A firm settled FINRA charges for failing to exercise reasonable diligence to ensure that it routed customer orders through venues that provided the best execution quality.
In a Letter of Acceptance, Waiver and Consent, FINRA stated that the firm prioritized the routing of marketable, non-marketable and odd lot equity orders to exchanges that paid for the order flow or paid the highest rebates. FINRA found that, for such orders, the firm's written supervisory procedures did not reasonably mandate an underlying execution quality analysis of competing markets, as required under FINRA Rule 5310 ("Best Execution and Interpositioning"). Additionally, FINRA stated that the firm failed to disclose in its Regulation NMS Rule 606 ("Disclosure of Order Routing Information") quarterly reports certain material information, such as the per share or order payments that it received from venues.
As a result of its findings, FINRA determined that the firm violated NASD Rule 3010, FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision") and 5310, and Regulation NMS Rule 606.
To settle the charges, the firm agreed to (i) a censure and (ii) an $850,000 fine.
Commentary
While the GameStop run-up was unrelated to the receipt by retail brokers of payment for order flow, the fact that some of the brokers principally involved in executing GameStop trades received the bulk of their revenue through payment for order flow has focused attention on the business practice. See also SEC Order AP - 10906.
Primary Sources
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