In November, FINRA will distribute to select firms a targeted exam letter on order routing conflicts. The targeted exams are used to gather information, conduct investigations, and inform responses to particular regulatory issues.
The Trading & Financial Compliance Examinations ("TFCE") section of FINRA's Market Regulation Department is conducting a review of the impact of inducements on order routing practices. Order routing inducements include payment for order flow and maker-taker rebates. Specifically, TFCE is soliciting information regarding the following:
- how a firm quantifies benefits to customers from the firm's receipt of order routing inducements;
- how a firm fulfills its duty of best execution and how a firm quantifies the benefits to customers of particular types of routing orders (e.g. routing orders that may have differing transaction costs in different market centers); and
- how a firm manages conflicts of interest between the duty of best execution to customers and the firm's own financial interests that arise in connection with order routing inducements.
Commentary / Patrick A. Calves
The FINRA targeted exam letter asks very broad and generic questions concerning very complex issues. This puts firms in a difficult position when trying to accurately and fully respond. It also leaves significant room for interpretation of the questions and thus variance in responses.
Nonetheless, order inducements such as maker-taker pricing and payment for order flow, while a frequent hot topic, are clearly under increased regulatory scrutiny. Note that FINRA's targeted exam letter conspicuously coincides with the SEC's focus on launching an access fee pilot. Firms should review prior FINRA and SEC guidance (see FINRA Regulatory Notice 15-46) on best execution obligations and payment for order flow when responding to this letter and when making order routing decisions (or programming order routing algorithms) generally.
Commentary /Steven Lofchie
This is a very clear message to firms that they must review their order routing and best-execution procedures.
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