FINRA Reminds Firms of Evolving Definition of “Prompt” Order Execution

FINRA recently reminded firms of their obligation to execute marketable customer orders fully and promptly.  While this seems fairly routine, what’s notable about the reminder is that “prompt” doesn’t necessarily mean what it used to.

FINRA Rule 5310 (Best Execution and Interpositioning) requires a firm to “make every effort to execute a marketable customer order that it receives fully and promptly.”  Over time, given the continual advancements in technology, average execution times for “held” customer orders have been reduced dramatically.[1]  FINRA notes that 97% of held customer orders are executed within 100 milliseconds and that 99.68% of held orders are executed in less than one second.

What firms should keep in mind is that their standards for supervising and reviewing transaction execution quality need to evolve along with these advances in technology.  FINRA notes that many firms use exception reports to supervise compliance with Rule 5310 and that many exception reports are coded to only generate an exception for executions that occurred 30 seconds or more following order receipt.  In the current environment of microwave data transmission and co-location, 30-second exception reports really don’t cut it.

FINRA is clear that firms need to regularly evaluate these thresholds, and modify them if necessary, to ensure their supervisory systems are designed to achieve compliance with their “full and prompt” obligations in light of current promptness standards in an ever-evolving industry. Firms should review and update their supervisory procedures and exception report thresholds with the expectation that FINRA will be reviewing these same areas during upcoming exams.

When considering reviews of prompt executions, firms may also take this opportunity to review execution quality in the overall context of best execution obligations, including regarding conducting “regular and rigorous” review of execution quality.  Specifically, firms can review routing methodologies and compare the quality of the execution obtained via existing order-routing and execution arrangements against the quality of execution available from competing markets, they can conduct reviews on an order type basis (i.e., market, marketable limit, non-marketable limit), and they can regularly evaluate for conflicts of interest related to routing to affiliates, payment for order flow, and liquidity rebates.  Finally, it is worth noting that FINRA’s reminder on execution quality should be viewed in a broader context as the SEC evaluates inherent tensions between best execution obligations and receipt of PFOF, as noted in our previous summary of the SEC staff report on volatility and market structure considerations.

[1] A “held” order is an order that requires prompt execution for an immediate fill. Contrast this with a “not-held” order, which provides brokers with both time and price discretion to try and get a better fill for a customer.