FINRA today announced that Deutsche Bank Securities, Inc. has been fined $2 million by FINRA for not complying with its obligation to seek the best execution of its customers’ orders.
Jessica Hopper, Executive Vice president and Head of FINRA’s Department of Enforcement stated that “the duty to seek the best execution of customer orders is a fundamental responsibility of any broker-dealer who buys or sells securities for customers.” We will continue to pursue disciplinary actions against firms that fail use reasonable diligence to execute customer transactions in a manner that is as favorable as possible given the prevailing market conditions.
FINRA Rule 5310 states that firms must seek the best terms possible for customers’ orders. Firms must review the order execution quality of customers under current routing arrangements and the quality that their customers could get through alternative routing arrangements to meet this obligation. When conducting reviews, firms must consider several factors such as price improvement or speed of execution. Deutsche Bank Securities reviews didn’t meet the requirements of Rule 5310.
Deutsche Bank Securities operated SuperX, an alternative trading system (ATS), from January 2014 to May 2019. The firm routed customer orders to exchanges via its smart order router. Unless customers opt-out, it routed any marketable orders to SuperX first. This preference was called the “SuperX-ping.”
However, orders not completed in the firm’s system at the time of SuperX ping caused an inherent delay. Orders could have lower fill rates due to this delay. The firm’s best execution committee examined reports showing lower SuperX fill rates than orders sent to the exchanges. Deutsche Bank Securities didn’t change its routing arrangement despite this information. The firm also failed to consider the price improvements for SuperX-ping orders in relation to those for orders routed directly into exchanges.
Deutsche Bank Securities also routed more customers’ orders to SuperX than any other Dark Pool during a portion of the period. However, the firm failed to consider alternative routing arrangements despite the fact that, according to its own dark pool ranking model for execution quality, SuperX consistently ranked higher than other dark pools.
Deutsche Bank Securities’ supervisory process was not reasonably designed to comply with its best execution obligation. This is because it failed to review certain factors. The supervisory procedures of Deutsche Bank Securities also failed to provide reasonable guidance as to how the firm should conduct its reviews, or in what circumstances the firm should reconsider changing its routing practices.
Deutsche Bank Securities failed to disclose material details of its relationship to the markets to which orders were routed in its quarterly reports filed under Regulation 606 of Regulation NMS. Although the reports did not specify whether trading rebates could be received by the firm, they did disclose details about the payments such as the amount per share or order.
“Best execution customer orders are FINRA’s primary focus area and we closely monitor and evaluate member firms’ compliance to this important component investor protection and market integrity,” stated Stephanie Dumont (Executive Vice President, Market Regulation and Transparency Services), whose department referred Stephanie Dumont. The enforcement action was taken.
FINRA included best execution in its 2022 and 2030 Reports on FINRA’s Examination and Risk Monitoring Program as well as its 2020 and 2019, Annual Risk Monitoring and Examination Priorities LettersDeutsche Bank Securities agreed to the entry without admitting or denying FINRA’s findings in settlement of this matter.