Charles Schwab Sells Customers Down High Frequency River

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 Charles 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, 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 Charles 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.

Whitewash

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: A Wall Street Revolt went on sale. The book fingers Charles 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, who sold out their customers, “accountable.”

9 comments

  1. Thanks for sharing this info….I did watch the 60 minutes piece and other interviews…….A book that I recommend is EXTORTION by Peter Schweizer, “How Politicians Extract Your
    Money, Buy Votes, And Line Their Own Pockets..”

    Facts do matter in that Washington is broken, but as long as it’s about moneymaking and
    not leadership, not much will change.

  2. Corruption is everywhere you look nowadays. Unless we the people demand transparency and accountability our politicians will sell us down the river the same way banks, insurance, energy and conglomerates have. I say nobody is too big to jail.

  3. Schwizer is paid to demonize the left and venerate the right. I do give him some points for profiling the actions of some very corrupt Republicans in “Throw Them All Out.” .

  4. Apparently you didn’t read Schweizer’s book…..Notwithstanding that both parties are playing the same game…..

  5. You are right I did not. But I was glad he exposed the blatant corruption of Spencer Bachus and Dennis Hastert. I understand he had to throw some Democrats in (either by habit of ideology or because he’s bosses wouldn’t approve) but I thought his charges against Pelosi were non-sense. Don’t get me wrong, I think Pelosi is a very weak leader of the Democratic caucus and would favor seeing her replaced. But, she was offered access to IPOs because she’s rich. That’s who Wall Street gives the best deals to, the wealth, if they are in Congress or not. The GOP has been giving Pelosi a hard time for being wealth for years. So either that is true and that’s why she got to buy into the opening IPO price or Schweizer is right and it was a political favor. Can’t have it both ways. BTW, if you think my comment was inaccurate, please check out all of Schweizer’s other publications.

    On your other point though, I totally agree. The money chase of state and national politicians is making the political class responsive only to the needs of those who can make high dollar donations.

  6. And, thank you for reading the article and commenting. I think I’ve got some more articles to come on this and hope you will enjoy them as well. To preview, I will discuss how the business media went after Lewis hammer and tong; will the rest of the media (that doesn’t depend on certain types of advertising) treated him evenhandedly.

  7. If the rules of the game were to change and that no party affiliation were attached to the individual, just their votes (stance on issues)….that would take party bickering out of the
    equation….and possibly something might get done….It seems that Washington resembles
    Wrestling; it’s theater, entertainment, sometimes people get hurt and it pays well. But
    nothing gets done because it’s a continuous soap opera.

  8. V Bennett · · Reply

    First, I understand that if has been almost 2 years since this was published and I did not read the book. However, I have some MAJOR issues with Charles Schwab that I know cannot be just “buried”. if there is someone that can direct me to a resource (I am not an attorney) but just a very financially hurt retail trader that once was part of their Private Client Program (SPC).

    Thank you

    1. Funny thing, I was just reading about Bernie Madoff and reading about front running and I got to thinking about a Charles Schwabb account I had years ago. Well thats the thing. I was trading stocks online and I always felt as if the trades were not on the up and up. Seemed as if I was playing against the house or the house was playing against me. It wasn’t anything I could prove, it just seemed as if Charles Schwabb was stacking the deck and manipulating the trading. Instead of making money on a sales order, I’d fid those trades didn’t go through. But if the stock price went down the order went through. It was as if they waited to see which way the stock went and then decided whether the order was going through. I wonder if anyone else has had any similar experiences.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: