FINRA Begins Sweep on Order Routing, Inducements, and Conflicts of Interest

Just a few weeks ago, FINRA sent targeted examination letters to a select group of firms requesting information as part of a review of how firms handle the conflicts of interest related to payments or other inducements for order routing.

These letters are coming from the Trading & Financial Compliance Examinations (TFCE) section in Market Reg, and their focus examines three main aspects of the issue:

  • How the firm quantifies the benefits to its customers;
  • How the firm meets its best ex obligations: and
  • How the firm manages the conflicts as it routes order flow some of which it garners larger economic gain from.

The SEC and FINRA each noted trading practices as a primary issue in their respective 2017 examination priorities, and both regulators reminded firms to provide accurate payment for order flow disclosures and accurate disclosures on how they comply with their duty of best execution when routing customer orders for execution. FINRA also reminded broker-dealers to consider how the automation of the markets and recent advances in trading technology and communications affect their order-handling decisions and their review of the execution quality they provide customers.

Further, in the last few months during exams, we’ve seen that regulators are expecting RIAs to be able to produce more detailed trade data to support best execution analysis than in the recent past.

More information on the sweep here

Oyster’s Trading & Market’s Practice Can Help

Oyster’s Trading & Market’s Practice team has worked for both large and small broker-dealers and registered investment advisors to examine their trading, order handling, and best execution processes.  We have specifically worked on the conflicts that arise when accepting order flow inducements.

We can review your best execution practices and insure they will pass inspection with both customers and regulators. Our review involves both traders and compliance professionals to achieve meaningful outcomes for your firm.

Recent Case Studies

  • A national discount broker-dealer needed a review of their trading practices and best execution processes. Oyster evaluated their best execution committees, vendor relationships, order flow routing inducements, and business structure to determine if they were achieving their goal of delivering best in class execution to their clients, while also delivering on their promise to meet the demands of the regulators.
  • For a RIA with $20 billion in assets, Oyster completed a review of their trading and execution processes to align them with their unique investment style and custodian mix.
  • A hybrid broker-dealer, with $100 billion in client assets and an ever-growing asset management business needed to be sure that their single equity execution desk, which handled the brokerage and advisory account order flow, was correctly attending to the regulatory reporting requirements. Oyster reviewed their trading operations and recommended changes to ensure correct regulatory reporting and adherence to best practices.
  • A RIA was unsure that their execution partners were keeping them competitive. Oyster helped them review their counter parties and negotiate new commissions rates.

About The Author

As the CEO of Oyster Consulting, Buddy Doyle has led the charge to create a successful organization built on the belief that transforming experienced industry practitioners into consultants adds more value to our clients.

Colored pencils stacked on top of each other

Download the Capital Markets Services eBook to learn about CAT Reporting, Trade and Position Reporting, Market Access and Best Execution.

Capital Markets eBook Cover Skyscraper
Colored pencils stacked on top of each other