FINRA imposes $850k fine on TradeStation Securities
TradeStation Securities, Inc. has agreed to pay a $850,000 fine as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA).
Since January 2014, TradeStation has predominantly routed its customers’ equity and option orders to several market-makers and certain exchanges that paid the Firm for that order flow. TradeStation did not exercise reasonable diligence to ascertain whether the venues where it routed certain equity and option customer orders provided the best market for the subject securities as compared to the execution quality that was being provided at competing markets.
From 2014 to September 2016, TradeStation prioritized the routing of marketable equity orders to market-makers and exchanges that paid for that order flow. The firm, however, failed to review separately the execution quality that was provided by each individual market. Instead, it only reviewed the execution quality that it received in the aggregate from all markets. In addition, although TradeStation compared that aggregate execution quality data to an industry average, it did not evaluate whether superior execution quality existed for marketable equity orders at specific competing markets until May 2019.
From 2014 until January 2017, although TradeStation prioritized the routing of non-marketable orders to exchanges that paid the highest rebates, it did not review the fill rates it received from such markets or evaluate whether it could have received better fill rates from competing markets.
Furthermore, from 2014 until September 2019, the firm prioritized the routing of odd lot equity orders to market-makers that paid the firm for that order flow. TradeStation, however, did not conduct any review of the execution quality it received from these markets for this order type, and did not consider whether it could obtain better execution quality for such order type from competing markets. As a result, the firm did not conduct a reasonable review of odd lot equity orders to determine whether material differences in execution quality, such as opportunities for price improvement, existed between specific competing markets.
Beginning in September 2019, the firm started to review and compare the execution quality it received from each market-maker and competing markets. TradeStation, however, did not document its reviews of the execution quality available from competing markets until February 2021.
In addition, from 2014 to June 2016, TradeStation conducted a daily random sampling of option orders to confirm they were executed within the National Best Bid and Offer (NBBO), but it did not conduct a regular and rigorous review of the execution quality it received from these markets.
Although, in July 2016, the firm began reviewing and comparing the execution quality it received from market-makers, the firm did not review execution quality information, such as data related to price improvement opportunities, of competing markets until February 2021. As a result, TradeStation did not reasonably consider the quality of executions that the firm could obtain from competing markets for marketable option orders.
In addition, FINRA has found that TradeStation’s supervisory system was not reasonably designed to achieve compliance with FINRA Rule 5310 and Supplementary Material .09 because the firm’s supervisory reviews for best execution disregarded several order types and factors set forth in FINRA Rule 5310.09(b), and failed to reasonably account for comparisons of the quality of executions the firm obtained via current order routing and execution arrangements to the quality of the executions that the firm could have obtained from competing markets.
Finally, TradeStation failed to disclose material aspects of its relationships with venues.
From January 2014 through October 2016, although TradeStation disclosed in its 606 report that it maintained payment for order flow arrangements with venues to which it routed non-directed equity and option orders for execution, it failed to report all of the material aspects of those relationships. Specifically, TradeStation failed to report the per share or per order payments that it received from the venues identified in its quarterly 606 reports. As a result, the Firm violated Rule 606 of the Securities Exchange Act of 1934 and FINRA Rule 2010.
On top of the fine, TradeStation consents to the imposition of a censure.