FINRA Rule 5310 Explained: Best Execution and Interpositioning
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Are you trying to understand what your firm is responsible for when it comes to getting clients the best possible execution on their trades? FINRA Rule 5310 outlines the key duties broker-dealers follow when handling customer orders, from reasonable diligence to routing choices and working with third parties.
This guide explains how Rule 5310 applies in daily operations. You’ll learn what regulators look for, how to think about market access and order handling, and why documentation, costs, and execution quality reviews matter.
Whether you work in trading, compliance, legal, or operations, this page will help you feel more confident about meeting best execution expectations.
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. If you need assistance with compliance or fintech regulations, click here.
What Is FINRA Rule 5310?
FINRA Rule 5310 explains your firm’s duty to look for the best available terms when handling customer trades. This is known as the best execution obligation.
The rule requires broker-dealers to use reasonable diligence to find the most favorable market for an order based on real-time conditions. It applies whether a firm acts as agent or principal, and it covers equities, options, debt securities, and even foreign securities.
Think of Rule 5310 as the core framework for fair order handling. It shapes how firms look at different markets, make routing decisions, review execution quality, and avoid choices that could harm customers. This rule is written broadly so firms have room to build their own systems, while still holding them to a high standard of care.
Below are the main parts of Rule 5310 and how they play out in everyday practice.
The Duty of Reasonable Diligence
At the heart of FINRA Rule 5310 is reasonable diligence. This is the idea that when a customer sends in an order, your firm should make a real effort to find the most favorable market available at that moment.
This is not about being perfect. It’s about demonstrating that you took reasonable steps to get your customer the best outcome the market could offer at the time.
Regulators look at several factors when deciding whether a firm used reasonable diligence. They include:
The character of the market: This involves things like liquidity, volatility, pricing trends, and how quickly information moves. Some markets are calm, while others move fast, and your decision-making should reflect that.
The size and type of the transaction: A large block trade may call for a different approach than a small retail order. Market depth, timing, and execution strategy all come into play.
The number of markets checked: Firms should look at multiple venues when possible. If you only look at one place, you may miss opportunities that are available elsewhere.
How easy it is to access quotes: This means considering whether quotes for the security are widely available, updated frequently, or harder to obtain. Even when quotes are limited, firms should rely on whatever information is accessible.
The customer’s instructions and order terms: A customer’s preferences or special conditions can shape how the order should be handled. For example, the customer may want a limit order, prefer speed over price, or have timing requirements.
Interpositioning and Third Parties
Interpositioning happens when a firm puts another party between itself and the best market for a customer’s order. FINRA views this as a problem because it can quietly chip away at the quality of a customer’s trade without them ever knowing.
Rule 5310 allows the use of an intermediary only when doing so helps the customer. For example, a firm may turn to a broker’s broker when it wants to keep its identity out of the market so the price does not move in a harmful way.
The point is that a third party should never be added out of convenience, habit, or as a favor to another firm. If routing through someone else adds cost, slows down the order, or prevents the customer from getting the most favorable price available at that time, then it violates the spirit of best execution.
Firms should always be ready to explain why they used an intermediary, and the explanation should make sense from the customer’s perspective, not the firm’s perspective. When in doubt, the straightforward path to the best market is usually the right choice.
Staffing and Internal Controls
According to Rule 5310, a firm cannot fall short on best execution simply because its order desk is busy, understaffed, or dealing with internal delays. Customers should never feel the impact of a firm’s operational hiccups, and regulators expect firms to be prepared to handle orders promptly even during hectic moments.
This means a firm should have enough trained staff, reliable systems, and a workflow that keeps orders moving without unnecessary hold-ups. If the market is moving quickly and the firm misses a favorable price because the team is backed up or the system is slow, that is a problem. Best execution is about doing right by the customer, even when the office is having a tough day.
Rule 5310 also discourages routing orders to specific venues or third parties just to return a favor or maintain a business relationship. Order routing should always be guided by what helps the customer, not by internal preferences or commercial arrangements.
