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E*Trade Has A Problem

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It wants/needs to sell its market-making unit to appease regulators, but also needs to stop giving the unit quite so much business to appease regulators.

The New York-based online brokerage disclosed in a regulatory filing this week that the Financial Industry Regulatory Authority, or Finra, was examining the way E*Trade routes its customers' orders to trading firms and exchanges to be filled, and whether those orders are getting the best possible prices....

E*Trade is alone among the major U.S. online brokers in running its own market-making unit, which in the past has received almost half of all orders placed by E*Trade customers.

Reports filed by E*Trade this week showed that 28% of orders to trade New York Stock Exchange-listed shares were routed to G1X, down from 48% in the first quarter. For Nasdaq Stock Market-listed stocks, the percentage fell to 34% from 47%, the E*Trade documents showed. G1X continued to be the main recipient of E*Trade customer orders in the quarter.

Enter old frenemy Ken Griffin, who has spent three whole months as a former E*Trade shareholder and member of its board, which means he's no longer in the business of berating the company over how it fills its customer orders but has gotten into the business of filling those orders.

One major beneficiary of the shift was Citadel LLC, the Chicago-based hedge-fund operator, which runs a trading arm that competes with G1X. Citadel Chief Executive Kenneth Griffin, until earlier this year a director at E*Trade, raised questions last year around E*Trade's handling of customer orders.

Citadel's trading division in the second quarter received 10% of E*Trade's orders for NYSE-listed shares and 9% of orders for Nasdaq-listed stocks, compared with none in the first quarter.

E*Trade Sends More Trades Outside Firm As Routing Is Scrutinized [WSJ]


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