Net trading, market making, and the SEC's view of best execution

摘要

Purpose – The purpose of this paper is to discuss the implications of a recent SEC settlement with Morgan Stanley & Co. (MS & Co.) with regard to: communication and coordination among legal, compliance, business, and technology departments when designing, implementing, and maintaining operating systems and compliance policies and procedures; and the SEC's view of best execution in the context of net trading and market making. Design/methodology/approach – The paper describes the Settlement Order. Itdiscusses, in light of the Order, the need for firms to coordinate among departments when they implement new systems or make changes to new systems; and provides a legal and regulatory analysis of the basis for MS & Co.'s liability, including a brief history of regulations on best execution and riskless principal trading. It also offers principal lessons to be drawn. Findings – The Settlement Order found that MS & Co. would at times execute with the Street at a better price than it provided to a customer. The SEC noted that MS &Co. violated its duty of best execution in violation of the 1934 Exchange Act but particularly emphasized that the practice was inconsistent with MS & Co.'s established internal policies and procedures and certain disclosures provided by the firm to third-party broker-dealers from which it received orders. Practical implications – Broker-dealers need to clearly define their processes for implementing new systems or changing existing systems, including approval requirements, responsible individuals, and periodic review procedures to ensure adherence to stated policies and procedures. Broker-dealers need to disclose net trading practices or similar trading practices to other broker-dealers that are routing orders to them. They should also review their net trading practices in light of Regulation NMS. Originality/value – The paper provides practical guidance and review of regulations concerning net trading, riskless principal trading and best execution from experienced securities lawyers.