NEW YORK (Reuters) - 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 practices.
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 investors.
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 handling obligations.
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 said.
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 Orr