Scottrade Settles Trading Charges for $950,000 Discount broker Scottrade has paid the heavy fine to settle SEC charges regarding misrepresentations to investors. Frank Schloegel
Scottrade, a leading discount broker, agreed to pay $950,000 for fraudulent misrepresentations it made to customers. The SEC claims it misled investors about how it executed its Nasdaq pre-open orders.
The Commission charged the discount broker with using outdated systems that did not get the best price for orders placed after the Nasdaq market closed from 2001 to 2004. Scottrade promised investors that it would get the best price for pre-open orders But in fact, it just let a computer program pick a routing center for the trades, according to the SEC.
Not only did Scottrade lie about its methods for getting the best price, it also failed to perform any review of their methods, which is also a violation of SEC rules. The stems from SEC rules 605 and 606, which set the standards that brokers should use in setting pre-order prices and methods. The problem the SEC was addressing in the November 2000 rules was that firms had trouble buying or selling shares at the proper prices when the market opened so there was a “liquidity premium” because of the lack of market action. The SEC rules attempted to get rid of this inefficiency.
The rules basically establish that brokerage houses have to seek out the best price to avoid the liquidity premium, and also to tell investors how they go about finding the best price.
The SEC found that Scottrade was not taking any such steps to ensure the prices it got for its customers were the best. According to the order by the SEC, Scottrade set up the sale via computer the night before and essentially the customer was stuck with that price.
"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,” said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.
Scottrade was required to set up a “best practices” guide for buying and selling pre- orders. But when it finally did so in January 2003, the guide was designed by unqualified people. The SEC said, “senior personnel did not provide any guidance” on how to set up the practices.
In December 2003, a Scottrade compliance employee sought input from upper management to determine how to get the best price on pre-orders. That employee said in a company memo that he devoted only 10 hours a week to the issue “when he could,” according to the SEC.
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