FINRA reminded firms of their obligations under current regulations and guidance on best execution and payment for order flow. FINRA emphasized that under SEC and FINRA rules and guidance, "member firms may not let payment for order flow interfere with their duty of best execution."
In the Notice, FINRA reiterated that the duty of best execution, as codified in FINRA Rule 5310 ("Best Execution and Interpositioning"), requires a broker-dealer to find the "most favorable terms reasonably available under the circumstances for a customer's transaction."
FINRA said it takes into account several factors when assessing whether a firm has exercised "reasonable diligence" in fulfilling its best execution obligations under the rule. These include:
- the nature of the market for the security in question (e.g., price, volatility and relative liquidity);
- the type and magnitude of the transaction;
- the number of markets the firm checked;
- how accessible the quotation is; and
- how the terms and conditions of the order resulting in the transaction are communicated to the member and associate persons.
FINRA reminded firms that:
- best execution procedures must be "reasonably designed to identify the best practices and obtain best execution" for customers while taking into context "prevailing market conditions";
- best execution responsibilities also apply to firms receiving customer orders from other member firms for order handling and execution purposes;
- they cannot transfer their best execution responsibilities to other persons or firms;
- they are not relieved of their best execution responsibilities as a result of (i) an existing order routing, handling or execution arrangement between firms or (ii) related disclosure requirements;
- they are required to compare "any material differences" in their execution quality with the execution quality of competing markets; and
- they are required to maintain procedures to ensure that periodic, thorough execution quality reviews on a security-by-security, type-of-order basis take place.
FINRA recommended that firms consider the following factors when conducting reviews of the quality of their order executions:
- opportunities to improve the price;
- instances in which customers received a worse price at execution than the best available quotes;
- the probability of the execution of limit orders;
- how long it takes to execute an order;
- the magnitude of the execution;
- the costs associated with the transaction;
- the needs and expectations of customers;
- careful assessment of the impact on execution quality as a result of receiving payments for order flow; and
- whether internalization or payment for order flow arrangements exist.
FINRA noted SEC Chair Gary Gensler's recent directive to staff "to consider whether additional best execution requirements or guidance are needed to promote investor protection." FINRA stated that it supports that effort and "may evaluate whether further changes to its best execution rule are necessary or appropriate."
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