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FINRA Initiates Sweep Exam: Order Routing Conflicts

November 21, 2017

In early November, the Trading & Financial Compliance Examinations section of FINRA Market Regulation (Market Regulation) began a SWEEP EXAMINATION to evaluate what impact the receipt of order routing inducements - e.g., payment for order flow and maker-taker rebates - has on firms' [equities and options] order routing practices and decisions.


As part of this review, selected member firms have been asked to provide complete and detailed responses to the following:


1.   How does the Firm quantify the benefits, if any, to [FIRM] customers from the Firm’s receipt of order routing inducements, such as payment for order flow and maker-taker rebates? Provide analytical or other evidence of such quantified benefits.


2.   Describe how [FIRM] fulfills the Firm's duty of best execution and quantifies the benefits, if any, to its customers when routing orders of a particular type to a market center with transaction costs for that order type that are materially higher than the transaction costs for the same order type on other market centers.


3.   Describe how [FIRM] manages the conflict of interest that exists between the Firm’s duty of best execution to customers and the Firm’s own financial interests in situations where the Firm routes customer orders to market centers that pay order routing inducements, such as payment for order flow and maker-taker rebates, or internalizes customer orders (e.g. routing customer orders to an affiliated over-the-counter market maker or alternative trading system in which the Firm has a financial interest).