As per a report published in
, the Securities and Exchange Commission (SEC) 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
) and Fidelity Brokerage Services earn nearly $100 million or more
annually for selling their orders. Further, the market makers like
KCG Holdings, Inc.
), Citadel LLC,
) 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
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
) 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
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