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.
IOSCO´s work on order routing incentives forms part of its ongoing effort to protect investors, promote market liquidity and efficiency, and enhance price transparency in financial markets.
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. In December 2016, it issued the Report on Order Routing Incentives for public consultation. None of the four comment letters it received proposed substantive changes to the report.
Among various monetary and non-monetary order routing incentives, the report focuses on the following 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.
All respondents to the consultation welcomed the report and stressed the importance of the conduct issues in connection with order routing incentives. Most agreed with IOSCO´s conclusion that no further work was required at this stage, arguing that existing regulation or imminent reforms (e.g., in the EU under MiFID II) adequately address conduct risks linked to order routing incentives.
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