Retirement Ripoffs

Beware of Those Who Pocket Invisible Profits

September 2014

BY JOHN D. MARKS

When Goldman Sachs was told in July to return nearly $1.7 million to harmed investors and fined $800,000 by the Financial Industry Regulatory Authority (FINRA), I’m not sure many people thought twice about it.

Heck, you read about fines all of the time if you’re a regular reader of the Wall Street Journal, Bloomberg, or Reuters. Fines are nothing new in the financial world. However, this fine should be troubling to everyone from individual investors who sit in front of their computers and buy/sell stock through their online broker, to state pension funds, to hedge fund or teachers/workers unions who are in and out of stock equities every day via their broker/dealer.

Welcome to the world of invisible profits from broker/dealers, accomplished through a process called ?trade-throughs?–or trade-through violations, a Securities Exchange Commission (SEC) and FINRA no-no. It’s a world where investors are simply getting ripped off. And while this is a very sophisticated method of fiduciary fraud, it’s very simple to explain and understand.

When you execute a stock trade on your computer, you’re able to see a spread call the bid/offer. The spread is the price of each share of stock, higher if you’re a buyer and a lesser price if you’re selling a seller. Let’s say you’re selling 1000 shares of Cisco Systems and the bid/offer is $20.90/$20.91. If you’re buying Cisco Systems, your buy cost is $20.91 per share and if you’re selling Cisco Systems, the sell price is $20.90 per share. Your broker/dealer might have a buyer for the shares you’re selling so the broker/dealer would make the penny spread plus any additional fees (like ticket/transaction fees) for both sides of the trade since they?re executing the buy and the sell in this example. That’s how they make money. The seller (you) pay a fee to execute the sale of shares and the buyer pays most likely a similar fee to buy the shares.

However, if there’s a trade-through violation, when you receive your settlement statement, you might see that you sold your 1000 shares for $20.88. As an investor, you might just assume the price went down between the time you or your broker/dealer hit the enter button and the trade landed at the fulfillment exchange to be filled. Plus, you might figure it’s only $20 and the hassle isn’t worth your time.

Now let’s say you’re a pension fund of teachers or union workers and that $20 difference happens 500 times in a trading day. The $20 difference (that once wasn’t worth the hassle) turns daily into $10,000. The harm done to your account amounts to $50,000 a week, or more!

Goldman Sachs? fine was for exactly these types of trade-through violations. It was determined by FINRA, which is the policing arm of SEC, that Goldman Sachs internalized stock trades. Internalization takes place when a broker/dealer executes the buy and sale of a stock transaction through an internal pool of clients and shares. Goldman Sachs executes both sides of the trade internally and fails to send the stock order out to 16 fulfillment exchanges to find the best bid or best offer’something investors are guaranteed under the National Best Bid/Offer (NBBO).

When Goldman Sachs internalizes and the FINRA investigation (through electronic records) finds there was a better price in the market from one of the fulfillment exchanges, that’s a trade-through violation. If Goldman Sachs internalizes these trades and they?re equal to the best bid or best offer, there is no violation. It’s only a problem when a better price in the market is found at the time your trade was executed.

Here’s the disturbing part. The FINRA investigation found 395,000 trade-through violations during an eight-day window of investigation in one Goldman Sachs private electronic transaction network, or what’s also called a ?dark pool.? That’s nearly 50,000 violated transactions per day.

Investors were all vulnerable?until now.

Securrex Services LLC (www.securrex.com) is the only firm in the world that can forensically examine Depository Trust Clearing Corp. (DTCC) stock settlement data and determine if an innocent investor has been ripped off. In the example above, the question remains: was there stock available from any exchange at $20.90? If the answer is yes (and Securrex can definitely prove it), the trade at $20.88 was a trade-through violation of $.02 and those affected are able to recover the difference.

Securrex captures every message that comes out of the National Market System (NMS) in chronological order. That means if the market crashes (like it did on May 6, 2010), Securrex would be able to re-assemble the trading day in order of each transaction. Nobody else (that we know of) in the world can state that claim either. Securrex has written proprietary algorithms that essentially enable us to apply all of the rules that exempt a trade violation rules (in the eyes of the SEC and FINRA) to each and every stock trade.

