The International Organization of Securities Commissions (IOSCO) has published a final report on order routing incentives. The final report follows an earlier consultation that IOSCO issued on 21 December 2016.
The final report provides a review of the approaches and practices used by regulators in their respective markets regarding incentives for order routing and execution that may influence the behaviour of intermediaries. The report also examines practices by intermediaries, as well as planned reforms by a number of IOSCO member jurisdictions.
Among various monetary and non-monetary order routing incentives, the final report focuses on the following three primary types of incentive arrangements or commercial practices:
- monetary incentives paid or received by brokers to or from third parties;
- internalisation and use of affiliated venues that may reap commercial benefits for a broker; and
- provision of goods and services bundled with execution by brokers, such as research.
In terms of future reforms and next steps, the final report notes that in Europe MiFID II includes significant changes that will require reforms to broker crossing networks, enhance best execution obligations, and place a new requirement on intermediaries providing execution services and research services to price and supply them separately. The final report also notes that in Hong Kong reforms have been introduced to the alternative liquidity provider’s regime, which will change future practices in the market. In the United States, the Securities and Exchange Commission has consulted on potential changes to its alternative trading systems regulation, and the Commodity Futures Trading Commission in 2015 proposed new regulations that would require exchanges to provide disclosure and implement other controls regarding their market maker and trading incentive programs.
Based on the above changes and the feedback given to IOSCO’s earlier consultation, IOSCO does not propose any next steps beyond the final report. However, IOSCO encourages market participants to consider the findings as relevant to their activities.