Why it’s not so simple when you hit the trade button (part 1)

Interview with an order flow manager

By Franklin Gold

I interviewed Jay Owen in mid-March on a variety of topics. I’ve known Jay for years during our time at Fidelity Investments. Jay was a member of the order flow team that oversees Fidelity’s customers’ (retail, RIA, broker-dealer and family office) orders; I was on the other side of the business, as a senior leader in retail brokerage. Jay has deep experience in the space so we thought he could shed some light on order handling, routing, and payment for order flow (PFOF) to help investors better understand what should happen when they trade.

Franklin - Tell me about your background – pre-Fidelity and your roles at Fidelity.

Jay – I started out in the industry doing operations at a small investment management firm. I learned a lot about the business – especially about fiduciary responsibility and always doing right by the customer. It’s something that has stuck with me throughout the years.

After that, I went to work at Fidelity on the phones, ultimately moving into the group that worked with Fidelity’s active trader customers. I complained a lot (on behalf of our customers) about some of their order executions. Fidelity Capital Markets, that handled Fidelity’s order flow, hired me since I understood what was going on. I started on the agency desk, handling customer orders sent out to brokers, and after two years, went over to the order flow team helping oversee equity and option orders.

I stayed in that group for over 15 years. During that time, there were many rule changes for order handling – the limit order display rule, Newton vs. Merrill Lynch, decimalization, Reg NMS, rule 605/606, FINRA Rule 5310. The thing these rule changes all had in common – they raised the bar for customer order executions and broker-dealer obligations around customer order flow.

Franklin - Let’s talk about your role in order flow management. Take me through a day in the life of an order flow manager. What did you do first thing in the morning, throughout the day, at the end of the day?

Jay – At the end of the prior trading day, we had sent out daily exception/surveillance reports. First thing in the morning, we reviewed all the responses that came back and took whatever action was appropriate (e.g. rebooked a customer order at a better price).

After the market opened, we reviewed a report on orders entered prior to the open that flagged an execution price that was worse than the primary opening print. We followed up with executing brokers where customers didn’t get that opening print. If they were due corrections, we booked those changes into customers’ accounts. (We only improved customers’ trades. If a customer got a better price than they deserved, it always stayed in their accounts.)

During the day, we had many meetings – with Compliance, other internal business partners, market makers and exchanges. We were a major source of order flow to the markets and people always wanted to visit us. The market centers kept us up to date on new things happening in the market and provided us an opportunity to give feedback on existing relationships.

Another thing that took a lot of our time was onboarding a new market participant. We needed to understand them thoroughly – what they did, how they did it, and whether they were an appropriate counterparty (from a risk perspective).

At the end of the day, we reviewed the daily execution reports for our orders and signed off on them. We then distributed the exception reports to market makers for price improvement opportunities for listed securities, OTC and options trades as well as the no-fill exceptions for limit orders. That set us up for the following day.

Continue to Part 2 here.