There are 106 possible exemptions to the rules, but if a stock trade makes it through the Securrex repository without qualifying for one of those exemptions and the buyer or seller did not receive the best price per the NBBO, it’s a violated trade?and the innocent investor would have a claim for recovery. It’s a simple as that! Either your stock trade received the best price or it didn’t. If it didn’t, you have a claim to make it right.

Broker/dealers have, historically, not given investors necessary data needed to forensically prove harm. Check out your monthly statements and you will notice that it doesn’t include the timestamp of your transaction. However, when your stock trade becomes “official,” there’s a message transmitted finalizing your trade that includes the time your trade was executed.?When investors are seeking information, they must ask for the DTCC settlement data that includes timestamps. The timestamp is an essential piece of data that allows Securrex to perform a full forensic examination.

This past April, Securrex was asked to testify in front of a Pennsylvania government hearing in support of a resolution encouraging pension systems to look at new technology to solve issues like trade-through violations. We pointed out to the legislators that another Bernie Madoff scheme would be very difficult to accomplish with an ongoing Securrex examination of stock trading reports. Without a Securrex exam, we explained, Pennsylvania?s pension funds are potentially at risk to something similar to the Madoff nightmare. In that case, the scheme was based on investors not having the right tools and information, thus allowing a deception of that size and magnitude. Securrex would have been able to recognize the fictitious stock trades. In fact, between 2008 and 2013, the Securrex data repository identified more than $22 billion of trade through-violations.

The SEC announced in 2004 that it believes that 7.5% of all stock trades are traded-through at $.023 per share. Securrex uses the SEC?s statements in its analyses. Once our repository marries an investor’s DTCC settlement data (stock trades), our database uncovers each and every violated trade. Plus, statutes say that a harmed investor can go back five years in search of violations. The amount of money retrieved could be substantial. By taking the number of shares an investor has traded, multiplying them by .075% and then by $.023, they can get a conservative estimate of potential harm. While we believe the $.023 might be close to accurate, the Securrex data would suggest that .075% is low. Since the SEC report is from 2004 and the Securrex data is actual (from 2008 to the present,) we believe our data is significantly more accurate.

In Michael Lewis? recent book, Flash Boys, he uncovers a serious problem called ?front running? and claims the markets are rigged. It’s been getting a lot of attention and was even featured on 60 Minutes. Front running is when a third party receives information that an investor is about to buy or sell stock and jumps ahead of the investor in order to eliminate the shares from being bought/sold by the investor. If a large transaction is about to occur, the front-runners buy the stock, and by doing so, raise the price that the innocent investor was going to purchase. Many times, the front-runner will buy the shares and immediately (within milliseconds) turn them around on the sell side for the innocent investor to purchase thus making a small spread called a ?scalp.? While there have been multiple lawsuits filed based on the book and 60 Minutes interview, the most valuable lesson is that innocent investors are finally becoming aware, and knowledgeable, that in the milliseconds it takes for a stock transaction to occur there are multiple ways that broker/dealers, market makers and exchanges can rip off innocent investors.

While front running is a very serious issue, trade-through violations are an equally, if not more, serious issue. When investors don’t receive the best execution and broker/dealers are skimming and scalping additional money from innocent investors, affecting their portfolios and retirement funds, the work we’re doing at Securrex becomes important, if not essential, to millions of people. We can prove the wrongdoing with irrefutable evidence.

This is an invisible profit center for the few, and can only be proven with forensic data and examination–data that Securrex has and provides as a service. Securrex knows with forensic certainty?whether you’re a pension fund, endowment fund, hedge fund or just a casual equities investor–you are getting ripped off.

For the millions of people out there with their retirement invested in private and public pension funds, it’s time to learn from the Goldman Sachs imbroglio. $1.7 million might also be the amount your fund is being ripped off each week?or more. By demanding an inquiry, you’re telling your pension fiduciaries that you want everything possible done to maximize your retirement accounts. By ignoring the potential harm of trade-through violations, you’re essentially inviting unscrupulous broker/dealers, market makers and exchanges to loot your retirement account time and time again, completely unbeknownst to you.

The concern isn’t ?Has your pension fund been harmed? The real question is ?How much have you lost??

John Marks can be reached at

Looking for one of our previous articles, investigations, commentaries, essays or book excerpts? Search our archives by typing key words into our SEARCH bar above, or at the top left corner of our site!