Tag Archives: Charles Schwab

HFT Chapter 3: U.S. Senate To Hear About Payment-For-Order-Flow, Conflicts of Interest and Best Execution

MarketsMuse Editor Note: Finally, the topic of payment for order flow, the questionable practice in which large brokerage firms literally sell their customers’ orders to “preferenced liquidity providers”, who in turn execute those orders by trading against those customers orders ( using arbitrage strategies that effectively guarantee a trading profit with no risk) will now be scrutinized by the U.S. Senate Permanent Subcommittee on Investigations in hearings scheduled for this morning.

The first paragraph of this morning’s NY Times story by William Alden regarding today’s Senate hearings frames the issue nicely: “..To the average investor with a brokerage account, the process of buying and selling shares of stock seems straightforward. But the back end of these systems, governing how billions of shares are traded, remains opaque to many customers…Behind the sleek trading interfaces of brokerage firms like TD Ameritrade, Charles Schwab and Merrill Lynch lie a web of business relationships with relatively obscure firms that make trades happen..”

MarketsMuse has spotlighted this issue repeatedly over the past several years, including citing long-time trading industry veterans who have lamented (albeit anonymously) that the notion of selling customer orders is a practice that not only reeks of conflict of interest, it is an anathema to those who embrace the concept of best execution. Their request for anonymity has been driven less by “not authorized to speak on behalf of the firm” and more by a common fear of “being put in the penalty box” by large retail brokerage firms who embrace the practice of double-dipping (charging a commission to a customer while also receiving a kickback from designated liquidity providers) simply because these firm deliver the bulk of orders to Wall Street trading desks for execution.

Throughout the same period that this publication has profiled the topic, we have repeatedly encouraged leading business news journalists from major outlets to bring this story to the forefront. In every instance other than one, journalists and editors have suggested the topic is “too complex for our readers” and many have indicated that its a story that their “major advertisers (the industry’s largest retail brokerage firms and ‘custodians’) would be offended by.”

NY Times reporter William Alden described the issue in a manner that is perfectly clear and simple to comprehend; whether the issue of “conflict of interest” is clear enough or simple enough for U.S. Senators to grasp is a completely different story.

The following extracts from Alden’s reporting summarize the issue brilliantly; link to the full article is below: Continue reading

Flash Boys Fight Over High Frequency: Op-Ed

MarketsMuse Editor Note: Having close on 3 decades “habitating” within the financial industry’s sell-side, this greybeard former trader turned opinionator and postulator is certainly fascinated by the spirited debate over “high-frequency trading”, not only because most of those arguing for and/or against HFT can only selectively point to lop-sided studies to defend their respective arguments , but the escalating war of words (over the Battle of the Transformers) has more recently captured the attention of the always beloved experts of financial industry market structure and trading technology: the Federal Bureau of Investigation. If there were an agency less qualified than the FBI to ask the right questions and determine whether any laws have been broken, it might be the always-conflicted and lobbyist-influenced SEC; particularly when real industry experts have vehemently pointed to an industry practice that truly undermines the credibility of financial markets: retail brokerages and custodians selling their customers orders to “preferenced market-makers” in exchange for cash..  [Then again, given that FBI Director Jim Comey came to his new job after serving as General Counsel for the world’s biggest and most high tech hedge fund, the debate about who is most conflicted becomes more complex]…..Ironically, the biggest beneficiary of the practice of payment for order flow is Charles Schwab (only because they’re arguably the biggest of the major custodians, but all others who do the same benefit accordingly)..whose Chairman/CEO announced this week that “HFT is a cancer that is plaguing the industry..” Clearly someone who likes to have their cake and eat it too.

In trading market lingo, “Bid Repeats”; the largest of the industry’s retail brokerage platforms–ostensibly those who have a fiduciary obligation to secure best execution on behalf of its clients when routing orders to the marketplace, are selling those orders to favored proprietary traders, a group whose primary obligation is to their own P&L, NOT the interests of public investors who would like to presume they are receiving best execution on their orders. Adding insult to injury, customers of these brokerages who know better and request their orders be routed to agency-only execution firms (whose role is limited to fiduciary broker and to secure true best execution by canvassing all market participants for best bids and offers) are rebuffed and faced with egregious fees  on any orders in which customers ask the custodian to “step-out” or “trade-away” to specific agency-only firms.

While most objective financial industry experts (if not experts from any other industry) would liken the practice of payment for order flow as a kickback scheme that undermines the notion of ‘fairness’, this practice, which clearly is antithetical to the notion of “fiduciary obligation” has gone virtually unmentioned by the media, and those from within the industry who have tried to raise this flag have been futily dismissed by advertiser-influenced media platforms, if not regulators responsible for overseeing fair and orderly market practices.

All of that said, and for an assortment of reasons that has led to market fragmentation,  the existing landscape enables a quagmire of complexity when trying to distill what makes sense, especially when those who have the biggest role in market efficiency are those who are focused on making dollars for themselves, not sense.

Perhaps one of the week’s best observations can be found not by replaying clips from heated debates broadcast on CNBC, but in an op-ed in today’s New York Times courtesy of Philip Delves Broughton, who, in critiquing the impact of Michael Lewis’s new book “Flash Boys”, frames the issue of HFT in a very intelligent way. His opinion piece,  “Flash Boys for the People” can be found by clicking on this link.


Pre-Thanksgiving Special: Custodians Flip The Bird to RIA Customers Seeking ETF Best Execution

riabiz logo  Courtesy of RIABiz and reporter Lisa Shidler

MarketsMuse Editor Note: Kudos to Lisa “Lois Lane” Shidler for her insightful expose profiling how custodians to RIAs excel at squeezing lemons from customers who they must think are lemmings. Though Ms. Schilder neglected to spotlight the fact that custodians systematically sell their customer orders to select principal trading firms (e.g KCG) who cherry-pick orders they can exploit for trading profit, her insight i.e. the practice of imposing exorbitant trade-away fees on those very same customers who seek to secure the real best prices via independent execution only firms is a topic worthy of sharing this story with industry regulators. Too bad those latter folks don’t get it…perhaps because they’re beholden to the biggest custodians in the industry?

Here are a few excerpts:

The big four RIA custodians are now charging advisory firms giant new fees — in the tens of thousands in some cases — relating to some ETF purchases.

Schwab Advisor Services, TD Ameritrade Institutional, Pershing Advisor Solutions LLC and Fidelity Institutional Wealth Services are levying what are known as “trade-away” fees to RIA firms that buy exchange traded funds through a broker-dealer other than the one owned by the custodian. The advisor typically chooses to use these third parties because they believe that RIA custodians are executing trades poorly along the bid-ask curve and forcing them to make ETF purchases at unacceptably high prices.

At first blush the fees look fairly benign. The fee at Fidelity is a $20 fee per account per trade. TD Ameritrade charges $25 per account. Pershing’s fee ranges from $8 to $20 per account depending on the volume of the trade. Schwab declined to disclose its fee through its spokesman, Greg Gable.

These fees have put RIAs like Chris Romano, director of research and trading with Fusion Investments Group LLC in Pittsburgh invests, in a bind in certain instances.

Though his firm manages about $139 million in assets, the bulk of them are institutional and banks custody them. Fusion advises for other RIAs but those assets are held away. In short, his firm manages just $11 million of mostly ETFs with Fidelity’s RIA custody platform, which means Fidelity’s $20 fee is too costly for the size of trades that he does.

“We don’t even consider trading away [in effort to get best execution] at Fidelity because of the high ticket trade away fee,” Romano says. “On the smaller account sizes, it can be a really significant fee. If the fee is $20, that can really add up.” Continue reading