Pershing BNY Mellon
Pershing LLC | Trading Services

Execution Quality Scorecard

November 2017

Click here to view past scorecards
 

Fixed Income Exception Statistics

November 2017

Click here to view past fixed income exception statistics

Trading Services | Best Execution
Frequently Asked Questions
Update July 2016


Equities and Options Fixed Income

Q: What is Best Execution?
A: The concept of best execution stems from agency law. A broker-dealer is charged with obtaining the most favorable terms for their client. While best execution has never formally been defined, case law, FINRA (formerly NASD®) Notice to Members, and the Securities and Exchange Commission (SEC) releases have provided some guidance. Upon reviewing these communications, we have come to the conclusion that what constitutes best execution is a highly subjective determination. Nonetheless, there is a general agreement that it does not mean solely achieving the best price. To ensure that it is achieving best execution for its client, the broker can consider such factors as the overall market quality, speed of execution, the size of the order, the trading characteristics of the particular security, counter-party risk, the availability of accurate information affecting choices regarding the most favorable market in which execution might be sought, the availability of economic access to the various market centers, and the cost and difficulty associated with achieving an execution in a particular market center. Because factors considered in evaluating best execution are constantly changing, the SEC has said that brokers have a duty to regularly and rigorously review their order routing decisions.

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Q: What additional sources of information are available concerning meeting my firm's best execution obligations?
A: For more information on defining best execution, please refer to: SEC Release No. 34-37619A, FINRA Notice to Members 96-65,
97-57, 98-96, 01-22, and FINRA Rule 2320.

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Q: Has there been regulatory guidance in terms of an Investment Advisor's obligations with regard to Best Execution?
A: The staff of the Securities and Exchange Commission's Division of Investment Management and Office of Compliance Inspections and Examinations prepared the information accessible via this link, which states in part:
Investment Advisers Must Seek to Obtain the Best Price and Execution for Their Clients' Securities Transactions.

As a fiduciary, you are required to act in the best interests of your advisory clients, and to seek to obtain the best price and execution for their securities transactions. The term "best execution" means seeking the best price for a security in the marketplace as well as ensuring that, in executing client transactions, clients do not incur unnecessary brokerage costs and charges. You are not obligated to get the lowest possible commission cost, but rather, you should determine whether the transaction represents the best qualitative execution for your clients. In addition, whenever trading may create a conflicting interest between you and your clients, you have an obligation, before engaging in the activity, to obtain the informed consent from your clients after providing full and fair disclosure of all material facts. The Commission has described the requirement for advisers to seek best execution in various situations.

In selecting a broker-dealer, you should consider the full range and quality of the services offered by the broker-dealer, including the value of the research provided, the execution capability, the commission rate charged, the broker-dealer's financial responsibility, and its responsiveness to you. To seek to ensure that you are obtaining the best execution for your clients securities trades, you must periodically evaluate the execution performance of the broker-dealers you use to execute clients' transactions.

You may determine that it is reasonable for your clients to pay commission rates that are higher than the lowest commission rate available in order to obtain certain products or services from a broker-dealer (i.e., soft dollar arrangement). To qualify for a "safe harbor" from possible charges that you have breached your fiduciary duty by causing your clients to pay more than the lowest commission rate, you must use clients' brokerage commissions to pay for certain defined "brokerage or research" products and services, use such products and services in making investment decisions, make a good faith determination that the commissions that clients will pay are reasonable in relation to the value of the products and services received, and disclose these arrangements.

The SEC staff has stated that, in directing orders for the purchase or sale of securities, you may aggregate or "bunch" orders on behalf of two or more client accounts, so long as the bunching is done for the purpose of achieving best execution, and no client is systematically advantaged or disadvantaged by the bunching. The SEC staff has also said that, if you decide not to aggregate orders for client accounts, you should disclose to your clients that you will not aggregate and the potential consequences of not aggregating orders.

