What Best Execution Requires
SEC and FINRA rules require broker-dealers to seek the best reasonably available terms for client orders, taking into account multiple factors including price, likelihood of execution, and order size. Best execution is not simply about achieving the best price on a single trade — it is a systematic obligation to ensure that order routing decisions serve clients' interests. FINRA Rule 5310 sets out the applicable standard for FINRA-member firms.
Rule 605 and Execution Quality Measurement
SEC Rule 605 requires market centers (including market makers like Citadel Securities) to publish monthly statistics on execution quality — including how often they improve on the National Best Bid and Offer (NBBO) and by how much. These statistics, known as 605 reports, allow comparison of execution quality across market makers. Studies have found that the 'price improvement' claimed by PFOF market makers is often modest relative to theoretical best execution on exchanges.
FINRA Enforcement of Best Execution
FINRA has brought enforcement actions against brokers that failed to adequately monitor execution quality or that prioritized PFOF revenue over best execution. In 2020, FINRA fined Citadel Securities $700,000 for conduct that the regulator found potentially disadvantaged customers — though the specific findings are more nuanced than a simple best-execution violation. Best-execution enforcement typically targets the broker rather than the market maker.
The Academic Evidence
Multiple academic studies have found that PFOF-receiving brokers achieve statistically worse execution quality than direct-access brokers. A 2021 SEC staff analysis found that some PFOF brokers provided inferior price improvement compared to non-PFOF alternatives. While Citadel Securities claims its execution quality meets or exceeds regulatory requirements, independent analysis suggests that the system as a whole may not deliver optimal outcomes for retail investors.