The Financial Industry Regulatory Authority’s Office of the Chief Economist has released a working paper (Study), maintaining that institutional orders routed by brokers that send a high percentage of such orders through affiliated alternative trading systems (ATSs) tend to receive lower order fill rates and higher execution costs. The Study examined order-handling information over the life of 330 million orders, routed by 43 active institutional brokers for a sample of 273 stocks during October 2016.

The Study divided brokers into three groups based on affiliated order routing, while noting that not all brokers demonstrated a preference for routing institutional client orders to affiliated ATSs. The Study found that the group with the most routes to an affiliated ATS filled 16.9 percent of orders on average, significantly lower than the 29.8 percent and 43.5 percent fill rates for the middle group and the group least likely to route orders to an affiliated ATS, respectively. The Study found that the institutional orders experiencing lower fill rates are associated with higher trading costs and increased opportunity costs resulting from unfilled orders.

Order routing, execution success and quality, and the potential for conflicts of employing affiliated ATSs has been the subject of continued focus for FINRA for several years. Sweep examinations were conducted in these areas in 2014, 2015 and 2017. The Study highlights the value of better disclosure on order routing practices and increased scrutiny where brokers demonstrate a preference to route orders to affiliated channels.

A full copy of the Study is available here