If your clients impose limitations on how you will execute securities transactions on their behalf, such as by directing you to exclusively use a specific broker-dealer to execute their securities transactions, you have an obligation to fully disclose the effects of these limitations to the client. For example, if you negotiate volume commission discounts on bunched orders, a client that has directed you to use a specific broker should be informed that he/she will forego any benefit from savings on execution costs that you might obtain for your other clients through this practice.

You should also seek to obtain the best price and execution when you enter into transactions for clients on a "principal" or "agency cross" basis. If you have acted as a principal for your own account by buying securities from, or selling securities to, a client, you must disclose the arrangement and the conflicts of interest in this practice (in writing) and also obtain the client's consent for each transaction prior to the time that the trade settles. There are also explicit conditions under which you may cross your advisory clients' transactions in securities with securities transactions of others on an agency basis (under Rule 206(3)-2). For example, you must obtain advance written authorization from the client to execute such transactions, and also provide clients with specific written disclosures. Compliance with Rule 206(3)-2 is generally not required for transactions internally crossed or effected between two or more clients you advise and for which you receive no additional compensation (i.e., commissions or transaction-based compensation); however, full disclosure regarding this practice should be made to your clients.
Modified: 11/23/2010

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Q: How does Pershing achieve Best Execution?
A: Pershing has consolidated our Best Execution responsibilities within a single group called the Customer Execution Quality team. This group is charged with monitoring execution quality through a regular and rigorous review of the execution quality we receive from the venues where Pershing routes equity and option orders. In addition, the group continually monitors alternative venues to identify opportunities for improving execution quality.

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Q: What does the CEQ team do when it identifies opportunities for better executions?
A: The group has the autonomy and authority to make changes in Pershing's order routing engine, the Advanced Trade Order Management System (ATOMS), to direct orders to the venues identified as providing superior execution quality.

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Q: How many venues are available for routing from ATOMS?
A: ATOMS is a state-of-the-art, rules-based order routing engine that was developed by Pershing. It has redundant fault tolerant connections to route orders to national stock and option exchanges and dozens of NASDAQ® market makers as well as alternative trading systems (ATSs).

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Q: Which execution quality terms are considered important by Pershing?
A: Among the factors Pershing considers are the amount of net price improvement, speed of execution, certainty of execution, cost of execution, service issues, reliability, credit worthiness of counter parties, and accessibility.

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Q: How does the CEQ team regularly and rigorously monitor execution quality?
A: The CEQ team regularly and rigorously monitors execution quality by submitting all system-routed equity and option orders* and executions to one of two external, unaffiliated, third-party execution quality auditing firms on a daily basis. These firms compare the reported executions and unexecuted orders to the National Best Bids and Offers (NBBOs) at the time of order entry and identify a subset of items that require review.

The CEQ team measures the proportion of exceptions generated by each market center relative to the amount of orders routed to each market center and finally the number of adjustments deemed necessary by the CEQ team relative to the number of exceptions generated by the market center. In addition, the CEQ team monitors execution quality statistical data made available by every equity execution venue pursuant to SEC 605 (formerly SEC Rule 11Ac1-5).

* Includes system-routed held orders that are non conditional, for instance, do not include All or None (AON), Not Held (NH), or Fill or Kill (FOK) orders.

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Q: What type of SEC 605 statistical metrics does the CEQ team study to make execution quality judgments?
A: The CEQ team focuses on the average effective spread*, which is a share-weighted measurement that indicates how wide a spread is used by a market center. This information is useful when comparing a single security across market centers.

* Average effective spread has been defined as double the difference between the execution price and the midpoint of the NBBO on a share weighted basis. For example, if the NBBO is $10 bid and $10.10 offer, the midpoint is $10.05. A buy order executed at $10.09 would be $.04 away from the midpoint and result in an effective spread of $.08. Lower is better when comparing effective spreads.

