FINRA Fines Online Broker for Best-Execution Violations

FINRA censured and fined a broker-dealer ("the firm") that provides online securities and investing trading services to retail customers for: (i) failing to conduct adequate reviews of the execution quality of its customers' orders and (ii) supervisory deficiencies concerning the protection of customer order information, as well as the firms' best-execution review.

The firm did not facilitate customer orders directly as principal, but instead routed customer orders as an agent to various exchanges and non-exchange market centers based on a set of priorities in the firm's order-routing system. According to FINRA, the firm's Best Execution Committee (the "Committee"), which is responsible for reviewing the execution quality of the firm's customer orders, lacked enough accurate information to assess the execution quality provided to customers. Specifically, the Committee (i) did not allow for the internalization model used by the firm, through which the Firm routed customer orders to an affiliated market maker, (ii) relied on execution-quality statistics based on flawed data, and (iii) relied too much on comparisons of the firm's overall execution quality with industry and custom averages.

Additionally, FINRA found that the firm lacked adequate systems and controls for ensuring that confidential customer order information was not misused by individuals that were registered dually with the firm's affiliated market maker. The dually registered individuals had access to the firm's order management and routing systems, which allowed them to (i) view all customer orders and order statistics, (ii) view and update exception tickets, and (iii) create and cancel orders.

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