Regulators are investigating discount brokerage giant E*Trade’s history of stock order executions, fueling more suspicion of rigged markets and high-frequency front-running, The Post has learned.
The Financial Regulatory Authority (Finra), Wall Street’s regulator, is looking into whether its clients received the best pricing on their purchases.
Finra opened the probe well before the latest public flare-up over high-frequency trading, or HFT, but the investigation hits many of the same hot buttons.
Finra is determined to find out how E*Trade has priced and electronically routed customer orders to G1 Execution Services, a business it bought for a reported $173 million and sold this year to Susquehanna for about $75 million.
“Finra notified E*Trade Securities LLC and G1 Execution Services LLC that it is conducting a probe of both firms’ routing practices,” E*Trade disclosed in a footnote in its latest 10-K annual regulatory filing.
“The Company is cooperating fully with Finra in this examination and, under the agreement governing the sale of G1 Execution Services to Susquehanna, remains responsible for any resulting actions taken against G1 Execution Services, as a result of such investigation.”
“Allegations of wrongdoing are coming to the forefront, and brokers are having to play defense and perhaps take a more candid and sobering look at the existing practices in terms of compensation for flow,” said Javier Paz, an analyst at Aite Group who covers retail brokerage, speaking generally of the industry.
More specifically, the Securities and Exchange Commission is said to be mulling a change that would require brokers to give investors more information about whether they’re receiving “best execution” when they trade stocks, according to industry sources.
Until it sold the unit to Susquehanna, E*Trade was sending most of its customer orders to G1. In 2012, former E*Trade board member Ken Griffin, chief executive of the Citadel investment firm, challenged E*Trade’s best-execution routing practices. He later resigned from the board.
At issue, sources believe, are fears that E*Trade put its drive for profitability ahead of customers’ best financial interests.
E*Trade seems to be candid. In its 10-K annual report, the discount broker notes it has implemented changes to its order routing-related practices and procedures — recommended during its own review — and it also kept regulators in the loop. Any regulatory investigations could subject E*Trade to monetary penalties and cease-and-desist orders, E*Trade disclosed.
A spokesman for Finra said there was nothing to add on E*Trade. The SEC and E*Trade had no comment.