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Q: Can the effective spread alone be used as a metric for measuring execution quality?
A: When baskets of securities, for instance the NASDAQ 100, are measured for execution quality the effective spread as a percent of the quoted spread is a better metric because it smoothes out variances caused by different characteristics in individual securities such as quoted spreads, volatility, and liquidity.

When comparing venues across a common basket of securities, the distribution of shares among the securities may be different for each venue, and therefore, the average quoted spreads confronted by the market centers being compared may also be different.

While using the effective spread as a percent of the quoted spread is still not exactly an "apples to apples" comparison, it does smooth out some of the differences that can occur when using the effective spread alone.

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Q: Does Pershing make the data analysis available to its customers to help satisfy their best execution obligations?
A: Some of the data Pershing studies is confidential. However, Pershing's Customer Execution Quality (CEQ) team has developed a condensed version of data in the form of an Execution Quality Scorecard that is available to customers that execute their orders through Pershing.

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Q: Has Pershing recently changed the data contained in the execution quality scorecard?
A: Starting in January 2015 Pershing introduced a number of changes to the execution quality scorecard, which include:

  • removing the benchmark
  • adding metrics for Exchange Traded Funds (ETF’s) listed at NYSE ARCA
  • adding metrics for the percent of shares improved for equities and ETF’s
  • the percent of contracts that were price improved for options
  • adding the rate of improvement per share for equities
  • adding the rate of improvement per contract for options

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Q: Why was the benchmark removed?
A:The benchmark was made up of public SEC 605 disclosures that were previously found to contain data anomalies caused by the uneven use of milliseconds in order time stamps as well as the inclusion of responses to Indications of Interest (IOIs) and IOC orders that could only trade at the inside price with any remaining balance canceled back to the order sender which is more akin to a limit order even though they were being included in the market order category. For these reasons we have determined that the differences will not allow for an accurate comparison. It should also be noted that Pershing was the only clearing broker providing a benchmark and we have no way to audit the 605 data of the participants whose performance was included in the benchmark. Finally not including a benchmark will allow Pershing to provide the scorecard in a more timely way since we will no longer need to wait for the prior month’s 605 statistics which are produced on a 30 day lag as per the SEC 605 rule.

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Q: What were these data anomalies in public SEC rule 605 disclosures?
A: In November 2011 Pershing found that for market orders of less than 2,000 shares in Listed S&P 500 stocks:

  • market centers reported negative effective spreads as a percent of quoted spreads
  • some market centers also reported speed of execution metrics for market orders of greater than 10 seconds even in the smallest order size buckets
  • large exchanges with significant enough volume to influence the industry performance reported effective spreads as a percent of quoted spreads in the single digits.
This would seem to indicate that these exchanges execute market orders consistently at the mid point of the spread, which is highly questionable.

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Q: What benchmark price does Pershing use as the opening price to begin execution for electronically entered exchange-listed equity orders under normal market conditions?
A: Marketable equity orders entered prior to 9:28 a.m. (ET) will, absent extraordinary circumstances, be routed to a venue where they will receive the official opening price for the primary listing market.

  • Orders received after 9:30 a.m. (ET) will be routed to the market in the normal course and are subject to execution based on the prevailing market conditions.
  • Please be aware that all exchanges have rules that pertain to "clearly erroneous" transactions. In such cases, executions may have prices adjusted or may be canceled out right. The declaration of a "clearly erroneous" transaction is final and binding and cannot be appealed as stated in the exchange rules.

