Opinion ID: 1969421
Heading Depth: 2
Heading Rank: 1

Heading: Order Flow Payments

Text: The issue before us is not the legality of order flow payments but the enforceability of the forum-selection clause. Nonetheless, at least for context, it is helpful to have some understanding of what the underlying case is about. As we indicated, order flow payments are those received by a broker for routing customer buy and sell orders through a particular wholesale dealer or other market maker. Relying in part on a public comment letter sent to the Securities and Exchange Commission by the New York Stock Exchange in December, 1993, Gilman obviously believes that the practice is heinous and unlawful. The history of the practice and the limited regulation of it by the Securities and Exchange Commission were described in some detail by the New York Court of Appeals in Guice v. Charles Schwab & Co., Inc., 89 N.Y.2d 31, 651 N.Y.S.2d 352, 674 N.E.2d 282 (1996), cert. denied, ___ U.S. ___, 117 S.Ct. 1250, 137 L.Ed.2d 331 (1997). The court noted that the practice originated years ago in the over-the-counter (OTC) market but that, with advances in computer technology making possible an entirely automated market system independent of the floor of any stock exchange, and automated trading systems permitting accelerated execution of orders, OTC market makers and members of regional exchanges could compete for orders in listed stocks with the New York and American Stock Exchanges. Thus, it observed, routing orders in listed stocks to OTC market makers and regional exchange specialists has more recently become a major source of order flow payments to retail broker-dealers. Id. at 354, 674 N.E.2d at 284 (footnote omitted). The Guice Court recounted that the SEC had monitored and studied the practice for over a decade and, after conducting a round table discussion in 1989 and considering public comment to a proposed rule change in 1993, the Commission decided not to prohibit the practice but rather to require additional disclosure of it. At 287-88, the Court noted that, in adopting its final rule for regulating order flow payments in 1994, [the Commission] explained that it rejected elimination of order flow payments entirely because the practice did not necessarily violate a broker-dealer's best execution obligation, and that the practice benefitted the securities industry in lowering execution costs, in facilitating technological advances in retail customer order handling practices and in enhancing competition among broker-dealers and the various exchange and nonexchange securities markets and, thus, also worked to the advantage of investors.... The SEC also noted the serious enforcement problems that elimination of the practice would entail and the drastic impact that an outright ban would have on the securities industry.... In its 1993 proposed amendment to Rule 10b-10, the SEC would have required brokers to disclose on their confirmation statements the specific dollar amount of any order flow payment received for that transaction, but it retreated from that position in the final 1994 rule, being apprehensive that mandatory disclosure of specific monetary receipts might be `unworkable' ... and would, at the least, impose `an extreme burden' upon broker-dealers `to determine the amount of order flow received for each order in time for a confirmation' and would entail expenses disproportionately high in relation to the potential benefits to customers.... Id. at 358, 674 N.E.2d at 288 (quoting in part from Payment For Order Flow, Securities and Exchange Release No. 34-34902 [Oct. 27, 1994], reprinted in 59 Fed.Reg. 55006, 55010 n. 39). See also Orman v. Charles Schwab & Company, Inc., 285 Ill.App.3d 937, 221 Ill. Dec. 720, 721, 676 N.E.2d 241, 242 (1996), noting as well that order flow payments are a recognized and widespread practice in the industry and part of the competitive market.