Best Execution When Acting as Principal
Best execution is not limited to situations where a firm acts as an agent. It also applies when a firm trades directly with a customer from its own inventory. In these moments, the firm is on both sides of the transaction, which can create opportunities for conflicts of interest. Rule 5310 makes it clear that the customer’s interests still come first.
When acting as principal, a firm must work to give the customer a price that is as favorable as possible under current market conditions. It does not matter that the firm is using its own capital or holding inventory. The duty to seek the best available outcome remains fully intact.
This obligation is separate from the rules on markups and markdowns under FINRA Rule 2121. Even if a markup is reasonable, the firm still needs to show that the overall execution met best execution standards. Both rules must be satisfied.
Securities With Limited or No Quotes
Some securities trade in very quiet or fragmented markets, and quotes may be sparse or completely unavailable.
Even in these situations, Rule 5310 still expects firms to put real effort into finding the most favorable terms for the customer. The lack of quotes simply means the firm needs to get a little more creative and thoughtful in how it approaches the order.
When pricing information is limited, firms can look to other sources, such as:
Recent trades in the same security
Quotes from counterparties the firm has traded with before
Pricing patterns in similar or related securities
Historical data that helps show what a reasonable price might look like
The key idea is that firms should not treat a thin market as an excuse to settle for whatever price happens to appear first. Instead, they should have written policies that explain how they will handle these situations step by step. These policies help guide decision-making when information is scarce and support fair outcomes for customers.
Documenting the process is also essential. When regulators review these trades, they want to see how the firm arrived at its decision and what information it considered.
Best Execution in Debt Securities
Debt markets can feel very different from equity markets. Quotes may come in the form of yields or dollar prices, and they may not be available on every platform. Even so, Rule 5310 still expects firms to put real thought into how they handle customer orders in bonds.
One of the factors FINRA looks at is how accessible the available quotes are. If quotes exist, the firm should take them into account and think about how easy they are to reach. Some quotes might be widely displayed, while others might sit on systems that only certain firms can view. Accessibility helps shape what reasonable diligence looks like in a particular situation.
Of course, debt markets often have moments where there are no active quotes at all. This does not lift the firm’s responsibility. In these cases, the firm can lean on its trading experience and look at whatever information is available, such as recent trades, dealer runs, or related instruments.
The goal is to make a thoughtful effort to find a price that reflects current conditions and supports the customer’s interests.
Foreign Securities and Global Markets
When firms trade foreign securities, they often find the market operates differently from the US. Market hours, transparency, liquidity, and pricing practices can all vary dramatically.
Even with these differences, Rule 5310 still applies. Customers who trade foreign securities deserve the most favorable terms available, and firms must approach these orders with care and thoughtful planning.
Due to the unique nature of foreign markets, firms need written policies that explain their approach to these orders. These policies should take into account local market structure, quote availability, settlement practices, and any unique challenges that might affect execution quality.
Ultimately, a one-size-fits-all approach does not work here. Each market requires its own understanding. Firms should also keep an eye on how foreign markets evolve. Technology changes, new trading venues appear, and access may improve over time.
When better opportunities arise, firms are expected to adapt their order-handling practices so that customers benefit from those improvements.
Customer Instructions and Directed Orders
When a customer gives an explicit, unsolicited instruction to route an order to a specific market or broker, Rule 5310 treats that instruction as the guiding factor. In these situations, the firm does not need to search for the best market beyond what the customer requested. The customer’s direction becomes the path forward.
Even so, the firm still has important responsibilities. The order must be handled promptly, and the trade must follow the customer’s terms. This helps create a smooth and dependable experience, especially for customers who enjoy taking a more active role in directing their trades.
If the customer chooses another FINRA member to receive the order, the receiving broker then becomes responsible for meeting Rule 5310’s best execution standards. This creates a simple handoff where each firm understands what it must do.
Regular and Rigorous Review of Execution Quality
Rule 5310 asks firms to step back on a regular basis and take an honest look at how well their execution process is working. This review should happen at least quarterly, but many firms choose to look even more often.