Please see the link below for a guide to the Opening and Closing auctions specific to the NYSE ARCA Exchange. NYSE ARCA has regulations that may prevent orders from being included in the Market Order Auction (MOA) which produces the NYSE ARCA official opening price in certain circumstances outlined in more detail below. Because of these regulations, NYSE ARCA does not guarantee an execution at the opening price.

https://www.nyse.com/markets/nyse-arca/trading-info#opening

Please see the links below for FAQ's and a guide to the Opening and Closing auctions specific to the IEX Exchange.

https://iextrading.com/docs/IEX%20Opening%20and%20Closing%20Auction%20Quick%20Guide.pdf

https://iextrading.com/docs/IEX%20Opening%20and%20Closing%20Auction%20FAQs.pdf

Please see the links below for FAQ's and a guide to the Opening and Closing auctions specific to the Nasdaq Exchange.

https://www.nasdaqtrader.com/content/ProductsServices/Trading/Crosses/openclose_faqs.pdf

http://www.nasdaqtrader.com/content/TechnicalSupport/UserGuides/TradingProducts/crosses/openclosequickguide.pdf

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Q: What is the trigger event for Stop and Stop Limit orders in all National Market System (NMS) and over-the-counter (OTC) equities?
A: Pursuant to the new Financial Industry Regulatory Authority (FINRA) Rule 5350, Stop Orders. Effective March 4, 2013, Pershing has instructed the market centers to whom we route, to elect or trigger non-directed stop and stop-limit orders based on round lot transactions up to and including 15:59:59 Eastern Time in all National Market System (NMS) and over-the-counter (OTC) equities. Odd lot transactions and other transactions which do not update the last sale will not trigger non-directed stop and stop-limit orders. Some Market Centers may exclude certain transactions away from the current NBBO in an effort to prevent erroneously triggered stop and stop limit orders. Non-directed stop and stop-limit orders had previously been elected or triggered based on National Best Bid/Offer (NBBO) quote updates.

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Q: What are some other impacts of the introduction of Regulation NMS in order handling protocols?
A: Market opening and closing prints are exempt from Regulation NMS.  This means that an opening trade can "trade trough" a quoted price established in the pre-market trading session. 

Similarly an order sent to a market center for display during normal market hours can be "traded through" by a closing cross.  Both of these examples are considered exceptions to the order protection rule of Regulation NMS. 

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Q: What factors determine where a market center is likely to display an order to expose it to the national market place and have it covered under the Order Protection rule of Regulation NMS?
A:Market centers display liquidity in several different market centers depending on factors such as obtaining the proper opening benchmark price or activity levels in a particular market center or the ability to establish Top of Book status to obtain protected status under the Order Protection rule of Regulation NMS and in order to satisfy their Limit Order Display obligations and improve fill rates. 

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Q: What is Pershing's policy for handling non directed Market-on-Close (MOC) Limit-on-Close (LOC) and Closing Offset (CO) orders received after Regulatory imbalances are published at 3:45 eastern time (or at 12:45 eastern time on Holiday shortened trading sessions)?
A: Beginning on March 1, 2010, for New York Stock Exchange (NYSE) and NYSE AMEX (AMEX) listed issues, MOC and LOC orders received 3:45 or later that are on the opposite side of the most recently published imbalance will be accepted, while orders that join the same side as the imbalance will be canceled by the market center. No electronic cancels of MOC, LOC or CO orders will be permitted after 3:44 eastern time. In the event a firm has a bona fide error, a cancelation may be phoned to the Pershing Execution Support Desk prior to 3:57 at (201) 413-4920. Any phoned cancelation orders will be handled manually and there is no guarantee that the order will be canceled by the market center.

MOC or LOC orders in NYSE ARCA listings will be handled in accordance with NYSE ARCA rules, which limit the entry of these order types after 3:59, only permitting orders that offset a published imbalance, while orders that exceed or reverse the imbalance are rejected. Beginning Monday, April 13, 2015, NYSE ARCA Equities is implementing new parameters for all of its Auction Collar logic. The new parameters will prevent Auction trades from executing outside of the following percentages:

Last Consolidated Price* Collar Percentage
$0.01 to $25.00 5%
$25.01 to $50.00 2%
$50.01 and higher  1%

*If there is no Last Consolidated Price prior to an Auction, the collar percentage will be calculated based on the previous close. Current Auction Collar percentages are 10%, 5%, and 3%, respectively.

