FINRA to investigate how firms route orders


Amid industry discussions that firms have been routing orders to markets based on their own interests rather than the interests of their clients, the Financial Industry Regulatory Authority has announced plans to investigate the claims.

FINRA plans to send brokers a questionnaire in the first half of the year that will assess how decisions are made about where to send trades, Thomas Gira, FINRA executive vice president of market regulation, told Bloomberg.

A recent study by the University of Notre Dame and Indiana University found that brokers routinely send orders to the market that pays them the most rather than the market offering the best price for a trade.

The survey will attempt to make sure "they're not making decisions to put the rebate ahead of the execution quality," Gira said.

Exchanges and alternative venues may offer a variety of incentives or payments to attract business. The system of charging brokers who place orders and paying ones who fulfil trades is called maker-taker pricing.

An investigation would be welcome by the buy side, according to Traders Magazine, which reported that buyside firms have long questioned how orders are routed.

One trader, David Jennings, of Houston-based Bridgeway Capital, told Traders Magazine that he was in favor of firms explaining order routing.

"Personally, I'd like to see an end to all forms of payment for order flow and maker-taker rebates, etc." he said.

Others agree. In November, RBC Capital Markets sent a letter to the Securities and Exchange Commission calling for a ban on the practice of charging for some traders while paying others.

FINRA often begins an investigation by sending out questionnaires. FINRA last sent out questionnaire letters in July when it explored automated strategies used by high frequency traders.

For more:
- read the Bloomberg article
- read the Traders Magazine article

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