FINRA Fines tastytrade $850,000 Over Payment-for-Order-Flow Review Failures

The Financial Industry Regulatory Authority (FINRA) has fined tastytrade $850,000 for failing to properly assess whether clients received the best available prices on stock trades. FINRA accepted the settlement on Tuesday and censured the firm, concluding a review that spanned three years of order routing. 

At the core of the case is best execution, the obligation for every US broker to seek the most favorable terms reasonably available when filling an order. 

FINRA said tastytrade, the Chicago options broker acquired by London-listed IG Group in 2021, fell short of that standard between January 2020 and January 2023. During that period, the broker routed all its customers' equity orders to five market makers, each paying for the order flow—a legal and common practice. The issue, per the settlement, was that tastytrade never compared the execution quality it received against what clients might have obtained at venues it did not use. tastytrade's best-execution committee met quarterly as required, but FINRA said those meetings only reviewed data from the five market makers already handling the firm's orders, ignoring competing market centers. 

The regulator also criticized the reviews for relying on aggregate shares routed per market maker, failing to break orders by type or track price disimprovement—cases where a customer receives a worse price than the best quote at order arrival. Under FINRA rules, a firm not reviewing each order individually must run "regular and rigorous" reviews, comparing its fills with rivals' offerings. FINRA found tastytrade's supervisory system and written procedures were not designed for that. The firm, formerly tastyworks, rebranded to tastytrade in early 2023 and updated those procedures the same month. 

tastytrade is not the first retail broker penalized over the combination of payment for order flow and best execution. In December 2019, FINRA fined Robinhood $1.25 million for similar shortcomings. E*Trade Securities faced a $900,000 penalty for lacking data to judge execution quality, and in 2022 Deutsche Bank Securities paid $2 million to settle related failings. Payment for order flow remains a revenue source for IG Group, which noted in its latest annual report that higher order-flow rates boosted tastytrade's US derivatives revenue. The practice is banned in the UK and EU, prompting IG to rethink charges for its tastytrade-branded options service in Britain. 

Between 2020 and 2022 alone, tastytrade routed over 8.8 million equity orders covering more than 1.7 billion shares. The firm signed the settlement on June 26 and agreed not to dispute FINRA's findings. It was represented by Susan Schroeder of WilmerHale, who led FINRA's enforcement division from 2017 to 2019 before returning to private practice.