MOC or LOC order in NASDAQ exchange listings will be handled in accordance with NASDAQ exchange rules, which does not allow the entry, replacement or cancelation of these order types after 3:49.

MOC or LOC orders entered prior to either a halt in an individual security or a market wide trading halt are not guaranteed an execution.

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Q: What is Pershing's policy for handling non directed Closing Offset (CO) orders.
A: The CO order is a day limit order to buy or sell and will be accepted up until 4:00 p.m., regardless of any imbalance or side of imbalance. The rules for cancellations will follow the same rules for MOC/LOC orders. CO orders provide liquidity to offset imbalances at the Close and execute at the closing price. CO orders will trade if marketable to fill any remaining imbalance and will yield to all other interest. Within the CO allocation, CO orders will be filled in time priority. CO orders on the same side of the imbalance will not participate.

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Q: What is the Limit Up/Limit Down Plan?
A: The Limit Up/Limit Down plan is designed to prevent trades in National Market System (NMS) securities from occurring outside specified price bands set at a percentage above and below the average reference price of the security during the immediately preceding five-minute period.

When one side of the National Best Bid and Offer (NBBO) equals the price band on the opposite side of the market, the security is said to be in a "Limit State." If the Limit State condition persists for 15 seconds, a trading pause will occur in the affected security. Quotes outside the price bands will not be executable. Equity market and marketable limit (sell limits below the price band or buy limits above the price band) orders will be re-priced by exchanges and displayed in the current NBBO quotation to avoid violating the price bands. Option market orders will be rejected by the market centers when the underlying security is in a Limit State.

The new plan will replace the single-stock circuit breaker program, which was instituted as a pilot following the May 6, 2010 Flash Crash to supplement the market-wide circuit breaker rule (below). The Limit Up?Limit Down pilot launched with a limited number of securities on April 8, 2013. More securities will gradually be added to the plan until the full rollout is complete, which is expected to occur by September 30, 2013.

To learn more about the Limit Up/Limit Down process, see nyse.com or nasdaqtrader.com.

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Q: What is a Limit State?
A: Trading immediately enters a Limit State if the National Best Offer (Bid) equals but does not cross the Lower (Upper) Price Band. When a Limit State occurs, the Securities Information Processors (SIP's), which are the most prevalent source of all consolidated/composite market data, shall indicate that National Best Bid (Offer) as a Limit State Quotation. Trading exits a Limit State if, within 15 seconds of entering the Limit State, all Limit State Quotations were executed or canceled in their entirety. If the market does not exit a Limit State within 15 seconds, the primary listing exchange will declare a five-minute Trading Pause.

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Q: What is a Straddle State?
A: A Straddle State occurs when the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS Stock is not in a Limit State. For example, assume the Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS stock would be in a Straddle State if the National Best Bid were below $9.50, and therefore non-executable, and the National Best Offer were above $9.50 (including a National Best Offer that could be above $10.50). If an NMS Stock is in a Straddle State, and trading in that stock deviates from normal trading characteristics, the primary listing exchange may declare a Trading Pause for that NMS Stock.

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Q: How will equity orders be affected during a Limit or Straddle State?
A: Market and Limit orders will be handled slightly differently as noted below:

  • Market Orders. A market order will be executed to the extent possible at or within the Price Bands. Any unexecuted portions of a buy (sell) market order shall be displayed at the Upper (Lower) Price Band.

  • Limit Orders. Limit Orders to buy (sell) that are priced above (below) the Upper (Lower) Price Band (both displayable and non-displayable) shall be re-priced to the Upper (Lower) Price Band. Resting limit Orders to buy (sell) will be re-priced to the Upper (Lower) Price Band if the Price Bands move and the price of resting limit-priced interest to buy (sell) moves above (below) the Upper (Lower) Price Band. If the Price Bands move and the original limit price of re-priced interest is at (or within) the Price Bands, orders will be re-priced to their original limit price.

