E*Trade Securities LLC has been fined $900,000 for alleged supervisory
violations. The Financial Industry Regulatory Authority (FINRA) announced
last week that E*Trade failed to adequately review the quality of customer
order execution. FINRA also claimed the company had supervisory deficiencies
in protecting the information of customer orders.
E*Trade is an online security investing and trading forum for customers
in the retail industry. It provides information of customer’s orders
to exchanges and non-exchange market centers. In order to do this, the
company is required to perform reviews regarding the quality of competing
markets when directing orders. These types of firms must rigorously review
the quality of execution regarding customer orders. This allows the company
to determine any differences in quality amongst the markets. To accomplish
this goal, E*Trade had formed the Best Execution Committee.
FINRA’s investigation found that the Best Execution Committee had
insufficient accurate information to perform the review of quality in
the markets. FINRA alleged that the committee failed to consider the internalized
order flow that was sent to affiliated broker-dealer G1 Execution Services
(G1X). They are also accused of considering actual execution quality from
the market centers to which they routed the customers’ orders.
FINRA claimed that E*Trade accepted G1X requests for prioritization changes
in the routing system without determining quality of execution. Finally,
the agency alleges that E*Trade failed to adequately protect the confidential
information on customer orders.
FINRA Executive Vice President and Head of Market Regulation, Thomas Gira,
made the following statement,
This action serves to remind firms that they must remain diligent in ascertaining
the best market for their customers, and must conduct regular and rigorous
reviews of their routing decisions to ensure their best execution obligations
are met. This needs to be a substance over form review, not a form over
substance review. This matter further underscores that firms must have
real systems and processes in place to ensure that confidential customer
information is protected.
E*Trade consented to the findings in FINRA’s investigation, but did
not admit or deny the charges against them.