Businessmen trading stock looking at graphs indexes and numbers on multiple computer screens

Brokerage firms that route a large share of their institutional orders to affiliated alternative trading systems (ATSs) receive lower fill rates and face higher trading costs, according to working paper published Monday from the Office of the Chief Economist of the Washington, D.C.-based Financial Industry Regulatory Authority (FINRA).

The paper analyzes trading activity of 330 million institutional orders in October 2016. Among other things, it finds that brokers that are affiliated with an ATS and send it a large chunk of their orders “tend to receive lower order fill rates and higher execution costs.”

States the paper: “Institutional orders experiencing lower fill rates are associated with higher trading costs when accounting for the lost opportunity costs resulting from unfilled orders.”

The study also points out that not all brokers with an affiliated ATS demonstrate a preference for their related trading venues.

“The evidence from this study does not support the idea that when a broker sends a high proportion of orders to an affiliated ATS, these venues necessarily offer a lower-cost option that avoids other market participants from learning of an institutional order,” says Jonathan Sokobin, chief economist and senior vice president at FINRA, in a statement.

“The difference across brokers in routing decisions, fill rates and trading costs are persistent over time, indicating that past routing behaviour is predictive of future behaviour,” he adds.

The study points to the value of better disclosure on broker routing practices in general, the U.S. self-regulatory organization says, and a higher level of scrutiny when brokers show a preference to route orders to affiliated venues.