A hands-on options curriculum covering real trading concepts. Read the lessons, work through examples, and test your knowledge.
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Lesson 5: 18.5: Best Execution Compliance & MIFID II Unbundling Requirements
Examine SEC Rule 605/606 disclosures, MiFID II research unbundling, best execution obligations, and payment for order flow (PFOF).
1. Best Execution Obligations & SEC Rules 605/606
Brokers owe clients a fiduciary duty of 'Best Execution'—executing trades on terms most favorable to the client considering price, speed, fill probability, and execution size.
• SEC Rule 605: Mandates execution quality reporting by market centers.
• SEC Rule 606: Requires broker-dealers to publish quarterly reports detailing order routing practices and Payment for Order Flow (PFOF) revenue.
★ Payment for Order Flow (PFOF): Compensation paid to retail brokers by wholesale market makers for routing retail order flow.
2. MiFID II Research Unbundling
European MiFID II regulations require asset managers to unbundle (separate) research payments from trade execution commissions, ending the practice of funding investment research via soft-dollar trading commissions.
Click to enlargeIV Crush Scenario Visualizer
Implied Volatility (IV) Crush is the primary account-killer for option buyers after earnings announcements. Play with the controls below to see how option premium collapses depending on Vega.
Scenario Modeling
KNOWLEDGE RECONNAISSANCE
What major change did European MiFID II regulations enforce regarding investment research?
More lessons in this module
- 18.0: Global Market Regulatory Frameworks (SEC, CFTC, FINRA, ESMA, FCA)
- 18.1: Market Abuse, Insider Trading, & Front-Running Enforcement
- 18.2: Anti-Money Laundering (AML) & Know Your Customer (KYC) Protocols
- 18.3: Trade Reporting, Audit Trails, & CAT (Consolidated Audit Trail)
- 18.4: Capital Adequacy Rules, Basel III/IV, & Risk-Weighted Assets
- 18.6: Cross-Border Regulatory Jurisdictions & Offshore Tax Frameworks
- 18.7: Algorithmic & HFT Compliance Governance (SEC Rule 15c3-5, MAR)
- 18.8: Regulatory Technology (RegTech) & Automated Surveillance Pipelines
Signal Desk is where you practice this on real stocks: real option chains (about 15 minutes delayed), the Trade Check and a paper-trading account that risks no real money. Join to add it, your progress tracking and PDF downloads.