Sector Snap: E-Trade and online traders slump

E-Trade and other online trading firms skid on concerns about increased regulatory attention

Associated Press

NEW YORK (AP) -- Shares of online trading firms slumped Friday as scrutiny intensified of high-frequency stock trading.

Brokerage firms use high-frequency trading to get a jump on their competitors. Powerful computers analyze market information and then execute buy and sell orders for stocks within a fraction of a second.

But the practice is getting more attention from critics and regulators. The FBI confirmed this week that it has been investigating high-frequency trading firms for a year, and U.S. Attorney General Eric Holder said Friday that the Justice Department is investigating the trading method to determine if any practices violate insider trading laws.

Charles Schwab Corp. issued a statement on high-frequency trading after the markets closed on Thursday. Chairman Charles Schwab and President and CEO Walt Bettinger said the trading method "a growing cancer."

"High-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges," the executives said in a news release.

Raymond James analyst Patrick O'Shaughnessy said the statement "would seem to open the door to a discussion of banning other perceived market structure flaws." One of those perceived flaws is payment for order flow, which is the compensation a brokerage receives by directing orders to different parties to be executed. The brokerage firm receives a small payment as compensation for directing the order. He said the practice is very profitable.

O'Shaughnessy said Charles Schwab may be trying to cause problems for two of its competitors. He said TD Ameritrade gets about $250 million in annual revenue from payment for order flow and E-Trade gets about $105 million, while it's not a significant source of revenue for Schwab. The analyst said there probably won't be dramatic changes but the Schwab's statement has made changes more likely.

In afternoon trading, shares of E-Trade Financial Corp. lost $1.73, or 7.8 percent, to $20.43. TD Ameritrade Holding Corp. shares declined $1.52, or 4.0 percent, to $30.50. Shares of Schwab fell $1.23, or 4.4 percent, to $26.14.

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