FINRA Requests Comment on Revised "Best Execution" Standard
Commentary by Steven Lofchie
FINRA issued Regulatory Notice 26-15 requesting public comment on how its principles-based best execution guidance should be amended in light of the SEC's proposal to rescind the trade-through prohibition and locked-market rules under Regulation NMS (see prior coverage).
The request for comment addresses how broker-dealers should structure their best execution reviews and internalization practices if the SEC eliminates the trade-through prohibition. FINRA asked how firms will make venue connection decisions if they are not subject to the prohibition, whether the national best bid and offer will remain a reliable benchmark for internalized executions, and how transaction costs and venue access fees should factor into best execution analysis if the SEC modifies access fee caps.
The notice also sought feedback on whether order-by-order reviews should remain mandatory for internalized order flow or whether periodic reviews would be more workable given advances in routing technology. FINRA explored differences between retail and institutional customer expectations, particularly regarding information leakage and block trades, and asked how best execution obligations should apply during extended and overnight trading sessions.
Additionally, FINRA requested input on the treatment of "held" versus "not held" orders, noting concerns that some firms use blanket disclosures to classify retail orders as not held to avoid immediate-execution responsibilities. The regulator also sought feedback on best execution issues specific to listed options and the implications of artificial intelligence and tokenized securities for order handling.
Comments must be submitted by September 25, 2026.
Commentary
The big question will be, "When is it appropriate for a broker-dealer to ignore or trade through a better bid or offer?" For example, firms may reasonably determine that the information cost of trading with a small offer, or the operational hassle, makes it not worthwhile. It will be interesting to see what impact this may have on odd-lot trading.
Similarly, firms may decide that it is not useful to maintain connectivity to a small exchange with limited trading volume. Will this cause the number of securities exchanges — which has increased substantially since the adoption of Regulation NMS — to fall back down?