Published August 06, 2013
NEW YORK – The Financial Industry Regulatory Authority is examining the way E*Trade Securities prices and sends customer stock orders to an affiliate, E*Trade said in a quarterly regulatory filing on Tuesday.
The notice was the first from the discount broker's parent, E*Trade Financial Corp, to disclose that a regulator is investigating trading practices and procedures between the firm and its market-making affiliate. FINRA notified it of the exam on July 11, E*Trade said.
E*Trade has previously said it was reviewing its order-routing practices and procedures following a complaint from former board member Kenneth Griffin about whether it was meeting its obligations to ensure "best executions" for customers.
Griffin, the founder of hedge fund Citadel LLC, which runs a competing trade execution business, earlier this year resigned from the E*Trade board and sold Citadel's 9.6 percent stake in the discount broker.
E*Trade also said in the filing that banking regulators and federal securities regulators "may initiate investigations" into its historical order-routing practices. Those could lead to monetary penalties, cease-and-desist orders and private lawsuits from customers that could each "materially and adversely affect" its broker-dealer business, the company said.
E*Trade said at the end of June that it was taking a $142.4 million impairment charge to close G1 Execution, and plans to sell the unit within six months.
FINRA, a private regulator delegated by the Securities and Exchange Commission to oversee brokerage firms, is investigating order routing practices at both E*Trade and G1 Execution, the filing said.
Separately, E*Trade said that a customer named John Scranton has filed a suit that seeks class-action status in the Superior Court of California alleging that E*Trade Securities failed to make good on promises involving options trades. He accused the firm of misrepresenting on its website that it would automatically exercise options that were profitable by 1 cent or more on their expiration date.
E*Trade said it "continue to defend itself vigorously" against Scranton's suit, which was filed on April 30, 2013.
An E*Trade spokesman said in an email that he could not comment beyond the filing on the lawsuits or the sales process for G1 Execution.
(Reporting by Jed Horowitz; Editing by Bob Burgdorfer)