Interactive Brokers LLC
Interactive Brokers LLC was fined $3.5 million due to its reviews of customer execution quality failing to meet the reasonable diligence standard of FINRA Rule 5310 and the regular-and-rigorous review requirements of FINRA Rule 5310.09. The findings stated that, prior to forming a best execution committee, the firm’s reviews of customer execution quality were ad hoc, not adequately documented, and did not consistently include all relevant execution quality factors or regularly assess competing venues. The firm also failed to conduct reasonable reviews for price improvement opportunities.
When the firm’s own Alternative Trading System (ATS), or two other market centers, disseminated priced indications of interest (IOIs) at least $0.01 better than the National Best Bid or Offer (NBBO), the firm routed its customers’ marketable orders to such venues before routing to venues that did not disseminate IOIs (non-IOI venues). The firm did so without reasonably evaluating the likelihood of obtaining greater price improvement from non-IOI venues.
In addition, the firm failed to reasonably assess whether its practice, which it ceased during the relevant period, of adjusting its routing of non-marketable equity and options orders at the end of certain months to receive volume-based rebate payments affected its customers’ execution quality. Furthermore, the firm failed to reasonably review the impact its routing to two broker-dealers that traded on a net basis had on its customers’ execution quality, including price improvement, transaction costs, speed of execution, and whether customers’ orders would have received better execution quality had the firm routed the orders directly for execution.
In addition, the findings stated that the firm effected approximately 10.4 million customer transactions through the two other broker-dealers, which engaged in net trading activities. As such, the firm interjected these two broker-dealers between itself and the best market for the subject security. FINRA also found that the firm did not reasonably supervise for best execution.
The firm failed to conduct reasonable reviews for price improvement as noted above. In addition, the firm did not have a supervisory system to review whether its periodic end-of-month adjustments to its routing of customer non-marketable equity and options orders to achieve exchange volume-based rebates affected the execution quality of customers’ orders or a supervisory system reasonably designed to review whether its routing to third parties for net trading impacted execution quality.
The findings also stated that the firm’s WSPs failed to reasonably describe the supervisory system in place for performing regular and rigorous reviews of execution quality. For example, the firm’s procedures failed to describe how best execution reviews should be conducted, including what execution quality statistics should be reviewed and how the firm’s supervisory reviews should be documented.
The WSPs were similarly devoid of any guidance for determining the circumstances in which the firm should modify order routing arrangements. FINRA found that the firm failed to disclose material aspects of its relationships with venues.
The firm’s quarterly reports under Exchange Act Rule 606 did not disclose per share or per order amounts that the firm received as trading rebates from exchanges. Instead, the reports contained general disclosures that the firm received trading rebates without specifically noting the amount per share received during the quarter.
