Brokers OK With Disclosing Routing Methods to FINRA

Broker-dealers are OK with disclosing their order-routing practices should the Financial Industry Regulatory Authority ask them about their procedures.

This comes in the wake of a Bloomberg News interview last week with Finra execs that said brokers can expect to see a questionnaire asking for more information on their order routing methodology and/or decision making process.

See Also:Buyside Welcomes FINRA Investigation into Order Routing

Thomas Gira, Finras executive vice president of market regulation, said in an article that Finra will be sending select brokers a questionnaire during the first half of 2014. He said that the regulators are seeking clarity on brokers’ order routing decision-making processes among the myriad exchanges, dark pools and alternate trading systems where U.S. equities trade.

Finra will “probably do some type of a sweep, and make sure firms are asking the right questions and looking at the right numbers and doing the right analysis when they’re making routing decisions,” Gira told Bloomberg. The self-regulatory organization, which oversees its broker-dealer members, wants to ensure that “they’re not making decisions to put the rebate ahead of the execution quality,” he said.

While the buyside was quick to applaud the regulators decision to seek more information, the brokers were mum at first. But now they are beginning to speak – anonymously.

Were in favor of transparency, said one electronic trading head in New York. We proactively disclose our algo methodology, smart order router logic, crossing systems, etc. We dont mind getting and answering any questionnaire.

He added that his firm has not received a questionnaire or knows what type of questions could be on it. However, the trading head said transparency was part of his firms two-pronged approach to clients and the firm offers a plethora of information – ranging from basic post-trade analysis to indepth pre- and mid-trade analytics.

It something that should be taken seriously by every broker – there is a market for transparency out here, he said. Wed have no trouble answering any questionnaire, should one come.

Another executive at a bulge trading firm told Traders that he welcomes the move towards transparency – both by his firm and the industry in general.

We welcome it, the bulge exec said about the Finra query on transparency. We also welcome everyone else being transparent.

A regional New Jersey-based broker was more tempered in his acceptance of any type of Finra inquiry. While acknowledging the buysides desire for increased clarity on order routing and the economic surrounding it, he questioned whether the regulator was up to the challenge.

Does Finra know what to ask in a questionnaire, he asked. And will they understand the answers given to them? They really have to ask the right questions of the industry and on a multitude of factors, such as toxicity, fees and leakage, or else this is a wasted exercise.

The broker added that discussions between the buy- and its sellside clients should already be dynamic and informative, and that a Finra questionnaire could be redundant.

If they dont like how transparent you are or how their order is being handled they can always vote with their order flow and send it elsewhere, he said.