2320. Best Execution and Interpositioning
This rule is no longer applicable. NASD Rule 2320 has been superseded by FINRA Rule 5310. Please consult the appropriate FINRA Rule.
(a)(1) In any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with 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. Among the factors that will be considered in determining whether a member has used "reasonable diligence" are:
(A) the character of the market for the security, e.g., price, volatility, relative liquidity, and pressure on available communications;
(B) the size and type of transaction;
(C) the number of markets checked;
(D) accessibility of the quotation; and
(E) the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.
(2) In any transaction for or with a customer or a customer of another broker-dealer, no member or person associated with a member shall interject a third party between the member and the best market for the subject security in a manner inconsistent with paragraph (a)(1) of this Rule.
(b) When a member cannot execute directly with a market maker but must employ a broker's broker or some other means in order to insure an execution advantageous to the customer, the burden of showing the acceptable circumstances for doing so is on the retail firm. Examples of acceptable circumstances are where a customer's order is "crossed" with another retail firm which has a corresponding order on the other side, or where the identity of the retail firm, if known, would likely cause undue price movements adversely affecting the cost or proceeds to the customer.
(c) Failure to maintain or adequately staff an over-the-counter order room or other department assigned to execute customers' orders cannot be considered justification for executing away from the best available market; nor can channeling orders through a third party as described above as reciprocation for service or business operate to relieve a member of his obligations. However, the channeling of customers' orders through a broker's broker or third party pursuant to established correspondent relationships under which executions are confirmed directly to the member acting as agent for the customer, such as where the third party gives up the name of the retail firm, are not prohibited if the cost of such service is not borne by the customer.
(d) A member through whom a retail order is channeled, as described above, and who knowingly is a party to an arrangement whereby the initiating member has not fulfilled his obligations under this Rule, will also be deemed to have violated this Rule.
(e) The obligations described in paragraphs (a) through (d) above exist not only where the member acts as agent for the account of his customer but also where retail transactions are executed as principal and contemporaneously offset. Such obligations do not relate to the reasonableness of commission rates, markups or markdowns which are governed by Rule 2440 and IM-2440.
(f)(1) Except as provided in subparagraph (3) below, in any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security, a member or person associated with a member shall contact and obtain quotations from three dealers (or all dealers if three or less) to determine the best inter-dealer market for the subject security.
(2) Members that display priced quotations on a real-time basis for a non-exchange-listed security in two or more quotation mediums that permit quotation updates on a real-time basis must display the same priced quotations for the security in each medium, except with respect to a priced quotation that represents a customer limit order displayed on an electronic communications network in conformance with the exception to FINRA Rule 6460 provided in paragraph (b)(5) of that rule.
(3) The requirements described in subparagraph (1) above shall not apply:
(A) when two or more priced quotations for a non-exchange-listed security are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis; or
(B) to any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security of a foreign issuer that is part of the FTSE All-World Index if such transaction is executed during the regular business hours of the foreign market for the foreign security and no trading halt or other similar trading or quoting restriction is in effect in any foreign market on which such foreign security is listed; or
(C) to any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security that is listed on a Canadian exchange, provided that (i) such order is executed by the member or a person associated with the member on a Canadian exchange in an agency or riskless principal capacity; and (ii) the member or a person associated with the member conducts, pursuant to NASD Rule 2320(a) and the duty of best execution, regular and rigorous reviews of the quality of the execution of such orders in such securities.
(4) Definitions
For purposes of this paragraph (f):
(A) The term "inter-dealer quotation system" means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers.
(B) The term "quotation medium" means any inter-dealer quotation system or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
(C) "Non-exchange-listed security" means any equity security that is not traded on any national securities exchange. The term "non-exchange-listed security" shall not include "restricted securities," as defined by Securities Act Rule 144(a)(3).
(5) Pursuant to the Rule 9600 Series, the staff, for good cause shown, after taking into consideration all relevant factors, may exempt any transaction or classes of transactions, either unconditionally or on specified terms, from any or all of the provisions of this paragraph if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.
| Amended by SR-FINRA-2009-054 eff. May 9, 2011. Amended by SR-FINRA-2010-003 eff. June 28, 2010. Amended by SR-FINRA-2009-078 eff. Dec. 14, 2009. Amended by SR-FINRA-2007-024 eff. Sep. 8, 2009. Amended by SR-NASD-2004-130 eff. Sep. 28, 2007. Amended by SR-NASD-2004-026 eff. Nov. 8, 2006. Amended by SR-NASD-2005-087 eff. Aug. 1, 2006. Amended by SR-NASD-2000-20 eff. Nov. 24, 2000. Amended by SR-NASD-98-57 eff. March 26, 1999. Amended by SR-NASD-97-42 eff. Oct. 22, 1997. Amended by SR-NASD-87-55 eff. May 2, 1988. Interpretation adopted eff. May 1, 1968. Selected Notices: 97-88, 99-16, 00-78, 06-58, 07-40, 09-58, 10-26, 10-42. |