Scottrade Inc. agreed to pay a $950,000 civil penalty to settle Securities and Exchange Commission charges that it made fraudulent misrepresentations to clients related to the execution of Nasdaq pre-open orders. The brokerage firm is not admitting to or denying wrongdoing by settling the charges. Scottrade is, however, agreeing to cease and desist from committing future violations.
Pre-open orders are normally placed after the market closes for execution when the market opens next. The SEC alleges that Scottrade made fraudulent misrepresentations when Scottrade told customers it would direct their orders based on a number of factors, including liquidity at market opening.
The SEC says that when a broker-dealer accepts customer orders, the firm is impliedly representing that it will make sure to review the quality of execution on orders. SEC Enforcement Director Linda Thomsen says that Scottrade not only failed to regularly and properly review the execution process but it neglected to consider the way technological advances were impacting the orders.
In 2000, The SEC reported that certain market makers that were trading Nasdaq market securities were offering investors the chance to not have to pay a liquidity premium at the market opening. The SEC told broker-dealers to consider specific pricing options when looking for the best execution for their customers’ orders: 1) Midpoint pricing-a midpoint price between the national best bid and offer (NBBO) used to buy and sell orders and 2) Single Price-one price for buying or selling.
The SEC however, alleges that rather than adhere to this advice, Scottrade misrepresented in customer account opening documents and statements that it would direct customers’ orders based on liquidity at market opening to allow its customers to get executions that were “superior to any one market center.”
The SEC says that Scottrade did not have the policies and procedures to evaluate liquidity at market openings that market centers provided between 2001 and 2004, which is the time period under scrutiny. The broker-dealer consequently failed to consider executions that may have been superior to NBBO, including midpoint and single pricing, when executing Nasdaq pre-open orders.
If you are an investor that has lost money because of the fraudulent actions of a broker-dealer, Shepherd Smith Edwards & Kantas LTD LLP would like to talk to you. Contact our stockbroker fraud law firm and ask for your free consultation.
Related Web Resources:
Scottrade to Pay $950,000 to Settle SEC Charges, BusinessFirst.com, June 24, 2008
SEC Charges Scottrade for Misrepresentations to Customers, SEC.gov, June 24, 2008