As discussed in the 2017 Report on FINRA Examination Findings, FINRA has observed firms that receive, handle, route or execute customer orders encountering challenges with meeting their duty of best execution in equities, options and fixed income securities trading. In particular, in 2018, FINRA observed that some firms did not comply with FINRA Rule 531022 (Best Execution and Interpositioning) because they relied upon a deficient “regular and rigorous review” of customer order execution quality. As a result, such firms failed to assure that order flow was directed to markets providing the most beneficial terms for their customers’ orders. FINRA reiterates its concern from the 2017 Report on FINRA Examination Findings that firms should not allow conflicts of interest relating to financial benefits from routing orders to particular venues adversely to affect the objectivity of their “regular and rigorous” review. Examples of some deficiencies FINRA observed are discussed below.
- No Execution Quality Assessment of Competing Markets – Some firms did not compare the quality of the execution obtained via their existing order routing and execution arrangements (including order-by-order review for the internalization of order flow)23 against the quality of execution they could have obtained from competing markets.
- No Review of Certain Order Types – In some instances, firms did not conduct adequate reviews on a type-of-order basis.
- No Evaluation of Required Factors – FINRA observed some firms that did not consider certain factors set forth in FINRA Rule 5310 (Best Execution and Interpositioning) when conducting a “regular and rigorous review,” including, among other things, speed of execution, price improvement and the likelihood of execution of limit orders.
22 FINRA Rule 5310 (Best Execution and Interpositioning) requires that, in any transaction for or with a customer or a customer of another broker-dealer, firms use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.