with potential material risk or damage to the interests of one or more of its clients. 

The Conflicts of Interest Policy in place outlines the procedure that CSUK will follow to manage such conflicts. This requirement applies to potential conflicts of interest that may arise between CSUK and its clients as a result of its execution arrangements which could prevent it from satisfying its best execution obligations. CSUK handles all potential conflicts of interest that can arise in the execution of a client order/transaction according to its Conflicts of Interest Policy. Further information can be obtained from the CSUK's Compliance Officer.

Monitoring and Review

CSUK monitors the activity that CS&Co undertakes in respect of how it regularly assesses execution quality provided by the various execution venues so that orders in all financial instruments not directed to a specific market by clients are routed to venues that have provided high-quality executions over time.

CS&Co monitors execution price and quality to ensure that trades are executed at or below the existing best bid/ask published independently of the execution venue.  CS&Co ensures that any significant or consistent deviation from best execution is reviewed and addressed to ensure as a whole that client's orders are receiving the best possible outcome.  Individual orders may be found to have received a price away from the market.  If the deviation is significant CS&Co contacts the execution venue to receive price improvement on behalf of the client.  If the deviation is small but the venue we are sending the order to consistently generates deviations, CS&Co will direct the order flow away from that execution venue.  

CSUK maintains detailed reporting on reviews of execution quality here:
2018 CSUK RTS 28 Report 


We are required to obtain clients' prior consent to this Execution Policy. In accordance with your agreement with CSUK, your prior consent to this Execution Policy is deemed to have been provided if you continue to retain our execution services. You can find any updates to this Execution Policy (from time to time) by visiting our website. 

We also require your express consent regarding:

  • Executing orders for you outside a regulated market or Multi-Lateral Trading Facility ("MTF"); and
  • The non-publication by us of non-filled client limit orders when trading financial instruments on a regulated market

Your express consent can be obtained by general agreement or in relation to specific transactions. In that regard we consider that when you sign the CSUK Client Agreement that you have provided us with your express consent in relation to the matters set out above. 

APPENDIX 1: List of Execution Venues and Custodians on which significant reliance is placed

The principal venues to which Schwab routes equity orders are as follows:

APPENDIX 1: List of Execution Venues and Custodians on which significant reliance is placed
1. Equity Orders
  • UBS Securities LLC 
  • Citadel Execution Services 
  • VIRTU G1X 
  • Two Sigma 
2. Exchange-Listed Options
  • Chicago Board Options Exchange 
  • International Securities Exchange 
  • Nasdaq Options Market 
  • BATS Options Exchange 
  • MIAX 
  • NYSE-AMEX Options 
  • Boston Options Exchange 
  • Pearl
3. Fixed Income Orders
  • ICE BondPoint 
  • ICE TMC Bonds 
  • Tradeweb Direct 
  • Citigroup Global Markets Inc. 
  • Headlands Tech Global Markets LLC 
  • Intl FC Stone 
  • JP Morgan Securities LLC 
  • Piper Jaffray & Co 
  • Wells Fargo Securities LLC 
  • Charles Schwab & Co. Inc.'s proprietary markets