SEC Investigates Brokerage Firms


As per a report published in Reuters, the Securities and Exchange Commission (SEC.TO) is investigating into how the retail customers’ orders are routed, executed and filled by the brokerage firms. For this, the SEC has issued subpoenas asking for records from the brokerage companies, according to close acquaintances.

The SEC is probing whether the retail customers are receiving the best prices and proper execution of their trades is being done. Also, the law enforcement agency is looking into the cash fees that the brokerage firms get from the stock exchanges and other trading firms for routing retail investors’ order through them.

Though the names of the brokerage firms that have received subpoenas are not known, several big and small brokerage firms’ names are expected to crop up..

Notably, a few large brokerage firms including The Charles Schwab Corp. (SCHW), E*TRADE Financial Corp. (ETFC), TD Ameritrade Holding Corp. (AMTD) and Fidelity Brokerage Services earn nearly $100 million or more annually for selling their orders. Further, the market makers like KCG Holdings, Inc. (KCG), Citadel LLC, Citigroup Inc. (C) and UBS AG (UBS) generally pay cash fees of roughly 30 cents per hundred shares to the brokerage firms.

The SEC regulations permit the practice of ‘payment for order flow’ as long as these are clearly disclosed. Further, the rules related to getting the best possible price in the shortest duration must also be revealed properly.

The recent probes by the SEC over the above-mentioned issues have gained momentum following the release of the book, Flash Boys: A Wall Street Revolt by Michael Lewis in April. The book deals with the issue of prevalence of high frequency trading and its impact on the overall financial markets.

Moreover, other than the SEC investigations, many other parallel probes are being conducted by Federal Bureau of Investigation and New York Attorney General, Eric Schneiderman. These mainly pertain to violation of laws by the high frequency traders.

In the last few years, the SEC has taken enforcement actions against brokerage firms including Scottrade Inc. and Morgan Stanley (MS) for their alleged violation of disclosure norms and other issues.

Nevertheless, we cannot say for sure that the aforesaid investigation against brokerage firms will lead to any enforcement actions. But even if no actions are taken, we believe that this probe will make the brokerage firms cautious about complying with the rules and revealing all necessary disclosures to retail investors.

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