Best Execution on Trade Discovery ™

Trade Discovery is a trading platform and matching engine that enables institutions and broker-dealers to trade directly and anonymously with each other in less liquid fixed income securities. Resulting matched transactions are executed by a central counterparty acting as the executing broker.

Participant bids and offers are posted for negotiation while potential counterparties are contacted electronically based on their stated interest or holdings. During a negotiation, the trade initiator may receive and view multiple bids or offers, and all parties to the negotiation see the best bid or offer highlighted as the inside market.

Gene Gohlke, Associate Director of the SEC Office of Compliance Inspection and Examinations, described the objective of best execution as: “In placing a trade, the trading desk will seek to find a broker/dealer or alternative trading system that will execute a trade in a way that the trader believes will realize the maximum value to the investment decision.”

Best execution is achieved when the buyer or seller completes a trade at the best price which is available in the marketplace at that time, for the specified quantity and according to the trade conditions imposed by that party. “Best price” refers to the price attained net of any commissions, markups, or other direct costs. The “marketplace” refers to the cumulative of venues that are reasonably accessible to the trader for transacting in the desired security. “Trade conditions” may include limitations imposed by one or more parties including “all or none,” non-standard settlement dates, or other terms, and can complicate the task of identifying the best executable price. Trade Discovery is designed to ensure that best execution is achieved for any trade completed on the platform, based on the bids or offers and trade conditions that were entered in a given negotiation.

As an electronic trading platform, Trade Discovery offers an unbiased venue beginning with equal and timely access to potential counterparties. Participants are notified simultaneously whenever an order is initiated. Consistent rules are applied to participants and transactions at all times. Beacon maintains a level playing field through the anonymity of trading participants, transparency of the offering, negotiating, executions and settlements processes, and by providing a reference price to participants in each negotiation.

The mandate to identify the best executable price is further complicated in the less liquid sector by several factors:
• The chosen security may not be available for sale anywhere else, or a potential seller may not be readily located.
• Substitute securities may be identified and available but hard to price accurately.
• An indicative quote for a security or comparable substitute may be available, but the actual security may not be located or otherwise available for sale.

Beacon’s mandate is to provide the venue by which our customers may find the best execution available in the marketplace. Customers will likely confer with other sources in order to be fully satisfied. A detailed electronic Audit Trail is available to the counterparties upon completion of each trade. The Audit Trail includes a time stamped record of every material event which occurs during the negotiation period including changes in bids and offers, quantity, trade condition, and benchmarks. The identities of the parties are not disclosed in order to maintain customer anonymity.

Beacon’s reference prices are calculated in real time, based on a benchmark price for the security, and displayed to participants. The quantitative model used to calculate the reference price is provided by a neutral third party, Andrew Kalotay Associates.

Once a negotiation commences, prices posted by the participants are firm; bids and offers are immediately executable when quantity and trade conditions are agreed upon. A match initiates an automated process whereby the matched order is presented to the executing broker for execution and clearance and settlement. Each party to the trade is notified at the moment of execution.

Beacon welcomes all qualified participants including large asset managers such as insurance companies, pension funds, mutual funds, hedge funds, portfolio managers, and foundations, and regional and national brokers and dealers, and originators of securities.

Beacon endeavors, through Trade Discovery, to provide an alternative trading system, which will enable participants to fulfill their missions and obligations more effectively and more confidently than is possible today.