Tastytrade
was fined $850,000 by the Financial Industry Regulatory Authority (FINRA) for
failing to properly check whether its customers were getting the best available
prices on stock trades, the US brokerage regulator said.
FINRA
accepted the settlement on Tuesday and censured the firm, closing a review that
spanned three years of order routing.
At the
heart of the case is a duty every US broker owes its clients, known as best
execution, the obligation to seek the most favorable terms reasonably available
when filling an order.
FINRA said
tastytrade, the Chicago options broker acquired by London-listed IG Group
in 2021, fell short
of that standard between January 2020 and January 2023.
During that
period, the broker sent all of its customers’ equity orders to five market
makers, each of which paid the firm for the order flow. The arrangement itself
is legal and common.
The
problem, according to the settlement, was that tastytrade never compared the
execution quality it was getting against what its customers might have received
at venues it did not use.
Reviews That Stopped at
the Firm’s Own Venues
tastytrade’s
best-execution committee met quarterly, as the rules require. But FINRA said
those meetings only looked at data from the five market makers already handling
the firm’s orders, and never at competing market centers.
The
regulator also faulted the depth of the reviews. The committee relied on
aggregate figures for total shares routed to each market maker, FINRA said, and
did not break orders down by type or track price disimprovement, cases where a
customer ends up with a worse price than the best quote available when the
order arrives.
Under FINRA
rules, a firm that does not review orders one by one has to run “regular
and rigorous” reviews instead, weighing its own fills against what rivals
offer.
FINRA said
tastytrade’s supervisory system and written procedures were not built to do
that. The firm, formerly known as tastyworks, rebranded to tastytrade in early
2023 and updated
those procedures the same month, according to the settlement.
A Familiar Charge for US
Retail Brokers
tastytrade
is not the first retail broker FINRA has penalized over how it pairs payment
for order flow with best execution. The regulator fined Robinhood $1.25 million in
December 2019 for
routing customer orders to firms that paid for the flow without adequately
reviewing execution quality, a case with clear echoes of this one.
Others have
landed in the same place. FINRA hit E*Trade Securities with a
$900,000 penalty
after finding its best-execution committee lacked the data to properly judge
the quality it was giving customers. In 2022, Deutsche Bank Securities paid $2
million to settle
similar failings.
Order Flow Still Pays at
IG
Payment for
order flow remains a live revenue line for tastytrade’s owner. IG Group said in
its most recent annual report that higher order-flow
rates helped lift
tastytrade’s US derivatives revenue over the past year.
The
practice is banned in the United Kingdom and European Union, which is one
reason IG has had to rethink how it charges for the options service it is
rolling out under the tastytrade brand in Britain.
Between
2020 and 2022 alone, tastytrade routed more than 8.8 million equity orders
covering over 1.7 billion shares. The firm signed the settlement on June 26 and
agreed not to dispute FINRA’s findings.
Representing
it was Susan Schroeder of law firm WilmerHale, who ran FINRA’s own enforcement
department from 2017 to 2019 before returning to private practice.
This article was written by Damian Chmiel at www.financemagnates.com.
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