Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, June 24, 2008

Scottrade Settles SEC Charges On Best Execution

The SEC 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. 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.  Without admitting or denying the Commission's findings, Scottrade agreed to pay a $950,000 penalty to settle the SEC's charges.

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." Scottrade, however, 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.

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