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Payment of Order Flow vs. Best Execution: Massachusetts Investigates

August 15, 2017

[Photo: William Galvin, Secretary of Commonwealth of Massachusetts]


by Howard Haykin


William Galvin, the top securities regulator for the Commonwealth of Massachusetts, announced that an investigation is underway into payment for order flow and best execution practices at 7 of the country’s top retail brokerage firms: (i) Fidelity Investment;  (ii) Charles Schwab;  (iii) Scottrade;  (iv) TD Ameritrade;  (v) E*Trade Financial;  (vi) Edward D. Jones;  and, (vii) Morgan Stanley.


The regulator sent letters to each firm requesting information about policies and practices for routing customer buy and sell orders to exchanges that offer payments for order flow, as well as procedures for ensuring best execution on trades. In his announcement, Mr. Galvin referred to a recent opinion piece in the NYTimes that said customers don't get the best price when brokers choose exchanges for the rebates they offer.


"My office is looking into the veracity of these assertions and whether the brokers are meeting their best execution obligation to their customers. If financial rebates or kickbacks create a conflict that results in less than the best deal for the investors, this practice must stop."


According to recent regulatory filings:

  • Schwab, sent 29% of customer orders to KCG, for which it received on average less than $.0009 a share; it also sent 27% to Citadel in a similar arrangement.
  • Fidelity sent 34% of its orders to Citadel, and 32% to KCG.
  • E*Trade sent 41% of its orders to G1, a former affiliate that pays on average $.0001 a shar; it also sends orders to Citadel, BATS, KCG and Citi, among others.


FINRA conducted a comprehensive sweep of Order Routing and Execution Quality of Customer Orders in July 2014.


To access Lightspeed Trading’s payouts, click on Routing Fees.”