To the average investor with a brokerage account, the process of buying and selling shares of stock seems straightforward. But the back end of these systems, governing how billions of shares are traded, remains opaque to many customers.
Behind the sleek trading interfaces of brokerage firms like TD Ameritrade, Charles Schwab and Merrill Lynch lie a web of business relationships with relatively obscure firms that make trades happen.
Those relationships will be under scrutiny on Tuesday by a Senate panel, which plans to examine possible conflicts of interest that arise when brokerage firms are paid to direct their customers’ orders to particular trading venues. The Senate panel, the Permanent Subcommittee on Investigations, has summoned stock exchange executives, as well as officials from a mutual fund company and a brokerage firm, for questioning.
Brokers that route orders to the venues with the highest fees “may not be obtaining best execution for their clients,” Robert H. Battalio, a professor of finance at the University of Notre Dame, will say on Tuesday, according to a copy of his prepared remarks.
Citing academic research, he plans to say: “Our results suggest that the decision to use a single venue that offers the highest liquidity rebates is not consistent with the objective of obtaining best execution for customer limit orders.”