FINRA has now gone public with its sweep by posting its “Targeted Examination Letter” on the FINRA website. The letter, issued by FINRA’s Market Regulation Department, covers a review period for this year to date, and pointedly asks firms to explain how they determine the best market to which to route their orders so that the resultant price is as favorable as possible. The remainder of the sweep letter’s requests seek more specific related information that is clearly designed to determine if fears raised by the academic paper are warranted, including:
An explanation of how the firm makes its exchange order-routing decisions for non-marketable limit orders, and for market and marketable limit orders;
A statement of whether the firm passes exchange maker/taker fees on to its customers;
An explanation of how the firm reviews the execution quality of customer non-marketable, as well as market and marketable, limit orders that the firm routes to exchanges, and whether the firm has a committee that reviews the execution quality of such orders; and
A statement of whether the firm routes customer market and/or limit orders to other broker-dealers for execution, whether the firm receives a payment and/or other remuneration for such routing, and how such decisions are made.
Even if your firm is not targeted by FINRA for this sweep, we recommend reviewing the sweep letter, since the issues raised by it are likely to arise in future cycle exams. In addition, it’s a fair bet that FINRA is likely to use the findings of these exams as the basis for future guidance or rule-making in this area.