Securities regulators are examining how brokerages decide where to send U.S. stock trades amid concern that routing practices are being driven by self-interest rather than what’s best for clients.
The Financial Industry Regulatory Authority anticipates sending some brokers a questionnaire during the first half of 2014, seeking clarity on their process for picking among the more than 50 venues where American shares trade, said Thomas Gira, executive vice president of market regulation at Finra.
The exchanges and alternative venues that constitute the $22 trillion U.S. equity market offer an array of pricing schedules and order types to lure business from traders. Brokers routinely send orders to whatever market pays the most, prioritizing their own profits over getting the best prices for their customers, according to a recent study from the University of Notre Dame and Indiana University.
The self-regulatory organization, which oversees its broker-dealer members, wants to ensure that “they’re not making decisions to put the rebate ahead of the execution quality,” Gira said.
The group usually sends questionnaires after noticing problems during regular examinations or following high-profile failures. Finra last sent targeted examination letters in July, when it probed automated strategies used by high-frequency traders.