As a result of conclusions from a recent study by Woodbine Associates, Senator Charles Schumer wrote to SEC Chairman Schapiro requesting that the SEC take action to ensure that brokerages disclose rebates and incentive payments they receive from national exchanges and other trading venues that they receive for routing securities transactions to those entities.  According to Schumer, the current disclosures do not go far enough to ensure customers are fully informed; he wants the SEC to take action.  Moreover, Schumer raised the spectre of conflicts of interest if routing decisions are based upon the economics for the brokerage.

The study found that most brokers are routing their trading orders to exchanges not based upon “best execution”, but rather on pricing incentives.  In other words, decisions are being made to route trades based upon the remuneration that the brokerage will receive from the exchange.  This system, the study says, has a direct impact on investment returns.  To combat this system, Schumer has called for more robust disclosures to ensure transparency for customers.

Although there are currently rules requiring the disclosure of information at the customer’s request, Schumer’s letter seeks to have the SEC put more of the onus on the brokerage to provide this information without a request.  If the SEC revisits this issue, the focus will surely be on transparency in the market.  Customer’s should know that they are obtaining best execution at the best price, not possibly best execution but the brokerage received an economic incentive.  It seems to me that with more transparency, there will be better competition and a more disciplined trading system based more on best execution than something else.