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Q: Which Exchange Traded Products (ETP's) are subject to the tier 1 parameters of Limit Up Limit Down?
A: NYSE Euronext, in tandem with other listing exchanges, has updated the list of ETPs eligible for Tier 1 of the Limit Up Limit Down Pilot program. The updated list of ETPs can be found here.

To determine eligibility for an ETP to be included as a Tier 1 NMS Stock, all ETPs across multiple asset classes and issuers, including domestic equity, international equity, fixed income, currency, and commodities and futures were identified. Leveraged ETPs were excluded and the list was sorted by the notional consolidated average daily volume ("CADV"). The period used to measure CADV was from the first day of the previous fiscal half year up until one week before the beginning of the next fiscal half year. In this case, the time period was 1/1/2013 to 6/24/2013.

Daily volumes were multiplied by closing prices and then averaged over the period. ETPs, including inverse ETPs, which traded over $2,000,000 CADV, were eligible to be included as a Tier 1 NMS Stock. To ensure that ETPs that track similar benchmarks but that do not meet this volume criterion do not become subject to pricing volatility when a component security is the subject of a trading pause, non-leveraged ETPs that traded below this volume criterion, but tracked the same benchmark as an ETP that did meet the volume criterion, were deemed eligible to be included as a Tier 1 National Market System (NMS) Stock.

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Q: How will Pershing handle Options Orders during trading pauses and limit states?
A: When an underlying security of an option is in a LULD/Straddle State, simple and complex option market orders will be cancelled or rejected. When the primary exchange places a stock in a trading pause, Pershing will accept option orders to participate in the re open. Limit and Stop Limit orders will continue to be accepted and routed when a LULD/Straddle State is declared. Incoming STOP orders will be routed to options exchanges. Based upon the policy of the exchange, the order will either be rejected back to the client or "frozen" by the exchange.

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Q: What are the changes for the Market-Wide Circuit Breakers?
A: The SEC has implemented several updates to the market-wide circuit breaker rule, which applies a halt in trading on all U.S. exchanges if the market experiences extraordinary volatility. The S&P® 500 will replace the Dow Jones Industrial Average index (of 30 stocks), for a broader, cross-market measure of market volatility. In addition, the SEC reduced the halt time to minimize market disruption, and lowered the percentage of decline at which a halt is triggered. For more information, visit sec.gov.

  INDEX HALT
THRESHOLD
DECLINE
CALCULATION
HALT
TIME
PERIOD WHEN HALT
CAN OCCUR
NEW CRITERIA S&P 500 7% Change from previous day's close 15 minutes Market open to 3:25 p.m. (ET)
ORIGINAL CRITERIA Dow Jones Industrial Average 10% Average of last month of the quarter 30, 60 or 120 minutes Six periods, each with varying criteria

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Q: Are there any steps introducing firms can take to obtain additional price improvement on their investor’s orders?
A: There are approximately 800 small capitalization equity securities in test groups 2 and 3 of the two year SEC Tick Size Pilot that permit liquidity providers to utilize an exception to the requirement that execution prices be in nickels and can therefore price improve marketable orders inside the spread by at least $.0.005 if the order is marked as retail at the time it is routed to the liquidity provider.

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Q: How does Pershing decide which orders to mark as retail?
A: In order to qualify for participation in the SRO retail programs an order must be an agency order entered by a natural person, e.g. not using any computerized methodology. Pershing will only mark orders as retail once the introducing firm attests to Pershing by source of input that orders qualify as retail orders. Firms that send orders to Pershing via Net Exchange Services, e.g. via real time FIX or XML formatted messages, will also need to populate the order message with the retail flag NOTE: It is critical that firms complete the attestation and test BEFORE transmitting this flag in production since orders sent with the flag prior to the attestation being received will be rejected.

