On January 21, 2022, FINRA issued Regulatory Notice 22-04 reminding broker-dealers of the requirements under Rule 5310.01 to execute marketable customer orders fully and promptly. The definition of what “prompt” means has never been clearly delineated in the rule itself although industry practice, based upon the timing requirements of other order handling-type rules, has been 30 seconds. This can be most clearly seen with respect to the limit order display requirements of FINRA Rule 6460 where FINRA has issued guidance indicating that limit orders must be displayed, routed or executed within 30 seconds of receipt. Within Notice 22-04 FINRA clearly reflects its awareness of firms setting their exception criteria with a 30-second time window when monitoring the execution of marketable customer orders.
FINRA cited statistics from September 2021 for marketable orders in NMS securities under 20,000 shares which showed average execution times well under 30 seconds. Based on the numbers provided by FINRA, 97% of such orders were executed within 100 milliseconds, and 99.94% of all such orders were executed within five seconds. FINRA advised firms that the definition of what constitutes a “prompt” execution must evolve over time with the advances in the technology of the financial markets. The compliance efforts, as well, must keep pace and evolve with the technology enhancements.
In that regard, FINRA is aware that firms have developed exception reporting to monitor the handling of marketable orders and that firms have set parameters utilizing the 30-second benchmark. With this guidance, FINRA has officially put the industry on notice to evaluate their current monitoring parameters and adjust as needed based upon existing execution practices. Factors to be considered include the very statistics cited in the FINRA notice as well as other indicators of industry standards and the firm’s own data.
ViP: Validus offers surveillance procedures for firms to monitor their handling of marketable customer orders whether market or limit orders. The parameters for the procedures can easily be tailored and adjusted as needed by the firm to account for changes in execution practices and current statistics. Firms can run distinct procedures side-by-side comparing output with different parameters to identify the appropriate levels required for monitoring of their specific execution activity. Eventus staff can work with the firms to provide guidance as to the suggested settings given the firm’s order flow and execution practices.
About Eventus Systems
Eventus Systems is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.