(Adds comment from regulator, background on SEC investigation
and study by academics)
NEW YORK, July 8 Wall Street's self-regulator
said on Tuesday it is conducting examinations of 10 firms to
ensure they are in compliance with regulations requiring that
investors receive the best execution for their stock orders.
The Financial Industry Regulatory Authority did not disclose
which 10 firms were sent letters demanding records and other
documents on their execution and order-routing practices.
FINRA posted a sample letter on its website explaining its
examination process. A link to the letter can be found at (here)
Tom Gira, executive vice president of FINRA's Market
Regulation Department, said the 10 firms were selected because
of their order flow.
"We're conducting a sweep, it's called a thematic sweep, we
want to learn more about these issues," Gira said. "We wanted to
ask them some questions. We're not concluding that they violated
anything," he said.
FINRA is now the second regulator conducting a deeper probe
into how orders are routed on Wall Street. Reuters reported in
May that the Securities and Exchange Commission has sent out
subpoenas in a broad investigation into similar routing
The SEC's enforcement division is also looking at the
payments that some retail brokers receive from exchanges and
trading firms in exchange for directing customer orders to those
platforms, people familiar with the matter told Reuters.
Some of the biggest retail brokerage companies are Charles
Schwab Corp, TD Ameritrade Holding, Fidelity
Investments' Fidelity Brokerage Services and E*Trade Financial
Corp, which can get paid $100 million a year or more
for selling their orders.
Payment for order flow has long simmered as an issue on Wall
Street, where some have questioned whether they are conflicts of
interest. Researchers from the University of Notre Dame and the
business school at Indiana University raised the issue in a
late 2013 a study that suggested the practice might harm retail
The study looked at TD Ameritrade, E*Trade, Scottrade and
Fidelity's unit, and found the firms tended to route "limit
orders" to the exchanges that pay the highest rebate fees. That
conflict may violate best execution rules, the study found.
Gira said FINRA's letter was exhaustive, and aimed to ensure
the 10 firms were aware of their best execution and order
FINRA wanted to know "how do they go about monitoring that
order flow and the quality of the orders, and how do they react
to issues when they see them, if they do see problems," Gira
FINRA's Trading Examination Unit of six investigators is
conducting the review of the 10 firms.
(Reporting by Herbert Lash. Editing by Andre Grenon, Bernard