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Q: Where can the attestation be found?
A: The attestation is found in a new work basket in workflow and can be completed there so that Pershing can automatically retain it in Imaging for record retention purposes and to remind firms when it is about to expire via Items for Attention (IFA). Only a single user per firm needs to complete the attestation via workflow. The user should have global data entitlements, e.g. access to all accounts/all offices, and must obtain Business Functional Entitlement (BFE) # 17402 by having their Entitlement Management System (EMS) administrator assign the BFE to them.

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Q: How can introducing firms know which orders were marked as retail if the orders are entered in Net Ex 360, Net Ex Investor or Block Trading and Rebalancing?
A: All orders marked retail will be marked as such within the standard files provided by Pershing.

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Q. How does Pershing help introducing brokers meet their best execution obligations when considering fixed income products?
A: Unlike equities and options, the fixed income market has no linkage between the different pools of liquidity and a much broader list of securities. Additionally, your firm typically does not place non-directed routable orders with Pershing; rather placing a request for quote interaction. The initial inquiry is often not even about a specific security, but rather a product, sector, maturity and rating, or some combination of these. In these instances, Bond Central® aggregates liquidity from many different dealers via a fixed income alternative trading system (ATS).

When purchasing a bond, Pershing filters the offerings and displays the best prices for each instrument within the ATS that meet the criteria provided. This allows us to respond to the request for quote. Pershing uses The Karn Group (TKG) to obtain fair value estimates for fixed income instruments within BondCentral. The fair value estimates are based on historical pricing from the Trade Reporting and Compliance Engine (TRACE) and the Municipal Securities Rulemaking Board (MSRB). They are weighted based on trade size and how recent the activity occurred. If there are no recent TRACE and MSRB trade reports, the system estimates prices based on comparable securities. A tolerance is affixed to the fair value estimate to establish a fair value range based on characteristics of the instrument being analyzed, such as product type, rating, sector and maturity.

Pershing’s BondCentral platform includes TKG pricing evaluations for offerings and bid wanteds. As investment professionals place purchases and enter sales, the Customer Price will be compared to the TKG pricing matrix.

NOTE: Customer Price includes all sales credit and desk mark your firm has added or has subtracted from a bid price.

While this tool is provided to assist your firm in fulfilling its obligations to achieve best execution, you should not rely solely on the tool or the steps taken by Pershing to meet your firm’s obligations. It is critical that your firm conduct an independent analysis of order execution quality to ensure your investors are getting best execution.

Offerings
As an advisor selects an offering, it will automatically be compared to the pricing matrix to determine if the Customer Price is outside of the predetermined fair value range. This first pass occurs upon opening a Buy ticket. If the Customer Price is within the fair value range, no message will be displayed.

If the Customer Price is outside of the fair value range, a warning icon will appear on the order ticket along with the TKG Fair Value Estimate. If the user hovers over the icon, a message will display indicating that the Customer Price is Outside the Fair Value Estimate Provided by Third Party. A second check will occur after Review Before Sending is selected, as adjustments to the sales credit may have been made. This could alter the results of the price check.

If users attempt to buy or sell thinly traded securities, they may receive a warning that there is Insufficient Historical Data Available for Third Party to Estimate Fair Value. This occurs when there are no relevant TRACE or MSRB prints or comparable bonds from which TKG can estimate a price.

If users continue with the purchase of offerings that have been deemed out of tolerance or have insufficient historical data, they will be required to attest that they have reviewed the message before they can proceed.

Bids
Similar to offerings, all bids received back in BondCentral via the bid wanted process will be compared to the TKG pricing matrix. If the pricing is within tolerance, no message will appear. However, if it is out of tolerance or, in rare circumstances, has insufficient historical data, the warning icon will display next to the Bid Request Detail in the Sell ticket. After the ticket is completed and any sales credit is entered, the Customer Price will be reviewed again and could have different results than when bid was initially received.

As with purchases, users will be required to attest to the warning messages to proceed with their Sell orders.

