May 15 (Reuters) - 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 clients’ orders.
“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