Yet another dirty tricks from brokers

With the first method - internalization - the brokerage firm trades an order against its own inventory, either shares it owns, or other buy and sell orders waiting to be executed. For example, if an investor wants to sell 100 shares of Company X at $20 each, the broker looks to fulfill the order from its own buy orders for Company X or from shares of the company it might own, rather than expose it to another stock exchange or marketplace. That way, the broker makes a small profit on both sides.

Internalization becomes a problem for investors if the broker chooses to trade against its own inventory when there is a better price available elsewhere.

The other practice under investigation involves order flow, where retail brokerage firms send aggregated small orders to market makers - firms that buy and sell particular stocks to maintain orderly trading. As a way to attract orders from brokers, some stock exchanges or market makers will pay for routing the order to them - perhaps a penny or more a share. The S.E.C. is looking into such payments, aware that problems can occur when brokers have a deal with market makers to send them orders. Because the order is not exposed to the larger marketplace, the investor may be missing out on the best price.

Brokerage firms - including Morgan Stanley, Merrill Lynch, Ameritrade, Charles Schwab and E*Trade Financial

From The New York Times, 8 Nov