Schwab Adopts Plan to Find Lower Prices : Your Money : Nasdaq: New computer system automatically searches for best values. SEC is considering such a rule.
In a sign of fundamental change taking place for individual investors in Nasdaq stocks, giant discount brokerage firm Charles Schwab & Co. said Tuesday that it is adopting a new system that will automatically seek better prices for customers in the 3,500 Nasdaq stocks in which the firm acts as a dealer.
The computer system is being phased in by Mayer & Schweitzer, a Schwab subsidiary that is one of the largest Nasdaq dealer firms. Schwab also said Mayer & Schweitzer will end a highly controversial practice known as “payment for order flow,” whereby the firm--like many other big Nasdaq dealers--pays brokerage firms to send it customer orders for execution.
Payment for order flow is a way in which brokerage firms extract extra profit from customer orders, but it has been sharply criticized for all but eliminating competition based on price in the trading of Nasdaq stocks. That’s because dealers, assured of getting a steady stream of orders anyway, don’t need to compete on price.
Mayer & Schweitzer executes most of Schwab’s customers’ orders for Nasdaq stocks and also executes orders for about 125 other, smaller brokerage firms.
Schwab’s move was widely viewed by Wall Street as an attempt by the firm to do what Nasdaq dealers may soon be forced to do anyway. The Securities and Exchange Commission is considering rule changes that would require dealers to begin seeking better prices for investors in Nasdaq stocks.
SEC Chairman Arthur Levitt Jr. lauded Schwab’s move, even though in some respects it does not go as far as what the pending SEC rules would require. It was an example of private industry taking “a very constructive step,” moving to help individual investors before regulators forced it to act, he said.
As a Times series in 1994 reported, individual investors are routinely denied access to the best available prices for Nasdaq stocks. Dealers publicly quote two prices--one at which they offer to buy a stock and a higher price at which they offer to sell. Individual investors generally are forced to pay those prices even though other individuals or institutional investors may be willing to trade at prices better than those quoted.
Schwab said its new computer system would seek to match its customer orders at prices better than the quoted prices. If a match couldn’t be made, Schwab’s computer would search Selectnet, a computerized trading system operated by Nasdaq, to see if any better offers were posted. While the search was being made, customers would be guaranteed a price no worse than the quoted price at the moment the search began.
In an interview, Schwab Vice Chairman Ronald W. Readmond predicted that Schwab’s abandonment of payment for order flow would lead other major dealers to follow suit.
But Emanuel E. Geduld, president of Herzog, Heine, Geduld, another giant dealer, said his firm wouldn’t do so. “We feel that payment for order flow enables the people we pay [brokerage firms] to give great discounts to clients,” he said.
Executives at Troster Singer Corp. and Cantor Fitzgerald, two other large Nasdaq dealers, declined to comment.
Readmond said he didn’t expect that the move will cost Schwab money. To some extent, Schwab had simply been taking money out of one corporate pocket and putting it into another. Subsidiary Mayer & Schweitzer was paying parent Schwab 2 cents a share for each Schwab customer order it executed.
Readmond said, however, that the Schwab orders account for less than half the orders executed by Mayer & Schweitzer, and he predicted that because the firm will be offering better prices for customers, it will continue to attract orders from other brokerage firms.
Readmond said the new system is already operating for Schwab customers and will be phased in by the end of this year for orders from other brokerage firms.
