Thursday, June 19, 2014

We'll Promise You Best Execution -- For Us (That Is)

The high-frequency investigations just heated up a notch this week, with some choice testimony coming from the grillings on Capitol Hill.

We previously had investigations (SEC, FBI, DOJ, NY AG) into the activities within dark pools, and they were mostly concerned with whether information about some parties was being disclosed to other parties, when it might have been expected to be hidden.  There were also more general concern about whether the game had changed in such a way as to make it easy for the high frequency trading firms (the HFTs) to game the "ordinary" investor. 

The recent hearings, held by the Permanent Subcommittee on Investigations, have now honed in on the all-important question of whether online or discount brokers are appropriately routing their customers' order flow in the best interests of the customer.

As highlighted in a WSJ article, there seems to be an indication that, at least for TD Ameritrade, the flow went to the exchange that was most likely to produce the highest refund (or revenue gain) to TD.

We haven't as yet been able to track down the transcript of the hearing (aside from the written statements, that is) but the snippet on the right seems to corroborate the WSJ's coverage:

"Mr. Levin asked [TD Ameritrade's] Mr. Quirk whether the firm's routing decisions "virtually always led you to route orders to the markets that paid you the most."
"Virtually, yeah," Mr. Quirk replied.

TD Ameritrade had already been feeling the heat from some clients who recently learned how much TD made from selling order flow to Citadel and Knight Capital. This testimony, we imagine, won't help any!

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