Electronic trading platform Interactive Brokers received a $3.5 million penalty from the Financial Industry Regulatory Authority (FINRA) for multiple alleged violations of the self-regulatory organization’s rules regarding execution and supervision.
FINRA’s disciplinary action published Dec. 22 cited Interactive Brokers for rule violations ranging from January 2014 to February 2023. The firm neither admitted nor denied FINRA’s findings in resolving the matter.
The details: At varying times during the relevant period, Interactive Brokers allegedly failed to:
- Consistently include all relevant execution quality factors or regularly assess competing venues in line with its best execution obligations;
- Assess whether its practice of adjusting its routing of nonmarketable equity and options orders at the end of certain months to receive volume-based rebate payments affected its customers’ execution quality;
- Review net trading activity affecting approximately 10.4 million customer transactions through two other broker-dealers to ensure it did not interfere with best execution obligations; and
- Disclose material aspects of its relationship with markets to which it routed orders in quarterly reports during a three-year period.
As a result, the firm violated multiples aspects of FINRA Rule 5310, as well as Rules 2010 and 3110, according to FINRA.
Compliance considerations: Interactive Brokers’ supervisory system was not reasonably designed to achieve compliance with its best execution obligations, FINRA determined.
“From at least January 2014 through November 2016, the firm’s reviews were ad hoc, not adequately documented, and did not consistently consider all relevant execution quality factors for existing order routing arrangements or regularly assess competing markets,” the organization said.
The firm was also faulted for deficiencies in its review systems regarding price improvement opportunities and routing to third parties for net trading.
Firm response: “Importantly, there are no allegations or findings by FINRA in its settlement order that [Interactive Brokers’] smart order routing logic caused customer harm or failed to provide best execution to our customers,” the firm said in an emailed statement. “In fact, after testing and review, [Interactive Brokers] concluded that no changes needed to or should be made to the firm’s smart order routing logic as a result of FINRA’s findings.”
The firm included a corrective action plan in FINRA’s order that noted remedial measures it has already undertaken.