FINRA Finds High Broker-Affiliated ATS Order Routing Is Linked with Lower Fill Rates
Commentary by Steven Lofchie
FINRA's Office of the Chief Economist ("OCE") found that brokers that route orders to affiliated alternative trading systems ("ATSs") at high rates obtain lower fill rates.
In a working paper, OCE analyzed order-handling information over the span of 330 million institutional orders to study whether order routing by brokers to affiliated ATSs impacts the quality of execution. FINRA's OCE found that trading costs are higher when clients select a broker with high rates of affiliated ATS routing. In addition, FINRA's OCE concluded that enhanced disclosures on order handling could benefit institutional clients with their broker selection.
Commentary
This is a warning signal. Firms running an ATS should consider the implications of the report for any ATS it runs, in terms of attracting business, regulatory risk relating to conflicts of interest, and customer risk in terms of disclosure and best execution.