To complement the price checks, and to help supplement your firm’s current Best Execution policies and procedures, Pershing created two pre trade checks in the Enterprise Rules Engine (ERE). These rules are intended to help firms meet their mandate with regard to pre-trade supervisory reviews for trades that are deemed to be off-market by a third-party execution quality audit firm. Firms are strongly encouraged to incorporate these reviews as part of their overall Written Supervisory Procedures that are intended to comply with FINRA Rule 5310 and MSRB Rule G-18.

Bond orders placed within BondCentral or via Sell From Holdings, which trigger the Out Of Tolerance message, can be routed for approval rather than automatically routed to the marketplace for execution. If your firm’s preference is to block any orders that trigger this rule, you may set it to hard stop and the order will auto-reject.

Rule Code Rule Name Rule Description Rule Message Status Outcome
1292 Bid and Offer Price Check Indicates that the customer price for which a bond order was placed was outside of tolerance from the fair value estimate provided by a third party.

Customer Price includes any sales credit or desk mark your firm has applied to the order.
  • For Sell orders, the price at which a sale has been requested is lower than the fair value estimate range. ? For Buy orders, the offering price for which a purchase has been entered is above the fair value estimate range.
Customer Price is Outside Tolerance From Fair Value Estimate Provided by Third Party Optional Approval or Stop/Auto-Reject
1293 Insufficient Data Indicates that an order has been placed for a bond for which there is insufficient historical data available for third party to estimate fair value.

Further analysis may be required to determine the quality of the Customer Price to meet your obligations with regard to Best Execution before proceeding with the order.
Insufficient Historical Data Available for Third Party to Determine Fair Value Optional Approval or Stop/Auto-Reject


Most corporate and municipal offerings have links to recent trade history to assist users in determining how an offering compares to recently priced trades as reported to TRACE and MSRB. There are also links to obtain information about recent material events pertaining to municipal securities that could impact the market price of these instruments and should be carefully considered prior to completing a transaction. Certain fixed income instruments or asset classes can be very illiquid and have esoteric terms which may require a broker dealer to explore all sources of liquidity or instruments from other issuers in order to obtain a favorable execution price.

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Q. How does Pershing help introducing brokers meet their best execution obligations when liquidating a fixed income position?
A: Pershing provides access to the Bond Central trading platform which provides a bid side market in many active corporate bonds. For municipal securities and in circumstances where there may not be a live and actionable bid in a corporate security Bond Central offers a Bid Wanted (BW) process that exposes the offer to hundreds of dealers for a predetermined period of time. At the conclusion of the auction the user is presented with all bid prices as well as the total number of bids obtained during the auction. The user will also be alerted with a detailed off market message if the bid received is outside a predetermined pricing parameter set by Pershing. If the user decides to trade with a bid that was flagged as off market they will be required to acknowledge the warning pre trade.

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Q. What additional tools are available post-trade to assist clients with complying with their best execution obligations?
A: Clients can contract directly with TKG to review exceptions on their fixed income trades executed with Pershing via Bond Central or the sales desk. Pershing will supply your trade data directly to TKG.

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Q. Which Fixed Income securities can TKG analyze for execution quality?
A: TKG is able to analyze execution quality for government, corporate, municipal, high yield, agency, CDs and mortgage backed securities.

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Q. Is there a way I can review my firm's trades for negative yields?
A: Yes. A daily Report (CON200D2) — Negative Trade Yield Report has been created in NetX360 Report Center to display trades with negative yield for each Pershing individual broker dealer. This report allows firms to be proactive in identifying trades with negative yields which may come under scrutiny by regulators. Certain fixed income issues trade with negative yields due to their structure or the current interest rate environment such as Treasury Interest Protected Securities (TIPS) and convertible bonds. Off market pricing, excessive commissions or incorrect security description may result in a trade recorded with a negative yield.

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Q. How does Pershing monitor execution quality for fixed income?
A: Pershing's CEQ group utilizes TKG and reviews execution quality exceptions on a post trade basis on trade date.

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