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Another Wall Street Scandal?
The US Securities and Exchange Commission (SEC), an essential financial watchdog, is investigating about a dozen brokerage firms including such major financial institutions as Morgan Stanley and Merrill Lynch. According to a story in the New York Times, the companies are under investigation "for possibly failing to secure the best available price for stocks they were trading for their customers, violating one of the industry's critical obligations to investors..."

The specific issue is under investigation is "the way in which the companies executed trades of Nasdaq-listed securities when the markets opened in the morning - a period marked by intense activity because of the backlog of orders from the previous day." According to the press account, "investigators found evidence that trades were often processed in ways that favored the firms over their clients..."

Imagine that. Wall Street firms alleged to have put their pockets before those of their customers. Why is Winston is not shocked? Perhaps because, as the article explains, "Over the past few years, the financial industry has been rocked by a series of scandals over practices that rewarded company insiders at the expense of ordinary investors."

The specific issue being examined by the SEC is "two common, if arcane, methods of executing trades: internalization and payment for order flow. Both are permitted by the SEC but have long been controversial, as they appear to pit the interest of the brokerage firm against that of its own clients' interests." Brokers have a legal obligation "to get the best possible all-in price for investors." Although the specific trading practices at issue may be arcane, there is a common term for brokers placing their own financial well-being over their client's interests: fraud.

The allegations, if true, would mean that the scamming amounted to "pennies a share traded - but the aggregate could represent substantial gains for the brokers." Just a little bit off the top certainly adds up over a large volume of trades, as the mutual funds industry has already demonstrated.

It is important to remember that the investigation is just that, no conclusions have been reached and no wrongdoing has been demonstrated. Thus, it is far too early for the government to be considering any regulatory "fixes." It is possible that none of the firms broke any law. Thus, Winston presumes that all of the firms are innocent. However, given Wall Street's track record, he is keeping an open mind.

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