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Sources: SEC Probing Major Brokerages

Nov 8, 2004 | AP

Federal regulators are investigating more than a dozen major brokerage firms for possibly executing some stock trades in ways that favor the firms at the expense of their customers, people familiar with the matter said Monday.

Examiners at the Securities and Exchange Commission discovered the trading patterns in which the brokerages apparently failed to obtain the best available stock price for customers and notified the agency's enforcement attorneys about two weeks ago, two people said, confirming a report Monday in The New York Times. They spoke on condition of anonymity.

In an investigation described as preliminary, the SEC examiners also formally notified the firms of the problems, according to these people. They include Ameritrade, E-Trade Financial, Merrill Lynch, Morgan Stanley and Charles Schwab.

By law, brokers are required to secure the best available price for customers, a mandate known as "best execution."

SEC spokesmen declined comment Monday. Spokesmen for the brokerage firms declined to comment to The Times.

The practices under investigation involve the firms' trading of shares listed on the Nasdaq Stock Market at the morning opening, when there is a backlog of trading orders from the previous day.

Brokers sometimes will execute customers' buy and sell orders using shares from their firms' own inventory, netting a profit on both sides of the trade. Customers can be disadvantaged in cases where brokers use this internal trading when a better price is available elsewhere.

The regulators also are said to be examining the practice of payment for order flow, in which retail brokerages bundle trading orders together and send them to stock exchanges or market makers in particular stocks which pay the brokers for sending the orders. Those payments could create a conflict of interest that deprives ordinary investors of the best possible price, in the regulators' view.

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