In recent years, Congressional hearings, best-selling books, press reports, and regulatory investigations have shined a spotlight on brokers’ order routing practices. As a result, investors are increasingly questioning and seeking to better understand how their orders are routed and executed. At the same time, regulators are looking to empower investors with more information, including through proposals to revise order handling disclosures and disclosures by alternative trading systems (ATSs).
While rules requiring better disclosures have been proposed, final rules may still be years away. In the meantime, firms looking to protect themselves are increasingly utilizing questionnaires with brokers and execution venues. Many firms have found that Questionnaires should be part of a comprehensive set of policies, procedures, and practices designed to help the investor or firm sending orders make smarter decisions.
Last September, we released the Healthy Markets ATS Questionnaire to help firms assess their ATSs. In March, we released our 2016 ATS Risk Assessment. Now, we’re starting to help firms assess their brokers.
Nearly 20 questions about the broker generally, such as the products traded by the firm or whether it provides sponsored access to customers;
Over 20 questions about the broker’s technology, such as how frequently its systems collapse and how it communicates changes to customers;
More than 10 questions about the broker’s order routing strategies generally, such as the types of strategies it offers, whether it uses conditional orders, and how it uses minimum quantity functionalities;
More than 50 questions about algorithmic order routing strategies, including how specific strategies, such as VWAP or Close strategies work;
More than 10 questions regarding how the broker monitors venues of execution, including whether it measures venue toxicity;
Nearly 100 questions on a broker’s conflicts of interest and potential information leakage, including the broker’s own trading activities and relationships with third parties; and
A detailed chart with statistics about how the firm routes and executes orders generally, as well as for the requesting firm.
All told, the Healthy Markets Order Routing Questionnaire goes well beyond the existing publicly-available data to provide everything that investors really want. While all questions and areas covered may not be important to all investors, we expect many investors and brokers to look to this as a resource to developing their own questionnaires.
The Healthy Markets Order Routing Questionnaire is the latest product of our Order Routing Transparency Initiative. The Order Routing Transparency Initiative, which is supported by our Working Group, is a multi-pronged effort to enhance order routing disclosure practices. These efforts include:
Development and publication of the Healthy Markets Order Routing Questionnaire to help investors make more informed broker selection decisions.
Development of Order Routing Disclosure best practices and working with individual firms to improve disclosure practices.
Development and publication of unique reports related to key issues impacting broker order routing practices.
Offering suggestions to regulators and the public, including through regulatory comment letters.
For any questions or comments, or to learn more about Healthy Markets, please feel free to follow up with Tyler Gellasch at firstname.lastname@example.org.