Recently, the Investment Industry Regulatory Organization of Canada (IIROC) released the results of a best execution survey it conducted of all its dealer members that execute secondary market trades in listed securities. There is great variability in the best execution practices followed by participants. In this post we comment on some of the survey results.
Compliance and Supervision Practices
Nearly three quarters of respondents have procedures specifically in place to supervise compliance with best execution. Only two thirds of the participants that are members of some marketplaces and always use an executing participant to enter orders on a marketplace have such procedures in place. Less than half of the non-participant dealer members have procedures for best execution supervision.
Internal Testing for Compliance and Record Retention
59% of responding dealer members perform internal testing for compliance with best execution. Only 49% of retail and 29% of retail type 1 and 2 conduct this internal testing.
Overall, 97% of the firms that test for compliance with best execution retain records of that testing. Only 75% of managed accounts and 88% of retail type 1 and 2 firms retained compliance testing records.
Confidence Firm is Achieving Best Execution Without Compliance Oversight
Of the dealer members that have no supervisory procedures for compliance with best execution or no internal testing or record retention of testing, almost 60% are highly confident they are achieving best execution for clients and rated their confidence at a 9/10 or a 10/10. Overall, these dealer members scored an average of 8.4/10.
In light of these findings, as part of its policy development process, IIROC may review whether there is a need to better articulate dealer members’ best execution supervisory obligations.
Treatment of Marketplace Trading Fees and Rebates
Marketplace Rebates and Trading Fees are not Generally Passed on to Clients
The majority of participants (76%) that take direct responsibility for achieving best execution do not pass marketplace rebates on to their clients, and only 11% of them disclose this fact to all of their clients. Discount brokers and institutional firms are most likely to pass marketplace rebates on to some or all of their clients (50% and 39% respectively) and to so disclose if they do not (40% and 15% respectively).
21% of participants that do not pass on marketplace rebates for passive orders to their clients also pass marketplace trading fees on to their clients. 80% of discount brokers pass these charges along to some or all of their clients. 91% of participants that pass marketplaces fees to at least some of their clients disclose that fact.
IIROC has expressed concern that participants might be providing incomplete or inconsistent disclosure regarding these fees and rebates.
Best Execution Governance
Almost all participants (95%) that take direct responsibility for achieving best execution have a process in place. Over half have their head trader or another senior member of the firm make the determination while a quarter have a best execution or order handling committee/working group that meets regularly;.
As illustrated in more detail below, best execution or order handling committee meetings are mostly held on an ad hoc basis (45%). 25% meet at least quarterly, 11% meet annually, and 13% do not hold meetings. Over half of the firms that use committees keep written records of decisions made
Click here to view table.
Events Triggering a Review of Router Preferences
Participants that use a smart order router (SOR) reported reviewing the SOR’s routing table:
- immediately upon the launch of a new, protected marketplace (83%);
- following a change in liquidity patterns (53%);
- changes in internal technology (65%);
- changes in marketplace fees (62%);
- launch of a dark marketplace (51%).
5% indicated that none of the above events would trigger a review.
IIROC will use the survey results to inform policy initiatives and rule proposals. In addition to the areas of focus previously identified in IIROC’s Annual Consolidated Compliance Report for 2013/2014, IIROC intends to concentrate on the areas of:
- policies and procedures for best execution;
- best execution governance;
- supervision of best execution practices; and
- disclosure of order handling practices.