Firm Settles FINRA Charges for Failures to Review Execution Quality
Commentary by Steven Lofchie
A broker-dealer settled FINRA charges for best execution and supervisory violations, and for failing to disclose material aspects of its relationships with trading venues.
In a Letter of Acceptance, Waiver and Consent, FINRA stated that the firm failed to conduct reasonable, regular, and rigorous reviews of its equities order flow and options order flow. As to certain periods within the scope of FINRA's review, FINRA found the following:
- Marketable Equity Orders - The firm failed to review the execution quality that was provided by each individual market, and only reviewed the execution quality that it received in the aggregate of all markets.
- Non-Marketable Equity Orders - the firm did not review the fill rates it received from certain markets or evaluate whether it could have received better fill rates from competing markets.
- Odd Lot Equity Orders – The firm did not conduct a reasonable review of odd lot equity orders to determine whether there were material differences in execution quality between specific competing markets. Even after the firm began such reviews, it did not document them.
- Marketable Option Orders: The firm did not review execution quality information of competing markets.
- Non-Marketable Option Orders: While the firm reviewed and compared execution quality for non-marketable orders that it received from market-makers since February 2019, it did not review execution quality information of competing markets until February 2021.
- Multi-Leg Option Orders: The firm did not review execution quality information of competing markets.
FINRA also found that the firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with best execution obligations. FINRA determined that the firm failed to report the per share payments that it received from the trading venues listed in its NMS Rule 606 reports.
As a result, FINRA found that the firm violated NASD Rules 3010(a) and (b), FINRA Rules 5310(a) ("Best Execution and Interpositioning"), 5310.09 ("Regular and Rigorous Review of Execution Quality"), 3110(a) and (b) ("Supervision"), SEC Regulation NMS Rule 242.606 ("Disclosure of Order Routing Information"), and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure and (ii) an $850,000 fine.
Commentary
The disciplinary action is useful for laundry listing a number of the comparisons that a broker-dealer is required to make in considering whether it is obtaining best execution.