HSBC Brokerage, a New York firm which allegedly directed all government securities orders to an affiliated broker-dealer, agreed to pay $250,000 to settle NASD charges it failed to have adequate systems in place to ensure the best execution for its clients.
Allegedly the firm routed orders to affiliate, HSBC Securities (HSI), without taking adequate steps to ensure that its customers could not get better prices through other sources. The NASD said in a news release that “HBI’s inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD’s ability to review transactions for best execution.” HBI settled this action without admitting or denying the charges.
Prior to a merger of the two related firms, HBI’s retail brokerage business was primarily located in HSBC bank branches, the NASD said. To support the retail business, HBI operated a trading desk to handle orders placed by brokers.
The NASD found that in mid-2004 HBI directed its fixed income traders to route all government securities orders to HSI for execution. The dollar volume of U.S. Treasury transactions that HBI sent to HSI rose from approximately one-forth of all orders in late 2003 to almost 100 percent by December 2004.
While HBI’s traders were required to “shop” orders for government securities transaction before placing it with the affiliate, according to the NASD, HBI had inadequate systems to monitor this process by its traders. While several HBI officers apparently recognized the increased risk associated with directing all government securities orders to a single, affiliated broker-dealer, the firm failed to put proper procedures in place to ensure clients received the best execution on their orders.
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