FINRA Rule 5310 (Best Execution and Interpositioning) requires firms to conduct a “regular and rigorous” review of the execution quality of customer orders if the firm does not conduct an order-by-order review.16 Where “regular and rigorous” reviews are used instead of order-by-order reviews, the reviews must be performed at a minimum on a quarterly basis and on a security-by-security, type-of-order basis (e.g., limit order, market order and market on open order). If a firm identifies any material differences in execution quality among the markets that trade the securities under review, it must modify its routing arrangements or justify why it is not doing so.
Noteworthy Examination Findings
FINRA continued to identify issues with some firms’ execution quality reviews, as well as conflicts of interest and related disclosures.
- No Execution Quality Assessment of Competing Markets – Some firms did not compare the quality of the execution of their existing order routing and execution arrangements against the quality of executions that the firm could have obtained from competing venues.
- No Review of Certain Order Types – In some instances, firms did not conduct adequate reviews on a type-of-order basis, including, for example, on market, marketable limit or non-marketable limit orders.
- No Evaluation of Required Factors – Some firms did not consider factors set forth in FINRA Rule 5310 (Best Execution and Interpositioning) when conducting their execution quality reviews, including, among other things, the speed of execution, price improvement opportunities and the likelihood of execution of limit orders.
- Conflicts of Interest – Some firms did not adequately consider and address potential conflicts of interest relating to their routing of orders to affiliated alternative trading systems (ATSs) or market centers that provide payment for order flow or other routing inducements. In addition, some firms continue to route significant portions of their order flow to such venues without conducting an adequate “regular and rigorous” review to support such routing decisions.
- Inadequate SEC Rule 606 Disclosures – Some firms did not provide adequate information in the material disclosures section of their order routing reports required by Rule 606 of Regulation NMS. For example, certain firms did not disclose, when required, the specific, material aspects of the non-directed order flow routed to their own trading desk, including that the firm stands to share in 100 percent of the profits generated by the firm’s trading as principal with its customers’ orders.17 Other firms did not disclose material aspects of their relationships with each of the significant venues identified on their reports, including descriptions and terms of all arrangements for payment for order flow (including the amounts of payment for order flow on a per share or per order basis)18 and profit-sharing relationships that may have influenced the firms’ order routing decisions.
- 2017 Report – Best Execution
- 2018 Report – Best Execution
- Regulatory Notice 15-46 (Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets)
- Report Center, Equity Report Cards section – FINRA’s Best Execution Outside-of-the-Inside Report Card
16 See also Regulatory Notice 15-46 (Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets).
17 See U.S. Securities and Exchange Commission, Division of Market Regulation: Staff Legal Bulletin No. 13A Frequently Asked Question about Rule 11Ac1-6, Question 14: Disclosing Internalized Order Flow.
18 See U.S. Securities and Exchange Commission, Division of Market Regulation: Staff Legal Bulletin No. 13A Frequently Asked Question about Rule 11Ac1-6, Question 13: Disclosing Payment for Order Flow.
Fixed Income Mark-up Disclosure