Best execution rules and payment for order flow in the EU

What you will learn

• What the EU best-execution duty under MiFID II requires, and what it does not guarantee
• How "total consideration" combines price and costs for retail clients
• What payment for order flow (PFOF) was, why the EU banned it, and what this means for brokers in Germany since July 2026
• How to compare two execution venues with your own numbers and find the order size where the cheaper one changes

Explanation

Venues and order types were covered earlier in this course. This lesson covers the rules that decide where and how your order is executed.

The best-execution duty

MiFID II (Markets in Financial Instruments Directive II) is the main EU law for investment firms. Its Article 27 requires a firm to take "all sufficient steps" to obtain the best possible result for clients when executing orders. This is called best execution. Relevant execution factors are:

• price
• costs (broker fees, venue fees, clearing and settlement fees)
• speed and likelihood of execution and settlement
• order size and nature of the order

For retail clients, the law says the best result is judged mainly by total consideration: the price of the instrument plus all costs directly linked to execution. A slightly better price is worthless if a higher fee eats it up.

Best execution is a process duty, not a promise for every order. The firm needs an execution policy (a document listing the venues it uses and how it chooses between them), give clients clear information about it, monitor execution quality and review the policy regularly. If you give a specific instruction ("execute on venue X"), the firm follows it and is partly released from the duty.

Payment for order flow

Payment for order flow (PFOF) means that a broker receives money from a market maker or venue in return for sending client orders there. It allowed some brokers to offer very low or zero fees. The problem is a conflict of interest: the broker may prefer the venue that pays it, not the venue with the best result for the client.

The 2024 review of MiFIR (Markets in Financial Instruments Regulation) added Article 39a, which bans firms from receiving PFOF for executing retail client orders. The ban has applied to cross-border business since 28 March 2024. Member states where PFOF was already common could allow a transition period, and Germany used it. That period ended on 30 June 2026, so since 1 July 2026 the ban also applies to German firms with domestic clients. In July 2026 BaFin (the German Federal Financial Supervisory Authority) published guidance on which business models remain allowed. Check the current rules and your broker's documents.

The ban does not make every order cheap. Brokers now earn through visible order fees, spreads when they trade on their own account, or other charges. Your job stays the same: compare the total cost.

What you can check yourself

• Read your broker's execution policy: which venues, which default venue, and whether you can choose.
• Some venues compare their prices with a reference market (for German shares often Xetra) and promise not to be worse; read the exact conditions.
• Use limit orders, so a poor quote cannot fill you.

Worked example

Hypothetical example: You want to buy shares of a liquid company. At the same moment you see two venues:

Order of 200 shares:

1. Venue A: 200 × €25.04 = €5,008.00; + €6.40 = €5,014.40.
2. Venue B: 200 × €25.06 = €5,012.00; + €1.00 = €5,013.00.
3. Venue B is cheaper by €1.40, even though its price is worse.

Order of 1,000 shares:

1. Venue A: 1,000 × €25.04 = €25,040.00; + €6.40 = €25,046.40.
2. Venue B: 1,000 × €25.06 = €25,060.00; + €1.00 = €25,061.00.
3. Now venue A is cheaper by €14.60.

Break-even size: the fee difference is €6.40 − €1.00 = €5.40; the price difference is €0.02 per share. €5.40 ÷ €0.02 = 270 shares. Below about 270 shares venue B wins on total consideration; above it venue A wins. Assumptions: both quotes are firm for the full size; taxes and custody fees are excluded.

Common mistake

Practice activity

You want to sell 500 shares. Venue X shows a bid of €12.10 with a total fee of €5.90. Venue Y shows a bid of €12.08 with a fee of €0.99. (a) Calculate the net proceeds on each venue. (b) Which venue gives the better total consideration? (c) At what order size are both equal?

Key takeaways

• Best execution is a duty to follow a sound, monitored process, not a guarantee of the best price on every order.
• For retail clients the yardstick is total consideration: price plus all execution costs.
• PFOF has been banned in the EU, and in Germany fully since 1 July 2026; brokers now earn through other, more visible charges.
• Calculate a break-even order size to see which venue suits your typical order.

Next step

In the next lesson you will see how trading hours, auctions and volatility interruptions change the price your order receives during the day.