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The US securities authority, the Financial Industry Regulatory Authority (FINRA) said on Thursday it has imposed a fine in the amount of $900,000 to securities brokerage E-Trade Securities in relation to its customer information protection policy. The broker has failed to conduct an adequate review of the quality of execution of its customers’ orders and for supervisory deficiencies concerning the protection of customer order information.
FINRA’s Department of Market Regulation conducted an investigation which showed that E-Trade’s Best Execution Committee, wich the broker recently set up to review execution quality it received on its customers’ orders, lacked sufficiently accurate information to reasonably execute its activities. The Committee failed to take into account internalized order flow sent to affiliated broker-dealer market maker G1 Execution Services (G1X) and failed to adequately consider the actual execution quality provided by the market centers to which it routed orders. Also, the broker regularly accepted requests from G1X to change prioritization in E-Trade’s order routing system and to redirect certain order flow, without determining whether these changes would improve the quality of execution received by its customers.
In addition, the broker did not have adequate systems and controls in place to ensure that there was no misuse of confidential customer order information by individuals dually registered with E-Trade and G1X.
Under the US regulatory framework, firms routing customer orders are required to assess the quality of competing markets to which it directs order flow and to periodically conduct regular reviews of the quality of the executions of its customers’ orders to determine whether any material differences in execution quality exist among the markets trading the security.
According to the notice, E-Trade Securities neither confirmed, nor denied the accusations.
“This action serves to remind firms that they must remain diligent in ascertaining the best market for their customers, and must conduct regular and rigorous reviews of their routing decisions to ensure their best execution obligations are met,“ said Thomas Gira, FINRA Executive Vice President, and Head of Market Regulation. “This needs to be a substance over form review, not a form over substance review. This matter further underscores that firms must have real systems and processes in place to ensure that confidential customer information is protected,” he added.
E-Trade Securities is a unit of New York-based holding company E-Trade Financial Corp., which offers various financial services, online brokerage and banking services. It works primarily with retail clients through its 30 offices across the US.
The holding company also has another two subsidiaries – E-Trade Capital Management for managed account solutions and E-Trade Bank for bank products and services.
Source: FINRA