The Board of the International Organization of Securities Commissions (IOSCO) published today the Report on Order Routing Incentives for public consultation.
The report provides an overview of the practices used by market regulators regarding incentives for order routing that may influence how intermediaries treat their clients.
The report examines the regulatory conduct requirements for brokers or firms to manage conflicts of interest associated with routing orders and obtaining best execution. It assesses how these requirements interact with market practices in different jurisdictions to shape order routing incentives and how these incentives influence the behavior of intermediaries towards their clients. Such incentives may include, for example, discounts or rebates designed to direct order flow to one particular venue or to channel payments from one intermediary to another to receive their order flow.
The consultation forms part of IOSCO´s ongoing efforts to protect investors, promote market liquidity and efficiency, and enhance price transparency in financial markets. The IOSCO Methodology for implementation of the principles for market intermediaries states that “a firm should act with due care and diligence in the best interests of its clients and the integrity of the market.”
To prepare the report, IOSCO conducted a survey of members on current and/or publicly proposed regulatory initiatives involving incentives that may influence the behavior of market intermediaries in different jurisdictions. Among various monetary and non-monetary order routing incentives, the report focuses on three primary types of incentive arrangements or commercial practices:
1. Monetary incentives paid or received by brokers to or from third parties;
2. Internalization and use of affiliated venues that may reap commercial benefits for a broker; and
3. Provision of goods and services bundled with execution by brokers, such as research.
Based on these forthcoming changes, IOSCO does not propose immediate next steps beyond this report and its findings. However, IOSCO encourages market participants to consider the findings of this report, and welcomes comments from stakeholders on the following question:
Do market participants have any comments on the findings of this report on order routing incentives or any views on whether IOSCO should undertake any further work to explore any of the issues raised in this report now or in the future?
Public Comments on this report should be submitted on or before 21 February 2017.