Targeted Examination Letters

July 2014

Re: Order Routing and Execution Quality of Customer Orders

 

The Trading Examinations Unit ("TEU") within the Trading and Financial Compliance Examinations ("TFCE") group of the Market Regulation Department at FINRA is conducting a review of processes and procedures of ABC Securities LLC ("the Firm") in connection with order routing and execution quality of customer orders in exchange listed stocks. As part of this review, TEU requests that the Firm provide the following information for the review period of January 1, 2014 to present (the "Review Period").

 

  1. Provide a copy of the Firm’s Written Supervisory Procedures for FINRA Rule 5310.
  2. Explain how the Firm uses reasonable diligence to ascertain the best market for orders that the Firm routes for execution to an exchange, or broker-dealer, so that the resultant price is as favorable as possible for its customer under prevailing market conditions. Include an explanation of any and all reviews that the Firm conducts as a part of its review of customer order execution quality.
  3. Explain how the Firm’s exchange order-routing decisions are made for customer non-marketable limit orders. Include a detailed discussion of the following in the Firm’s response:
    1. any and all factors used by the Firm for determining which exchange to route customer non-marketable limit orders;
    2. how exchange maker/taker fees are considered in the Firm’s routing decisions for customer non-marketable limit orders;
    3. any and all individuals at the Firm who must approve order-routing decisions based in any way upon exchange maker/taker fees for customer non-marketable limit orders;
    4. any and all individuals at the Firm who are advised of order-routing decisions based in any way upon exchange maker/taker fees for customer non-marketable limit orders; and
    5. how the Firm’s exchange routing decisions differ, based in any way upon maker/taker fees, for non-marketable limit orders placed on behalf of:
      1. retail customers;
      2. institutional customers;
      3. principal activity of the Firm; and
      4. proprietary activity of the Firm.
  4. Explain how the Firm’s exchange order-routing decisions are made for customer market and marketable limit orders. Include a detailed discussion of the following in the Firm’s response:
    1. any and all factors used by the Firm for determining which exchange to route customer market and marketable limit orders; 
    2. how exchange maker/taker fees are considered in the Firm’s routing decisions for customer market and marketable limit orders;
    3. any and all individuals at the Firm who must approve order-routing decisions based in any way upon exchange maker/taker fees for customer market and marketable limit orders;
    4. any and all individuals at the Firm who are advised of order-routing decisions based in any way upon exchange maker/taker fees for customer market and marketable limit orders; and
    5. how the Firm’s exchange routing decisions differ, based in any way upon maker/taker fees, for market and marketable limit orders placed on behalf of:
      1. retail customers;
      2. institutional customers;
      3. principal activity of the Firm; and
      4. proprietary activity of the Firm.
  5. State whether the Firm passes any and all exchange maker/taker fees on to its customers. In addition:
    1. explain the Firm’s rationale as to whether to pass along maker/taker fees;
    2. describe how the Firm discloses to its customers whether it passes any exchange maker/taker fees to customers; and
    3. provide copies of any and all customer disclosures which explain whether the Firm passes any exchange maker/taker fees to customers.
  6. Explain how the Firm reviews the execution quality of customer non-marketable limit orders that the Firm routes to exchanges. Include a detailed discussion of how maker/taker fees are considered in the Firm’s reviews. 
  7. Explain how the Firm reviews the execution quality of customer market and marketable limit orders that the Firm routes to exchanges. Include a detailed discussion of how maker/taker fees are considered in the Firm’s reviews. 
  8. Explain whether the Firm uses a Smart Order Router (“SOR”) to route customer orders to any exchange that provides maker/taker fees. If so, please also provide the following information.
    1. Explain how exchange maker/taker fees are considered as a part of the SOR’s routing decisions of customer orders.
    2. Discuss how often the Firm makes changes to its SOR based in any way upon maker/taker fees.
    3. Identify any and all individuals at the Firm who must approve SOR routing changes of customer orders based in any way upon maker/taker fees.
    4. Identify any and all individuals at the Firm who are notified of SOR routing changes based in any way upon maker/taker fees.
    5. Provide a copy of any documentation or manual that explains the SOR’s routing decisions of customer orders to exchanges.
  9. State whether the Firm routes customer market and/or limit orders (“Customer Orders”) to other broker/dealers for execution and the Firm receives a payment and/or other remuneration for such routing. If so, please provide a list of all payment for order flow arrangements between the Firm and any other broker/dealer, and a detailed description of each payment for order flow arrangement.
  10. For those orders routed to other broker/dealers for execution, explain how the Firm’s order- routing decisions are made for Customer Orders. Include a detailed discussion of the following in the Firm’s response:
    1. any and all factors used by the Firm for determining which broker/dealer to route Customer Orders;
    2. how payment for order flow is considered in the Firm’s routing decisions for Customer Orders;
    3. any and all individuals at the Firm who must approve order-routing decisions based in any way upon payment for order flow for Customer Orders;
    4. any and all individuals at the Firm who are advised of order-routing decisions based in any way upon payment for order flow for Customer Orders; and
    5. how the Firm’s routing decisions to other broker/dealers differ, based in any way upon payment for order flow, for orders routed on behalf of:
      1. retail customers;
      2. institutional customers;
      3. principal activity of the Firm; and
      4. proprietary activity of the Firm.
  11. Explain whether the Firm uses a SOR to route Customer Orders to any broker/dealer that provides payment for order flow. If so, please also provide the following information.
    1. Explain how payment for order flow is considered as a part of the SOR’s routing decisions of Customer Orders.
    2. Discuss how often the Firm makes changes to its SOR based in any way upon payment for order flow for Customer Orders.
    3. Identify any and all individuals at the Firm who must approve SOR routing changes of Customer Orders based in any way upon payment for order flow.
    4. Identify any and all individuals at the Firm who are notified of SOR routing changes of Customer Orders based in any way upon payment for order flow.
    5. Provide a copy of any documentation or manual that explains the SOR’s routing decisions of Customer Orders to broker/dealers that provide payment for order flow.
  12. Explain whether the Firm has a committee that specifically reviews execution quality of Customer Orders, including the manner in which the Firm exercises reasonable diligence in ascertaining the best market for orders that the Firm routes for execution so that the resultant price is as favorable as possible for its customer under prevailing market conditions. Please provide all of the following information:
    1. Explain any and all functions of the committee.
    2. State how often the committee meets.
    3. Identify all employees on the committee including their title and division of the Firm.
    4. Explain any and all statistics regularly reviewed by the committee.
    5. Explain how each individual on the committee is made aware of any and all changes to routing decisions, including but not limited to changes that are made considering exchange maker/taker fees and changes made in connection with payment for order flow arrangements.
    6. Provide a copy of the minutes of any and all committee meetings during the Review Period.
    7. Explain who approves, and who is made aware of, any and all changes to routing decisions, including but not limited to changes that are made considering exchange maker/taker fees and changes made in connection with payment for order flow arrangements. 
    8. Identify all market centers (i.e., exchanges, other broker-dealers, and ATSs) to which the Firm routed orders during the Review Period. Include the quarterly volume percentage of Customer Orders sent to each noted market center.
    9. If the Firm does not have a committee, provide a detailed explanation of all reviews the Firm conducts as part of its reviews of order execution quality and respond (as relevant) to 12(a) through 12(h) above.