Group Co.
FINRA Posts Review and Advisory on Order Routing Conflicts
Traders Magazine Online News, November 15, 2017
The Trading & Financial Compliance Examinations (TFCE) section of the Market Regulation Department (Market Regulation) at the Financial Industry Regulatory Authority, Inc. (FINRA) is conducting a review of firms concerning the impact the receipt of order routing inducements, such as payment for order flow and maker-taker rebates, has on the Firm’s [equities and options] order routing practices and decisions.
As part of this review, TFCE requests that the brokers provide complete and detailed responses to the following:
- How does the broker quantify the benefits, if any, to a broker's customers from the Firm’s receipt of order routing inducements, such as payment for order flow and maker-taker rebates? Provide analytical or other evidence of such quantified benefits.
- Describe how the broker fulfills the broker's duty of best execution and quantifies the benefits, if any, to its customers when routing orders of a particular type to a market center with transaction costs for that order type that are materially higher than the transaction costs for the same order type on other market centers.
- Describe how the broker manages the conflict of interest that exists between the broker's duty of best execution to customers and the Firm’s own financial interests in situations where the Firm routes customer orders to market centers that pay order routing inducements, such as payment for order flow and maker-taker rebates, or internalizes customer orders (e.g. routing customer orders to an affiliated over-the-counter market maker or alternative trading system in which the broker has a financial interest).
Best execution of customer orders is a key investor-protection requirement, and for years has been a priority-focus area FINRA said. In the latest development, FINRA is asking select member firms for information on the impact of order-routing inducements such as payment for order flow and maker-taker rebates on the firms’ order-routing decisions and practices. FINRA will use the information to evaluate what additional actions, if any, may be appropriate to help ensure rigorous compliance with rules safeguarding the best execution of customer orders.
On November 9, FINRA sent a “sweep” letter outlining the aforementioned review to select firms that represent a cross-section of member firms. Responses are due by Nov. 30, 2017.
The sweep is part of FINRA’s continuing focus on best execution, as indicated in its 2017 Regulatory and Examination Priorities Letter and its 2015 guidance on best-execution obligations.
- -- The 2017 Priorities letter reminds firms of the obligations they owe customers when they receive, handle, route or execute customer orders in equities, options and fixed income securities. It also notes that firms should consider how this obligation interacts with the continued automation of markets for equity securities and standardized options, and recent advances in trading technology and communications in the fixed income markets. Firms are expected to understand how these changes affect their order-handling decisions and factor those changes into their review of the execution quality they provide customers. In addition, the letter reminds firms of the importance of providing accurate payment for order flow disclosures
- -- FINRA has brought a number of significant enforcement actions regarding best execution. For example in May 2017, FINRA fined Merrill Lynch $650,000, imposed restitution, and required other undertakings for their handling of certain customer orders related to violations of the best execution requirements in Rule 5310.
For more information on related topics, visit the following channels:
Comments (0)