U.S. securities regulators are reviewing the impact of some brokerage firms’ move to offer commission-free trading.
The market regulation division of the U.S. Financial Industry Regulatory Authority Inc. (FINRA) issued a targeted exam letter detailing its compliance sweep to investigate the effects of zero commissions on various aspects of firms’ businesses.
The letter indicated that the self-regulatory organization is looking for data from firms on the details of their commission practices and other forms of compensation.
FINRA is also seeking information on firms’ disclosure to clients; their order routing arrangements, including the details of any “payment for order flow” arrangements; their best execution procedures; and supervisory practices.
Earlier this year, FINRA indicated that it would be looking at the effects of a recent increase in zero-commission brokerage activity and its impact on order handling, including whether eliminating commissions changed firms’ routing practices, execution quality and their provision of trading rebates or payment for order flow.
FINRA also said that it may review firms’ disclosure and advertising to clients.
Last year, FINRA sanctioned a zero-commission broker Robinhood Financial LLC for best execution violations involving payment for order flow.
Robinhood, which neither admitted nor denied the charges, was fined US$1.25 million and agreed to hire an independent consultant to review its best execution procedures.