Tastytrade was fined $850,000 by the Financial Industry Regulatory Authority (FINRA) for failing to properly check whether its customers were getting the best available prices on stock trades, the US brokerage regulator said.
FINRA accepted the settlement on Tuesday and censured the firm, closing a review that spanned three years of order routing.
At the heart of the case is a duty every US broker owes its clients, known as best execution, the obligation to seek the most favorable terms reasonably available when filling an order.
FINRA said tastytrade, the Chicago options broker acquired by London-listed IG Group in 2021, fell short of that standard between January 2020 and January 2023.
During that period, the broker sent all of its customers’ equity orders to five market makers, each of which paid the firm for the order flow. The arrangement itself is legal and common.
The problem, according to the settlement, was that tastytrade never compared the execution quality it was getting against what its customers might have received at venues it did not use.
Reviews That Stopped at the Firm’s Own Venues
tastytrade’s best-execution committee met quarterly, as the rules require. But FINRA said those meetings only looked at data from the five market makers already handling the firm’s orders, and never at competing market centers.
The regulator also faulted the depth of the reviews. The committee relied on aggregate figures for total shares routed to each market maker, FINRA said, and did not break orders down by type or track price disimprovement, cases where a customer ends up with a worse price than the best quote available when the order arrives.
Under FINRA rules, a firm that does not review orders one by one has to run “regular and rigorous” reviews instead, weighing its own fills against what rivals offer.
FINRA said tastytrade’s supervisory system and written procedures were not built to do that. The firm, formerly known as tastyworks, rebranded to tastytrade in early 2023 and updated those procedures the same month, according to the settlement.
A Familiar Charge for US Retail Brokers
tastytrade is not the first retail broker FINRA has penalized over how it pairs payment for order flow with best execution. The regulator fined Robinhood $1.25 million in December 2019 for routing customer orders to firms that paid for the flow without adequately reviewing execution quality, a case with clear echoes of this one.
Others have landed in the same place. FINRA hit E*Trade Securities with a $900,000 penalty after finding its best-execution committee lacked the data to properly judge the quality it was giving customers. In 2022, Deutsche Bank Securities paid $2 million to settle similar failings.
Order Flow Still Pays at IG
Payment for order flow remains a live revenue line for tastytrade’s owner. IG Group said in its most recent annual report that higher order-flow rates helped lift tastytrade’s US derivatives revenue over the past year.
The practice is banned in the United Kingdom and European Union, which is one reason IG has had to rethink how it charges for the options service it is rolling out under the tastytrade brand in Britain.
Between 2020 and 2022 alone, tastytrade routed more than 8.8 million equity orders covering over 1.7 billion shares. The firm signed the settlement on June 26 and agreed not to dispute FINRA’s findings.
Representing it was Susan Schroeder of law firm WilmerHale, who ran FINRA’s own enforcement department from 2017 to 2019 before returning to private practice.
This article was written by Damian Chmiel at www.financemagnates.com.RegulationRead More
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