Best Execution Tax denotes the implicit financial cost incurred by market participants when trade execution falls short of optimal conditions, even when a nominal best execution standard applies. In crypto markets, it represents the quantifiable performance degradation resulting from not securing the most favorable pricing or liquidity across available venues.
Mechanism
This cost materializes when a trading system or intermediary fails to route an order to the venue offering the tightest spread, deepest order book, or lowest total transaction fees at the moment of execution. Factors contributing include fragmented liquidity, varying network latencies between platforms, and information asymmetry, leading to higher slippage or wider bid-ask spreads than achievable with superior routing.
Methodology
Quantifying this implicit tax necessitates a rigorous post-trade analysis, comparing executed prices against a theoretical best achievable price across all accessible liquidity sources, accounting for market impact and all direct and indirect transaction costs. Mitigation strategies center on implementing advanced smart order routing algorithms that aggregate and evaluate liquidity from diverse centralized and decentralized exchanges.
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