The Financial Industry Regulatory Authority (FINRA), the largest independent regulatory authority in the US, has issued a fine against E*Trade Securities LLC for the sum of $900,000 after a discrepancy in its execution, according to a FINRA statement.
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E*Trade is a US-based financial services company and online stock brokerage – the group drew a fine from FINRA for its failure to properly conduct an adequate review of the quality of execution of its clients’ orders. Additionally, FINRA had ruled that E*Trade suffered from supervisory deficiencies with regard to the protection of customer order information, according to a recent manifest. In response to the fine, E*Trade neither admitted nor denied the charges.
The nature of the issue stemmed from E*Trade’s customer orders to multiple exchanges and non-exchange market centers, which were not executed in a proper fashion. Traditionally, financial firms that route customer orders are dictated by quality control measures, such as ascertaining the overall quality of competing markets, which ultimately directs order flow.
Such firms are required to conduct periodic and rigorous reviews of the quality of the executions of these orders to prevent any differences in execution quality in an effort to satisfy these needs. E*Trade had previously established a best execution committee with the sole purpose of overseeing and reviewing its execution quality.
However, despite the efforts by E*Trade’s committee, FINRA ultimately ruled that the group did not possess accurate information to plausibly assess the execution quality that it provided its customers. In particular, the committee did not properly take into account the internalized order flow that was sent to its affiliated broker-dealer market maker G1 Execution Services (G1X), and failed to consider the actual execution quality provided by the market centers that it was routing to.
According to Thomas Gira, FINRA Executive Vice President (EVP) and Head of Market Regulation , said: "This action serves to remind firms that they must remain diligent in ascertaining the best market for their customers, and must conduct regular and rigorous reviews of their routing decisions to ensure their best execution obligations are met."
“This needs to be a substance over form review, not a form over substance review. This matter further underscores that firms must have real systems and processes in place to ensure that confidential customer information is protected,” he added.
