The Charles Schwab Corporation is all about accountability. Just ask them.
In a commercial, Chairman, Charles Schwab, explains, “the most principled people are the people who frankly can stand by their promises.” Schwab promises a “commitment to providing the most ethical financial services” including an “accountability guarantee.”
The accountability business appears to be booming. In 2013, Charles Schwab personally received a 24 percent raise with compensation of more than $8 million. A corporate statement justified the raise by explaining the company was no longer limited to making money from “inexpensive stock commissions” as it had tapped into a “broader range of services.”
A broader range of services
UBS paid Charles Schwab to execute its customers’ buy and sell orders. Although this provided no benefits to Schwab’s customers, who still had to pay commissions, it added $285 million to Schwab’s bottom line for its shareholders and executives.
Why would another company pay to execute trades for Charles Schwab? A cab driver does not pay the customer for the ride. According to the Wall Street Journal, UBS paid for Schwab’s information to, “earn profits by taking the first crack at trading on these orders.”
Through “electronic front-running” high-frequency (HF) trading firms can buy a share of stock before Schwab’s retail customers. When the actual retail orders come though, a HF trader can mark up the price to make the profit from the difference.
In an interview for his latest book, Flash Boys: A Wall Street Revolt, Michael Lewis, explains, “They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.”
How much did Schwab customers loose from this trading? According to an analysis in Flash Boys, “Schwab left at least a billion dollars on the table.” Add this to the $285 million the company was paid to sell out its customers and it starts to look like real money.
Charles Schwab was providing a “broader range of services” to other banks alright. It did so at the expense of its own customers.
In an apparent attempt to cover its tracks, Charles Schwab called for banning HF trading on April 3rd.
This was four days after a high profile interview of Michael Lewis on 60 Minutes and three days after Flash Boys went on sale. The book fingers Schwab, among others, for selling out its retail clients to HF trading firms.
The FBI is investigating possible insider trading or fraud by HF trading companies. They may also be looking to hold companies, especially those who sold out their customers, “accountable.”