SEC probes broker stock-trading activities

The U.S. Securities and Exchange Commission is investigating about a dozen brokerage firms that may have failed to obtain the best price for stocks traded for customers, the New York Times reported on Monday, citing people briefed on the inquiry.

The brokers under scrutiny include Morgan Stanley , Merrill Lynch, Ameritrade Holdings, Charles Schwab and E*Trade Financial Corp., the report said.

Regulators are looking specifically at the way these companies traded Nasdaq-listed stocks during early morning trade, the report said.

After examining trading data from the last four years, the investigation found evidence that trades were often processed in ways that favored the firms over their clients, the Times said, citing unnamed sources.

The newspaper’s sources said that regulators are examining two methods of executing trades known as internalization and payment for order flow.

Internalization is when a broker executes an order from securities in its own account rather than from a market order. Payment for order flow occurs when retail brokers send aggregated small orders to market makers. In some instances, some stock exchanges or market makers will pay for routing the order to them.