Technological developments often make basic tasks easier and in revolutionary cases, it becomes possible to do things that couldn’t be achieved in earlier days.
In the financial world, improved electronic trading platforms – now widely proliferated across the industry – allow traders to rapidly identify the best price for a security, much to the benefit of their clients.
Down on the actual playing fields, it doesn’t always work that way: firms tend to lean on the trading systems of established clearing partners, possibly to the detriment of customers. The Financial Industry Regulatory Authority (FINRA) examined the issue last year, and declares that they’re not having it. The regulator plans to enforce rules on technology that will require traders to seek out the best price and provide adequate disclosures on markup to clients.
The relevant instruction is FINRA Rule 5310, which calls for firms to make what it calls “regular and rigorous” investigations into whether customers are receiving the most advantageous price available for securities.
Additionally, the usual concern of whether trades are in the customer’s best interest must be addressed. In the regulator’s mind, this cannot be treated as mere boilerplate. Exacting records must be kept and firms had better be ready to substantively defend any actions on client accounts.
In its report, FINRA declared that too often, traders take the easy way out, relying on established clearing relationships and failing to leverage evolving technology that can provide customers access to the best possible prices. FINRA expect traders to do more than simply scan their ECN displays: they must actively seek better deals, if necessary via negotiations with sellers if that’s what it takes to gain the most advantageous price for clients.
The regulator is concerned over markup disclosure challenges, noting a lack of full reporting from many firms. In future, laxity in disclosure is unlikely to be tolerated. Companies can respond by employing trade cost analysis applications from outside vendors. These solutions automatically log all trading data, provide markup details to clients, and illustrate the market range of security prices at the time of all trades.
For more information, please read:
How Advisors Can Comply With FINRA’s Stricter Fixed Income Governance | ThinkAdvisor