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Brokers Routing to Their Own ATSs Face Scrutiny

Traders Magazine Online News, February 25, 2019

Ivy Schmerken

A FINRA working paper has raised concerns about broker order routing to affiliated alternative trading systems (ATSs), shedding light on order routing decisions and potential conflicts that can impact execution quality.

The major finding is that institutional orders routed by brokers that send a relatively high percentage of institutional orders through affiliated ATSs receive lower fill rates and higher execution costs, according to a working paper by FINRA’s Office of the Chief Economist, published in late January.

Though this is not the case with all brokers that own ATSs, FINRA was able to analyze a massive amount of data to identify distinct patterns of order routing behavior.

Using data from the Order Audit Trail System (OATS), FINRA completed a detailed analysis of order handling information over the life of 330 million institutional orders routed by 43 active institutional brokers for a size stratified sample of 273 stocks, or 2.3 billion orders, in October 2016.

FINRA used the FINRA ATS Transparency data, which had 32 ATSs on the list during the sample period.

Buy-side firms have long suspected that their orders may have been exposed to many venues during an order’s life cycle, but they have lacked the industry-wide data necessary to prove it.

In FINRA’s sample, the institutional top order size was 1,371 shares with the average share in the order routed approximately 10 times in the order’s life cycle.

Orders coming to the brokers were received either electronically or manually. They could also be generated by the broker’s order routing algorithm, according to Jonathan Sokobin, FINRA’s Chief Economist and Senior Vice President in a follow-up email.

As the paper notes, it’s been difficult for institutions to assess the performance of their brokers, even though they utilize transaction cost analysis “especially since routing data is either unavailable or hard to decipher.”

Opaque reporting has prevented the buy side from accessing this data, notes the paper. And, with 13 stock exchanges and 45 dark pools, US equity market structure is complex to assess.


While FINRA’s paper states that not all brokers show a preference for routing institutional client orders to affiliated ATSs, some brokers demonstrated a persistent pattern of routing orders to affiliated ATSs.

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