IOSCO solicited public comment on a newly released Report on Order Routing Incentives ("Report") that surveyed the approaches and practices of certain regulators concerning incentives for order routing and execution. The Report examined how these incentives affected the behavior of intermediaries (e.g., securities brokers and investment advisors) toward their clients. Additionally, the Report contained an assessment of regulatory requirements for brokers concerning conflicts of interest management associated with order routing (e.g., best execution requirements, and how they "interact with market practices around order routing incentives."
The Report focused on the following order routing incentives: (i) monetary incentives paid or received by brokers to or from third parties (e.g., maker-taker access fees / rebates and payments for order flow), (ii) the internalization and use of affiliated venues (e.g., dark pools) that may have commercial benefits for a broker and (iii) the provision of goods and services bundled with execution by brokers (e.g., the use of "soft dollar" credits).
IOSCO found:
- Few jurisdictions prohibited the ability of intermediaries to receive third-party payments relating to order execution, but a majority of intermediaries did not receive any third-party payments relating to client/customer order routing or execution. In most cases, a third-party payment to a firm that did receive it was "identified as a potential conflict of interest and [the firms] took steps to manage it, most commonly through disclosures."
- Many intermediaries that internalized customer orders or routed them to affiliated venues "have taken steps to provide enhanced disclosure on how their crossing systems work, . . . [have monitored] execution quality when using internal networks in a similar way to external venues, and have applied strong information controls and governance around best execution to manage the potential conflict of interests."
- Two-thirds of responding intermediaries bundled goods and services – primarily research and corporate access – with execution. Despite concerns in some jurisdictions that bundling reduces the transparency of the costs of goods and services provided to clients by intermediaries, the vast majority of regulators applied general conflict of interest and best execution rules only to intermediaries (as opposed to specific regulations that addressed bundling additional goods and services with order execution).
In the report, IOSCO noted that it does not propose any immediate steps concerning the report's findings beyond soliciting comments, which must be submitted by February 21, 2017.
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