The idea is simple. Firms should compare the quality of their current execution routes with what other markets might offer. If another venue consistently provides better prices, faster fills, or stronger liquidity, the firm should think about adjusting its routing practices. If the firm decides not to make a change, it should have a clear and thoughtful reason why.
During these reviews, firms pay attention to things like:
Price improvement opportunities
How often limit orders get filled
Speed and size of executions
Transaction costs
Customer expectations
The impact of internalization or payment for order flow
These reviews help keep firms honest about the quality of execution their customers receive. They also encourage continuous improvement, which is crucial in a market that rarely stands still.
If a firm relies on another broker-dealer to handle its order flow, it can lean on that firm’s own review process. Even then, it should still take time to look at how the review is conducted and confirm that the results make sense for its customers.
Insight from the Experts
"Best execution is a daily practice that reflects how much a firm values its customers. When teams approach every order with curiosity, care, and a mindset of doing right by the investor, the quality of execution naturally rises."
What Is the Purpose of Rule 5310?
FINRA Rule 5310 exists to protect customers by helping firms focus on giving every investor the best possible outcome when their order is executed.
Here are the main goals behind the rule:
Promote Fair Pricing for Customers
One of the core aims of Rule 5310 is to help customers receive the most favorable pricing available when their orders are executed. This gives them the assurance that their orders are handled with care and that the price they receive reflects real opportunities in the market.
By focusing on fair pricing, firms help create a trading environment where customers feel respected and supported. And when customers trust that their trades are handled with their best interests in mind, they are much more likely to feel comfortable and stay engaged in the market.
Support Honest and Transparent Order Handling
Another key aim of Rule 5310 is to make order handling transparent and trustworthy. Customers want to know that their orders are being routed and executed in a way that reflects real market opportunities, not hidden arrangements or outdated habits. When firms handle orders openly and with thoughtful care, customers feel more confident about every step of the process.
Transparent order handling also helps teams work more smoothly. It reduces confusion, lowers the chances of mistakes, and creates a healthier relationship between firms and the people who rely on them.
Encourage Thoughtful Use of Market Information
Rule 5310 aims to help firms make smart, well-informed choices when routing and executing orders. Markets move quickly, and having a clear understanding of pricing, liquidity, and available venues helps firms find strong outcomes for their customers. When teams take the time to review market data with care, they make better decisions that support both fairness and customer satisfaction.
Thoughtful use of information also helps firms adapt as markets evolve. It creates a culture where teams stay curious, stay alert, and look for ways to improve their order handling over time.
Promote Ongoing Review and Improvement
A core purpose of Rule 5310 requires firms to regularly look at how well they are executing customer orders and find areas where they can do even better. By taking a look at execution quality on a routine basis, firms stay aligned with these changes and keep their processes fresh and effective.
This habit of continuous review not only improves execution outcomes but also builds a stronger culture inside the firm. Teams become more aware of how their decisions affect clients, and they learn from past patterns to make smarter choices in the future. It is a simple practice that leads to steady, meaningful progress.
Strengthen Investor Confidence
Rule 5310 helps build trust by showing customers that their orders are handled with care, attention, and fairness. When investors feel confident that their trades are executed in a way that reflects their best interests, they are more likely to stay active and engaged in the markets.
This kind of investor confidence benefits everyone. It creates a healthier trading environment, encourages participation, and supports long-term growth.
Reduce Conflicts of Interest
Rule 5310 helps firms avoid situations where personal or business incentives could influence how customer orders are handled. When firms put clear guidelines in place and follow them consistently, customers can feel confident that their trades are being routed based on real market benefits rather than internal preferences.
By reducing these conflicts, firms create a healthier environment for both customers and staff. It keeps the focus on fair outcomes, encourages better decision-making, and supports a culture where doing the right thing is the natural choice.
