FINRA Fines Deutsche Bank Securities, Inc. $2 Million For Best Execution Violations
The Financial Industry Regulatory Authority (FINRA) announced that it has fined Deutsche Bank Securities, Inc. $2 million for failing to comply with its obligation to seek “best execution” for its customers’ orders, according to a press release on March 8.
FINRA Rule 5310 requires brokerage firms to seek the most favorable terms reasonably available for a customer’s orders. Firms are required to conduct reviews to evaluate the order execution quality their customers receive under the firm’s current routing arrangements, as well as the execution quality their customer orders could receive through different routing arrangements.
Deutsche Bank Securities’ reviews did not meet the standards of Rule 5310, which lists several factors (such as price improvement and speed of execution) that firms should consider when conducting these reviews.
Between January 2014 and May 2019, the relevant period, Deutsche Bank Securities owned and operated an alternative trading system (ATS) known as SuperX. When routing customer orders to exchanges through its smart order router, the firm routed its customers’ marketable orders to SuperX before routing any part of the order to an exchange, unless customers opted out of this routing preference. This preference was known as the “SuperX ping.”
The SuperX ping reported caused a delay for orders that were not fully executed in the firm’s ATS. This delay subjected orders to potentially lower fill rates. In fact, the firm’s best execution committee reviewed reports that showed lower fill rates in SuperX than orders routed to the exchanges.
Despite this information, Deutsche Bank Securities did not modify its routing arrangement. In addition, the firm did not reasonably consider how price improvement for SuperX ping orders compared to price improvement opportunities for orders routed directly to exchanges.
Further, Deutsche Bank Securities routed more orders to SuperX than any other dark pool during some of the period. The firm, unfortunately failed to consider alternate routing arrangements even though, according to the firm’s own dark pool ranking model, other dark pools consistently ranked higher than SuperX for execution quality.
In addition, Deutsche Bank Securities allegedly failed to reasonably review certain factors set forth in the rule. The firm’s supervisory procedures also failed to provide reasonable guidance on how the firm should conduct its reviews or circumstances in which the firm should consider modifying its routing practices.
Deutsche Bank Securities also failed to disclose material aspects of its relationship with the markets to which it routed orders in its quarterly reports filed under Rule 606 of Regulation NMS. The firm’s reports contained non-specific disclosures that the firm could receive trading rebates but did not disclose any details regarding the payment, such as amounts per share or per order.
Deutsche Bank Securities consented to the entry of FINRA’s findings without admitting or denying them, according to the press release.
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