NEW YORK (CNN/Money) -
Wall Street's fairness to individual investors is back in the spotlight as regulators have begun a new investigation into how some of the nation's biggest brokerage firms -- including Merrill Lynch and Morgan Stanley -- execute buy and sell orders for stocks.
The SEC's Office of Compliance Inspection and Examinations reviewed trades in Nasdaq stocks from the past four years and found cases of brokers putting their own interests ahead of their clients', a person familiar with the situation told CNNfn Monday.
About a dozen firms are targeted, this person said, including Merrill Lynch (Research), Morgan Stanley, Charles Schwab (Research), Ameritrade (down $0.76 to $13.11, Research), and E*Trade Financial.
Merrill, Schwab, Ameritrade and E*Trade (Research) had no comment. Morgan has yet to respond to CNN inquiries. All five of the brokers' stocks are trading lower with Ameritrade suffering the steepest loss at 5.5 percent.
The New York Times first reported news of the probe Monday morning.
The Securities and Exchange Commission study looked at trades executed at the opening bell and, in some cases, found firms filling orders from their own inventory instead of shopping for the best price in the marketplace, the source said.
The SEC's analysis also reviewed cases where brokers paid to receive orders, then executed them, without seeking the best available price for a client, the source added.
"They'll never admit to it. They'll have some sort of settlement," said a veteran Wall Street trader who spoke on condition of anonymity.
Securities regulations forbid brokerage firms from placing their own interests ahead of their clients'.
For individual investors the amount lost would be only pennies per trade. But given the thousands of trades brokers execute daily, such practices could boost their bottom lines.
Brokerage firms have repeatedly faced charges they were profiting at their clients' expense.
In July Knight Trading agreed to pay $79 million to settle charges it made trades for itself ahead of customer orders, allowing the firm to improperly earn tens of millions of dollars.
Two dozen major securities firms settled a civil antitrust case in 1996 that charged them with colluding to boost profits from trading in Nasdaq stocks. The SEC concluded NASD violated securities laws for failing to punish the brokerage firms. In a settlement, NASD agreed to spend $100 million to improve its market surveillance.
The New York Stock Exchange also is suffering from charges it has not operated in the best interests of investors. Five NYSE specialist firms in February agreed to pay $240 million to settle charges they had traded ahead of customer orders.
-- CNNfn's Allan Chernoff contributed to the story
|