Create a More Reliable Trading Experience
Rule 5310 helps customers enjoy a smoother, more dependable trading experience. When firms follow thoughtful processes for routing and executing orders, customers are less likely to face unpleasant surprises or inconsistent results. This steady level of care makes trading feel more approachable and builds comfort and credibility over time.
A reliable experience also helps firms operate more effectively. Clear routines, organized workflows, and well-informed decisions all contribute to better outcomes for customers and stronger performance across the firm. It’s a win for everyone involved.
Example 1
Example 1: Missed Opportunity to Check Additional Markets
A regional brokerage was handling a customer’s market order for a popular retail stock. The trading desk routed it to the venue they normally used without checking any alternatives. Later that month, during an internal review, the firm discovered that another venue had been offering better prices with faster fills at the exact time the order came in. The customer did not complain, but the firm knew they had fallen short of their best execution obligations.
This realization pushed them to make meaningful changes. They introduced a simple pre-trade check that compares available venues in real time and added a weekly spot review to catch any trends. These small updates helped the team make more thoughtful routing decisions and gave customers better results without slowing anything down.
Example 2
Example 2: Finding Fair Pricing for a Hard-to-Trade Security
A customer wanted to sell shares of a small healthcare company that barely traded. The firm’s initial instinct was to route the order through their usual pathway, but a quick look showed almost no activity and a wide spread. Instead of forcing the trade through a thin market, the trading desk took a moment to explore other options.
They checked recent trade history, reached out to a few liquidity partners, and gathered quotes from firms that had handled similar securities before. With a bit of extra effort, they found a buyer offering a noticeably better price. The customer walked away satisfied, and the firm saw firsthand how a little curiosity and thoughtful market checking can turn a difficult order into a positive experience.
Note: The practical examples are fictional and created solely to enhance understanding of FINRA Rule 1210. They are not based on actual events or individuals and should not be interpreted as real-life scenarios.
FINRA Rule 5310 Violations and Cases
Even with clear best execution rules, firms sometimes fall short in practice. These real-world cases show how small gaps in supervision or outdated routing habits can lead to costly consequences.
01
Routing Orders to an In-House System Without Checking for Better Prices
In March 2022, regulators fined a large brokerage firm $2 million after finding that it routinely routed customer orders to one of its own internal trading systems even when better prices were available elsewhere. The firm had allowed this routing pattern to continue for years without taking a careful look at whether customers were actually receiving the most favorable executions.
Instead of comparing venues for things like price improvement or execution speed, the firm simply stuck with its default destination. Once regulators dug into the data, they found that many customers could have received better pricing if the firm had taken time to review its routing choices more thoughtfully.
After the action, the firm overhauled its execution quality reviews and upgraded its monitoring tools so it could spot when other venues were offering better outcomes. These changes helped it provide stronger protection for its customers while strengthening its overall compliance program.
02
Failure to Conduct Regular Execution Quality Reviews
In February 2024, FINRA fined a broker-dealer $175,000 after it found that the firm did not perform the “regular and rigorous” reviews required by Rule 5310. The firm’s systems failed to compare execution performance across competing venues and lacked proper documentation of its order routing decisions.
During the review period from 2014 to 2023, the firm’s written supervisory procedures did not clearly describe how best execution should be evaluated, what routing alternatives should be considered, or when routing logic should be changed. As a result, the firm could not demonstrate that it had taken reasonable steps to achieve the most favorable outcomes for its customers.
Following the decision, the firm rebuilt its execution review framework, added venue-by-venue performance tracking, and created a documented process for routing changes when new information indicates better execution is available.
Insight from the Experts
“Strong best execution programs come from curiosity. When firms keep asking whether their customers could get something better, they naturally build smarter routing practices and stronger relationships with clients.”
Frequently Asked Questions About FINRA's Best Execution and Interpositioning Rule
Understanding how FINRA Rule 5310 is applied in real-world situations can provide valuable insights into compliance and regulatory expectations. Below are examples of violations and cases that illustrate the consequences of non-compliance and the importance of adhering to the rule's requirements.
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