The Invisible Layer - Episode 7

Rethinking Best Execution in Fragmented Markets

If you ask a trading desk in a traditional market what best execution means, most will start with price, and that makes sense when so much of the market’s plumbing exists to make prices comparable. Consolidated data feeds, recognized benchmarks, and years of regulatory guidance mean a desk can look at a fill and judge fairly quickly whether it was a good one. Even so, the formal definition has never been about price alone. MiFID II, for example, asks firms to weigh price alongside costs, speed, the likelihood of execution and settlement, and the size and nature of the order, and it leaves each firm to decide how much weight those factors deserve for different kinds of business.

In digital asset markets, that wider definition is where the conversation has to begin. Liquidity sits across centralized exchanges, bilateral liquidity providers, and on-chain pools, there is no consolidated tape tying them to a single reference price, and what happens between execution and final settlement depends heavily on where the trade was done. A fill at the best quoted price can end up being a poor result once fees, funding costs, and settlement delays are counted, while a fill at a slightly worse price can be the better outcome for the firm overall.

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What Counts as the Price

The first problem is deciding what to measure against. The same pair can be quoted differently across venues for reasons that have nothing to do with new information, including fee schedules, settlement terms, the credit standing of the venue, and the fiat rails it supports in a given region. The top of the book also tells you little about what an institutional-size order will actually get, because that depends on how much depth sits behind the best level and how the market reacts once the order starts working through it.

So price has to be looked at on an all-in basis, with spread, fees, slippage, and market impact added to the quoted rate, and compared against a benchmark the firm has chosen on purpose and can defend. That benchmark might be a composite reference price or the prevailing price when the order arrived, but whichever it is, the choice belongs in the execution policy, since the same fill can look strong against one reference and weak against another.

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Certainty and Timing

A price is only worth something if you can trade at it. A firm quote for the full size, of the kind an RFQ provides, tells the institution exactly where it will end up before it commits. A sharper price on screen that only fills part of the order leaves a remainder that still has to be worked, often after the market has moved. For a lot of institutional flow, that certainty is worth a few basis points, and a framework that only rewards the best headline price will keep undervaluing it.

Timing is a separate decision, and one that never goes away in a market that trades around the clock. Executing all at once removes the risk of prices drifting while the order is open but puts all of the market impact into a single moment. Spreading the order out with something like TWAP softens that impact at the cost of staying exposed for longer. Which approach is right depends on what the trade is for and how much movement the institution is prepared to sit through while it completes.

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What Happens After the Trade

The part of execution that tends to get left out of the analysis is everything after the fill. Some venues require prefunding, which locks up capital and leaves balances sitting with that venue. Settlement and withdrawal times differ, so proceeds may not be available when the next step in a workflow needs them, and every additional venue means more reconciliation and another counterparty to monitor. If capturing two or three basis points of price improvement means keeping balances spread across several venues, the cost of that idle capital and concentration risk can easily outweigh what was saved on the trade.

This is where execution meets the settlement questions covered earlier in this series. A trade isn’t really done until the assets have moved, the records match, and the capital is free for whatever comes next, and any measure of execution quality that stops at the fill is only looking at part of the result.

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Different Flows, Different Priorities

Two trades of the same size in the same pair can call for very different definitions of best execution. A payments company converting stablecoins to cover an end-of-day payout cares most about certainty and settlement timing, and a few basis points of price improvement barely registers. A fund rebalancing a position over several days is more concerned with market impact than speed. A corporate treasury converting a recurring balance may simply want a process that is easy to run. Hold all three to one execution standard and at least two of them will be poorly served.

For governance, that points toward defining best execution by flow type and writing down which factors matter for each and how they are weighted. Trading teams then have a clear basis for routing decisions, and risk, compliance, and oversight committees have something specific to review against.

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Governance and Evidence

Good oversight here comes down to being able to explain a decision after it was made. That starts with an execution policy that lays out the factors considered, how they are weighted for each type of flow, which benchmarks apply, and how exceptions are handled. It also needs post-trade analysis that goes past slippage to look at fill rates, settlement times, and funding costs, along with records taken at the time of each trade showing what alternatives were available and why a particular route was picked. When an auditor or steering committee asks whether execution was appropriate, the answer should already exist in the records rather than being pieced together afterward.

Few institutions will want to build all of this one venue at a time. The more practical route is to work through infrastructure that already pulls these pieces together, with aggregated liquidity so no single venue sets the available price, streaming prices that give a live reference point, and a choice of order types, including market, limit, RFQ, and TWAP, so each flow can be handled with the right balance of price, certainty, and timing. When settlement is coordinated with execution and every trade leaves a clear record behind it, applying the policy consistently becomes far more manageable.

Best execution in fragmented markets is a judgment that weighs several things at once, and the right answer depends on what the trade is meant to accomplish. Institutions that approach it this way and document how they apply it will be able to explain their results when asked, which in the end is what oversight requires.

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About Aquanow

Aquanow is a global digital asset infrastructure and liquidity provider supporting institutions across trading, stablecoin payments and settlement. Aquanow provides institutional liquidity, real-time pricing and flexible execution capabilities across supported digital asset and fiat pairs. Through its platform and APIs, clients can access streaming prices and multiple execution options - including RFQ, MARKET, FOK, LIMIT, GTC and GTD orders - providing greater price visibility and execution control as market conditions change.