When the Financial Industry Regulatory Authority recently published its 2019 Report on Examination Findings and Observations, the regulator signaled a significant change was afoot. In this year's examination report, FINRA revealed it is now much more serious about ensuring financial institutions and advisors comply with its rules regarding the use of technology systems — including those involving best execution and markup disclosures for fixed income securities.
FINRA Rule 5310 (Best Execution and Interpositioning) requires advisory firms to conduct "regular and rigorous" reviews of customer orders to make sure the best possible prices for the securities were achieved, and all trades can be justified to be in investors' best interest. In its 2019 examination, FINRA found some firms did not compare their existing execution and routing arrangements with those of other venues to see if prices and quality could be improved.
The advent and proliferation of electronic trading platforms has made price discovery for fixed income much easier, and FINRA has made clear that firms should not solely rely on their clearing partners' trading systems to execute every trade. As technology continues to improve, FINRA expects the institutions under its purview to leverage it to enhance their best execution programs — and integrate markets beyond their pre-existing clearing relationships in order to satisfy best execution.
For example, electronic communication networks (ECNs) generally display all available publicly listed prices for a particular security. However, that may not be the best price available and there may be additional negotiations that could derive a better price. The process could be compared to buying a car — the best deal you can get probably isn't the one you find right off the internet. To obtain a better price, you search for offers from multiple local car dealers, check the reputations of the different dealers, see what other features come with the car, and then you visit one of the vendors and begin to haggle.
Financial advisors and institutions can strengthen their best execution programs by partnering with technology providers that combine human capital with technological innovation. In addition to aggregating and comparing prices from different bond market sources, prospective vendors should have capital markets teams that actually engage with institutional market sources, and reach out to various sources of liquidity (including those that don't publish offers on electronic platforms), to negotiate and conduct deeper price discovery.
Furthermore, while market orders can make sense for ease of execution, in today's fast-moving marketplace advisors and institutions need to make sure execution isn't compromised, and clients don't receive less than they expect.
David Hsu is chief compliance officer of 280 CapMarkets (
