Massachusetts Regulator Galvin Investigates Whether Exchanges Are Giving Kickbacks to Brokers for Making Institutional Investor Trades

Massachusetts Secretary of the Commonwealth William Galvin is probing whether there are brokers who are getting paid kickbacks by exchanges in return for investor trades. The investigation comes in the wake of an op-ed article published in The New York Times last month alleging that there are financial representatives who have been sending orders to specific exchanges for these kickbacks, referred to as “rebates,” even if it means poorer results for their institutional investors.

The op-ed was written by Yale Law Professor Jonathan Macey and Yale University Chief Investment Officer David Swensen. Already, the state regulator has sent inquiry letters to Morgan Stanley & Co. (MS), E*TRADE Securities, Charles Schwab & Co. (SCHW), and Fidelity Brokerage Services LLC.

According to the article, because of these “rebates,” brokers are frequently selecting less favorable trades for their institutional investors clients to use these exchanges. If this is true, then it would be distressing considering that institutional brokers are legally bound to make trades on the exchange that has the terms that are most favorable for a client. Failure to do so could be grounds for a securities case. Meantime, it is supposed to be up to the exchanges, all 12 of them, to compete to provide the best trading opportunities.

Broker Fraud
When kickbacks win out over the best trades, this means that brokers are making ill-gotten gains while rendering poor outcomes for institutional investors. This then impacts insurance policy holders, individual pension beneficiaries, and mutual fund investors. This type of misconduct is called broker fraud.

The op-ed’s authors note that granted, the harm at issue involving each trade is “fractions of a cent per share,” they were quick to point out that the “aggregate kickbacks” end up adding up to billions of dollars annually.

Machey and Swensen are arguing for the “elimination of kickbacks” and that this would not only enhance US securities markets but also improve executions for investors. A few days before their article was published in The NY Times, US Senator Mark Warner (D-VA) pressed SEC Chairman Jay Clayton to completely get rid of rebates on exchanges in order to enhance price transparency and improve stability.

Institutional Investor Fraud Cases
If you are an institutional investor who suspects that your losses are due to broker fraud, broker negligence, or some other misconduct, please contact our institutional investor fraud law firm today. The SSEK Partners Group represents high net worth individual investors and institutional clients.

Wall Street Profits by Putting Investors in the Slow Lane, NY Times, July 18, 2017

SECRETARY GALVIN BEGINS INVESTIGATORY SWEEP OF BROKER DEALER “KICKBACKS” (PDF)