SEC PROBING FIRMS' TRADING PATTERNS
By PAUL THARP
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November 9, 2004 -- The government's latest crackdown on Wall Street targets a practice that's been openly used by financial giants for years.
The Securities and Exchange Commission is said to be investigating a dozen brokerages for their time-honored practice of traders buying and selling Nasdaq-listed stocks at prices designed to favor the firm instead of its customers and for getting paid to send orders to a particular trading system or exchange.
One legal expert says the SEC probe is puzzling and "almost idiotic" because regulators have always turned a blind eye to one of the traders' most common abuses against smaller investors.
Brokerage stocks fell sharply yesterday on the news, led by Ameritrade's 5.5 percent decline to $13.10. E*Trade Financial fell 3.6 percent to $12.72, while Charles Schwab slipped 9 cents to $9.52.
Putting firms' interests ahead of clients' interests is widely accepted on Wall Street, observers say.
"This is the culture of Wall Street, and it's been going on for generations without any effort to stop it or call it illegal," said securities lawyer Bill Singer.
"It reminds me of the scene in 'Casablanca,' when the police commissioner sees gambling at the cabaret and remarks, 'I'm shocked, shocked,' and then pockets his winnings."
The SEC is looking at numerous brokerages — including Morgan Stanley, Merrill Lynch, Ameritrade, Schwab and E*Trade — for failing to secure the best available stock price for their outside customers, according to a report in The New York Times.
The price typically involves just an additional few pennies for a customer, but to the firm those pennies can add up to millions in profits, the report said.
Firms make trades using their own inventory of stocks instead of going out into the open market. The SEC declined to comment, as did the firms. |
