Recent settlements over market makers providing misleading information on equity trades have put institutional investors on notice that they need to take a closer look of how their trades are routed, sources said.
The fines against Citadel Securities along with Deutsche Bank Securities and Credit Suisse over misleading trade execution show that investors and regulators “aren’t taking brokers word it any more” on best execution, said Peter Maragos, CEO of Dash Financial.
“This should be a call to action for both asset owners and institutional investors,” David Weisberger, managing director and head of trading and quantitative services at IHS Markit, New York, said of the Jan. 13 announcement that Citadel Securities would pay $22.5 million to settle Securities and Exchange Commission charges that it misled other brokerages in getting the best market price on retail orders.
“In the institutional world, there’s virtually no scrutiny of routing, so what do you think is actually going on?” said Mr. Weisberger. “In retail, with a halogen light shining down, this still goes on. There’s no data on fill rates and other information on the institutional side that provide the basis for market comparison. If you think Citadel is doing it, there are hundreds of institutional brokers with no scrutiny of their routing.”
That lack of scrutiny, sources said, can open the door to trades being routed to exchanges and dark pools based more on rebates and lower fees than on best execution. In Citadel’s case, algorithms did not take the other side of the orders, called internalization, at the best price observed — but reported to clients that it did.
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