Exclusive: SEC probing brokerages over handling of retail orders - sources

Tue May 6, 2014 4:05pm EDT
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By Sarah N. Lynch and Emily Flitter

(Reuters) - The Securities and Exchange Commission has sent out subpoenas and demands for records to brokerage companies as part of a probe into how retail customers' orders are routed, executed and filled, according to several people familiar with the matter.

The SEC's enforcement division is investigating whether retail customers are receiving the best price and the most efficient execution for their trades, these people said. The regulator is also asking about the payments that some retail brokers receive from exchanges and trading firms in exchange for directing customer orders to those platforms.

It's unclear which firms received the requests, though the people familiar with the matter said they were distributed widely. Some of the biggest retail brokerage companies are Charles Schwab Corp., TD Ameritrade Holding, Fidelity Investments' Fidelity Brokerage Services and E*Trade Financial Corp, which can get paid $100 million a year or more for selling their orders.

The SEC's investigation comes as public debate has intensified over rules governing payment-for-order flow and other market structure issues that may favor high-frequency traders over retail investors, spurred in part by Michael Lewis's "Flash Boys," a book that explores the rise and potential abuses of computer-driven high-speed trading.

Andrew Ceresney, the director of the SEC's enforcement division, declined to comment specifically on the recent flurry of data requests in an interview last week, but confirmed the SEC is generally looking at issues surrounding retail order flow.

"That is obviously an ongoing investigation," Ceresney said in the interview. "I will say broadly, we are looking for abuses in this area."

SEC rules allow the practice of paying for order flow, as long as rebates are properly disclosed and rules about getting the best price in the shortest possible time are followed. The SEC has taken enforcement actions in recent years against firms including Scottrade and Morgan Stanley for improper disclosures and other violations regarding their routing of retail orders for securities.

The SEC is also asking the firms for evidence that they are engaging in a "rigorous review" of their routing practices to ensure they are achieving best execution, one of the people familiar with the probe said.   Continued...

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst