Bloomberg Tradebook, a wholly owned agency broker of Bloomberg L.P., is the latest broker to come under the US regulators’ hammer over best execution violations and supervisory failures.
The broker-dealer today settled charges brought by the Securities and Exchange Commission that accused Tradebook with making misrepresentations and omitting material facts about how the firm handled certain customers’ trade orders.
The failures spanned from November 2010 and September 2018, the SEC said and involved 6.4 million customer orders that were fell outside the firm’s regular review process. Instead, several order types, such as “immediate-or-cancel” orders, were executed based on routing decisions made by unaffiliated broker-dealers without informing the clients concerned.
Bloomberg Tradebook neither admitted nor denied the charges in settling this matter, but consented to the entry of its findings and agreed to pay a $5 million penalty.
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According to the SEC’s findings, Bloomberg Tradebook routed for more than eight years these orders of its customers who paid relatively low commission rates to three unaffiliated broker-dealers, all of which were responsible for directing the order flow to their preferred venue for execution. This arrangement was known internally as the “Low Cost Router.”
Regulators concerned about execution lapses
Bloomberg Tradebook marketing materials claimed that it provides transparency to investors in terms of execution strategy through its own technology that responds to real-time data and dynamically re-routing between different strategies and counterparties to prove best execution. However, the Low-Cost Router provided unverifiable information for customers in terms of venue selection for more than a million orders.
This practice causes concerns for regulators as market makers who get such order flow typically make those trades against their own inventory rather than actually executing the orders on relevant exchanges. The industry rules also require brokerages to use reasonable diligence to ensure that the transaction prices for customers’ trades are as favorable as possible amid the current market conditions. This duty of “best execution” is also incorporated FINRA Rule 5310, which provides standards for firms with respect to best execution.
“Contrary to representations in its marketing materials, Tradebook let unaffiliated brokers make decisions about the routing of certain customer trade orders in a way that lowered Tradebook’s costs,” said Joseph G. Sansone, Chief of the Enforcement Division’s Market Abuse Unit.