Folio Investments reached a settlement with the Financial Industry Regulatory Authority over allegations of best execution failures, according to ThinkAdvisor.
Folio has been censured and fined $1.3 million after FINRA said the firm routed nearly all orders to three market makers and failed to compare the quality of executions it obtained from its order routing and execution arrangements to the quality of executions it could have obtained from competing markets.
“From at least January 2017 to the present, Folio failed to conduct reasonable regular and rigorous reviews of execution quality,” FINRA stated in its letter of acceptance, waiver and consent. “During this period, Folio routed its customer orders to two market centers that paid the firm for that order flow. In 2022, Folio began routing a substantial portion of its orders to another market center, which was a firm affiliate.”
FINRA added that in reviewing the execution quality provided by its existing routing venues, Folio reviewed price improvement but did not consider other relevant execution quality factors. The firm’s price improvement review was also unreasonable because it did not reasonably consider differences in order types or sizes.
Between 2017 and 2025, Folio routed approximately 440 million equity shares for execution annually. The firm had a best execution committee that met quarterly to review execution quality, but the “reviews of execution quality only included the executions of orders the firm routed to its existing routing venues and did not include data for the execution quality available at market centers to which it did not already route its order flow,” FINRA states.
“Thus, the firm failed to compare the execution quality of its current order routing and execution arrangements to the execution quality the firm could have obtained from competing markets,” according to the order.
The best execution committee’s regular and rigorous review “was primarily limited to a single execution quality factor — price improvement — and the firm failed to reasonably review any other execution quality factor,” the order continues. The committee also “did not review price improvement statistics broken down by order type or size, and therefore the firm could not reasonably evaluate differences in execution quality among its existing venues because differences in order types or sizes may have affected execution quality.”
Folio, which was acquired by Goldman Sachs in 2020, was found to have violated FINRA Rules 5310(a), and 5310 Supplementary Material .09 (Rule 5310.09), which provides that, “[i]n any transaction for or with a customer or a customer of another broker-dealer, a member . . . shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.”
During this same period, Folio also violated FINRA Rules 3110 and 2010 by failing to establish and maintain a supervisory system, including written supervisory procedures reasonably designed to achieve compliance with its best execution obligations.
As part of the settlement, Folio is required to certify that it has implemented a supervisory system reasonably designed to remediate the issues identified by FINRA.
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