Washington, D.C., June 24, 2008 (LAWFUEL) – The Securities and Exchange Commission today charged St. Louis-based broker-dealer Scottrade, Inc., for fraudulent misrepresentations it made to customers relating to the firm’s execution of their Nasdaq pre-open orders, which are placed after the day’s market close to be executed at the next market opening. Without admitting or denying the Commission’s findings, Scottrade agreed to pay a $950,000 penalty to settle the SEC’s charges.
By accepting customers’ orders, a broker-dealer impliedly represents to customers that it will regularly and rigorously review the quality of execution that it receives on its orders, and take any material differences between the price improvement opportunities offered by market makers into account when deciding where to route its orders. According to the Commission’s Order, Scottrade did not conduct a regular and rigorous review of the execution quality of its Nasdaq pre-open orders, and falsely disclosed to customers that it would route orders based on factors including liquidity at market opening when in practice it did not do so.
“A broker-dealer, in fulfilling its duty of best execution, should conduct a ‘regular and rigorous review’ of its practices in light of technology and market changes and modify those practices, if necessary, to seek to obtain the best executions that are reasonably available for its customers,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “Scottrade failed to conduct a regular and rigorous review when it did not consider the impact of technological advances on Nasdaq pre-open orders.”
Elaine C. Greenberg, Associate Regional Director of the SEC’s Philadelphia Regional Office, said, “Broker-dealers must ensure that disclosures in customer account opening documents and account statements accurately and adequately reflect broker-dealers’ order routing practices. This is particularly important when the representation relates to seeking liquidity because it offers customers the opportunity to receive superior executions. Without proper disclosure, customers cannot make informed decisions about where they choose to send their orders.”
In 2000, the Commission advised the public that some market makers trading Nasdaq securities offered investors an opportunity to avoid paying a liquidity premium at the market opening. A liquid market allows buying and selling with relative ease and, accordingly, allows market makers to offer opportunities for superior executions. The Commission stated that an example of this is “midpoint pricing” – one price that is offered to both buy and sell orders at the midpoint between the national best bid and offer (NBBO). Another example is a “single price” – one price that is offered to both buy and sell orders somewhere between the NBBO. The Commission further advised that broker-dealers should take these alternative pricing options into consideration when seeking to obtain best execution for their customers’ Nasdaq pre-open orders.
According to the SEC’s Order, Scottrade did not follow the Commission’s advice, and from Jan. 1, 2001, to Dec. 31, 2004, misrepresented in customer account opening documents and statements that it would route its customers’ orders based on factors that included “liquidity at market opening,” which gave its customers the opportunity to receive executions “that may be superior to the national best bid offer (NBBO) in any one market center.” A market center is a market maker that stands ready to buy and sell stocks at publicly quoted bid and offer prices. During the relevant time period, Scottrade had no written policies and procedures to assess liquidity at the market opening provided by market centers and, as a result, did not consider the availability of executions that may have been superior to the NBBO, such as single or midpoint pricing, for its Nasdaq pre-open orders.
As a result of these misrepresentations, Scottrade willfully violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934, which prohibits broker-dealers from using manipulative, deceptive or fraudulent devices or contrivances to effect securities transactions. Scottrade has consented to the entry of an Order by the Commission that censures Scottrade; requires it to cease-and-desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act; and requires Scottrade to pay a civil penalty of $950,000.