May 15 The chief executive officer of Charles
Schwab Corp on Thursday suggested that regulators
require brokerage firms to disclose how much they are paid for
selling their clients' orders.
Companies like Schwab receive hundreds of thousands of
orders daily and have long sold many of them to trading firms
known as market makers or to exchanges. The controversial
practice, known as payment for order flow, has received new
attention because it was mentioned in Michael Lewis' new book
"Flash Boys" about high-frequency trading that claims the
markets are rigged.
The controversy raised concerns among investors in brokerage
companies that regulators might prohibit the lucrative payments
and that these companies might lose the loyalty of customers who
felt that their orders were being exploited. The U.S. Securities
and Exchange Commission has begun issuing subpoenas and other
demands to brokerage companies to learn how they handle their
"One idea for the regulators to consider ... is maybe a
requirement that we put on a trade confirmation the actual
amount of order-flow payment that we receive, and maybe who we
receive it from," Schwab CEO Walt Bettinger said at the
company's annual meeting in San Francisco on Thursday.
Bettinger said last month that Schwab had no plans to end
the practice, which amounts to fractions of a penny a share but
can add up among all orders to hundreds of millions of dollars a
year. But he also said that retaining the confidence of
investors in the fairness of markets and brokerage firms is a
major priority for Schwab.
He is the first brokerage executive to suggest that
regulators require companies to tell each customer what their
trade is worth. Schwab and its competitors do not return the
money directly to clients, but say the payments help subsidize
the very low commissions charged by discount brokers and lead to
trade executions that have never been faster. They also insist
that their first priority in handling trades is to make sure
that customers get the most efficient executions, not that the
brokerage gets the highest payment.
Trading companies, including market makers such as UBS
, KCG Holdings and hedge fund Citadel
LLC, are willing to compete for retail investors' orders because
they are considered "dumb money" that shows the professionals
where markets are headed.
In reporting first-quarter earnings last month, Schwab said
that it expects to earn about $100 million this year from
selling client orders, the first time it gave out a specific
number, and higher than the estimate it had given a few weeks
earlier to Reuters.
E*Trade Financial Corp said it collected about $25
million in the first quarter from payment-for-order flow. TD
Ameritrade Holding Corp, which includes a large number
of active and professional traders among its clientele, declined
to disclose its order-flow revenue. Several analysts estimated
the number at $130 million to $200 million annually.
(Reporting By Jed Horowitz; Editing by Jan Paschal)