By Rebecca Kahn, J.D.
As part of ongoing efforts to protect investors, promote market liquidity and efficiency, and enhance price transparency in financial markets, the International Organization of Securities Commissions, has published a Final Report on Order Routing Incentives. The report provided an overview of practices used by market regulators regarding incentives for order routing that may influence how intermediaries (e.g., investment advisers and securities brokers) treat their clients.
The report focused on three types of order routing incentives: (1) monetary incentives paid or received by brokers to or from third parties; (2) internalization and use of affiliated venues, such as dark pools, that may have commercial benefits for a broker; and (3) the provision of goods and services bundled with execution by brokers, such as research.
The report found that, while few jurisdictions prohibit intermediaries from receiving third-party payments relating to order execution, most intermediaries did not receive such payments. Generally, third-party payments were identified as a potential conflict of interest, which firms usually managed through disclosures. Many intermediaries that internalized customer orders or routed them to affiliated venues take steps to provide enhanced disclosure on how their systems work, monitor execution quality when using internal networks as do external venues, and assert strong information controls and governance around best execution to manage potential conflicts of interest.
Most survey participants bundled goods and services such as research and corporate access with execution. There were some concerns that such bundling would adversely affect transparency in the costs of intermediary-provided goods and services. Most regulators applied general conflict of interest and best execution rules only to intermediaries, rather than specific regulations for bundling of additional goods and services with order execution.
All respondents to the consultation welcomed the report, according to a press release, and stressed the importance of the conduct issues in connection with order routing incentives. Most agreed with IOSCO that no further work was required at this stage, as existing regulation or imminent reforms, such as MiFID II in the EU, adequately address conduct risks linked to order routing incentives.
Companies: International Organization of Securities Commissions
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