Do you know what "best execution" means? Arthur Levitt, chairman of the U.S. Securities and Exchange Commission, thinks that today's Internet-savvy, quote-addicted investor does, and he's cracking down on the brokerage industry to make sure that they deliver it. On Thursday the SEC posted new guidelines on its Web site to educate investors about this important concept.

"In the past, customers generally trusted their brokers to make decisions on how and when and where to execute trades," says Mr. Levitt. But that mode of practice is just another anachronism these days, he asserts.

"A new breed of investor, more informed, more inquisitive, more cynical, more in touch with our markets than ever before has been spawned by the Information Age. New technologies and faster, cheaper computer power makes it even more possible to improve customer execution prospects," he says.

Mr. Levitt made his statements at the Securities Industry Association's annual conference in Boca Raton, Florida, a prestigious conference that serves as a sort of Cannes Film Festival of the securities industry.

THE PRICE IS RIGHTBest execution is securities industry jargon for the ability to obtain the best price for a security at any moment in time. As Mr. Levitt defines it, the concept of best execution "encompasses a number of factors, starting with the price of the execution, as well as the opportunity for price improvement." Another consideration is the likelihood of a trade execution.

The SEC's push in this area could establish new standards for the brokerage industry as well as for retail investors, especially those who actively trade on the Web. Unlike the technical performance of Web sites that affects the price at which customers can buy or sell stocks, best execution cuts to the heart of time-honored brokerage traditions and practices. Mr. Levitt thinks that industry folks who don't think there's any need for change of this tradition are "old-fashioned and trite."

Mr. Levitt, in fact, calls on the financial press that rate brokerage performances to include best execution as a criteria. "I see no reason why execution should not be part of every review of retail brokerages," he says.

The SEC expects the brokerage industry to come up with a solution rather than the SEC passing any new rules, according to Mr. Levitt. But he said that a recent study of brokerage compliance with best-execution rules yielded "troubling" results.

That's because many brokerages engage in a practice known as "payment for order flow," which means that market-making firms and specialists at exchanges pay retail brokerages to send securities orders their way. Sometimes, the commission found, this practice came at the expense of the retail orders. It means that retail investors don't always get the best price.

Although market makers are already required to disclose whether they engage in the practice of payment of order flow, Mr. Levitt says the current levels of disclosure are not enough. "An investor has a right to know how his broker is being compensated for executing any given trade, to know that his broker has been paid to send an order to a specific exchange, and to know the profit-sharing arrangement with a market center," he declares.

LET'S MAKE A DEALMany brokerages already complain about regulations that have been implemented in the past couple of years. These include the SEC's order-handling rules, which in part helped spawn the electronic communication networks (ECNs), and decimalization rules. The decimalization initiative, which converts the denominations of stocks to decimals instead of fractions, is slated to go into effect the summer of next year. Traders at brokerage firms have been fretting about profits because decimalization could significantly narrow the pricing spreads. Now Mr. Levitt is chipping away at another way that the brokerages have traditionally made money: payment for order flow.

Although it's doubtful that the vast majority of retail investors could define the concept of best execution, a glance at the various online message boards indicate that investors who trade online compare notes on brokers and their performance.

For now, however, most investors are only dimly aware of the concept, according to electronic commerce consultants. It's going to be difficult to bring a fair, objective measure of best execution to the retail world, says Alex Stein, a principal with Gomez Advisors. Gomez Advisors was recently asked by three brokerage firms -- one full-service firm and two online discounters -- to conduct a best-execution study because they were convinced that they were the best. But they backed off after they realized what it would do to their existing business, he says.

"As soon as you can prove it, it's going to mess up your payment for order flow," Mr. Stein says.

Mr. Stein says that payment for order flow is still a significant revenue generator for the online brokerages. He estimates that the online brokerages currently make, on average, 0.8 cents a share for every share that they are paid to send to a market maker. He says that the brokerage industry has two options when it comes to measuring best execution. Either the market makers surrender data about their trades to a third party for measurement, or the brokerages will need to risk some of their own capital to investigate whether they provide best execution. He estimates that it could cost an individual company at least $1 million to do so.

"If Chairman Levitt were serious, he would require the brokerages to release enough information so that third parties could compare apples to apples," he says.