FINRA Launches Review of Routing and Execution Quality of Customer Orders in Exchange-Listed Stocks (with Lofchie Comment)

In response to routing patterns discovered through the FINRA Order Audit Trail System, the FINRA Trading Examinations Unit is conducting a review of the processes and procedures through which retail brokers route customer orders.

FINRA posted an example on its Web site of the "sweep letter" it will send to brokers requesting that each firm provide information in connection with order routing and the execution quality of customer orders in exchange-listed stocks, including information as to:

• the firm's written supervisory procedures for FINRA Rule 5310 ("Best Execution and Interpositioning");
• the firm's internal procedures for reviewing execution and the supervisors responsible for execution procedures;
• how the firm uses reasonable diligence to ascertain the best market for orders routed for execution to an exchange or broker-dealer so that the price is as favorable as possible for its customer;
• how the firm's exchange order-routing decisions are made for customer non-marketable limit orders, customer market orders and customer marketable limit orders;
• whether the firm routes retail, institutional and proprietary orders in the same way;
• whether the firm passes any and all exchange maker/taker fees on to its customers;
• whether the firm uses a Smart Order Router ("SOR") to route customer orders to exchanges and, if so, how maker/taker fees are considered as part of the SOR routing decisions for customer orders; and
• whether the firm routes customer market and/or limit orders to other broker-dealers for execution in exchange for payment or other remuneration ("payment for order flow") and, if so, how (in a detailed disclosure) all such payments for order flow are arranged.

Lofchie Comment: Whether or not they receive a sweep letter, all firms should consider how they would answer these questions and whether their responses would be satisfactory to regulators and customers.

See: FINRA Example Letter Re: Order Routing and Execution Quality of Customer Orders.