Brokers could be required to tell investors exactly where theysent a stock order to be filled under a measure the U.S. Securitiesand Exchange Commission (SEC) is weighing to address complaintsthat the decisions sometimes aren't in clients' best interests.

The proposal could give investors more insight into whether theyare getting the best price when they buy and sell large numbers ofshares, according to three people familiar with the matter. Brokersentrusted with orders in the U.S. stock market can choose fromdozens of exchanges and private venues. Some money managers such asT. Rowe Price Group Inc. have told regulators that incentivesoffered by exchanges for attracting orders can put a broker'sfinancial interest at odds with the customer's.

The SEC faces pressure to overhaul trading after Michael Lewis's“Flash Boys” book made the claim that high-frequency traders hurt other investors by learning whichshares investors plan to buy, purchasing them, and selling themback at a higher price. The SEC has said it's reviewing everyaspect of how stocks are traded, and regulators are trying toidentify changes that could be implemented quickly, the peoplesaid.

“We've actually started this conversation about what can we doright now,” SEC Commissioner Kara M. Stein said in an interview.“All five commissioners are very focused on these issues and arecommitted to making sure the market is fair and efficient andpromoting capital formation.”

There is a lot of “low-hanging fruit” that should be considered,said Stein, who declined to discuss specific steps. Commissionersexpect the SEC's staff to present them potential policy options “inthe near term,” Commissioner Luis A. Aguilar said in aninterview.

Florence Harmon, an SEC spokeswoman, declined to comment.

Brokers can face a conflict of interest as they select where tosend customer orders. Brokers can either capture a rebate or pay afee to an exchange depending on the type of order used, whileprivate venues known as dark pools charge lower fees but don't haveto disclose how they treat customers.

No Execution

Requiring brokers to report every step they took to fill acustomer's order could help investors defend against the predatorytraders described by Lewis, said Andy Brooks, head of U.S. equitytrading at Baltimore-based T. Rowe Price. While large investors candemand such reporting, regulators could require “a very detailedand comprehensive template” that would allow investors to comparethe brokers they use, he said.

“It's where you went and didn't get an execution that begs thequestion of why did you go there?” Brooks said in an interview.“Why is a broker sending an order to a venue where you get noexecution?”

More disclosure of where orders are sent probably isn't going tochange the “nature of the way things take place,” said Keith Ross,CEO of Glenview, Illinois-based PDQ ATS Inc., a dark pool that hasmarketed itself as a haven from high-frequency traders.Institutional money managers should know how their orders are beinghandled by brokers, Ross said in a phone interview.

“I would argue that is why they get paid their exorbitant feesfor managing money, which is greater than the fractions of pennieswe are talking about here for the high-frequency folks,” Rosssaid.

Greater transparency is one idea being weighed by the SEC'sDivision of Trading and Markets, the people said. Regulators coulddecide to publicly encourage more uniform order-routing noticesinstead of imposing a new requirement on brokers, the peoplesaid.

While improved disclosure is helpful, the SEC should experimentwith altering the economic incentives that affect how orders arehandled, Brooks said. T. Rowe has joined the New York StockExchange, Royal Bank of Canada, and IEX Group Inc. in lobbyingregulators to ban the “maker-taker” system, which pays rebates tolarge brokers to attract trades.

Brokerages often put their own self-interest in front of theirclients' under maker-taker, according to a study by Robert Battalioand Shane Corwin of the University of Notre Dame and RobertJennings of Indiana University.

“Simply saying to brokers 'Give us more disclosure'” isn'tenough, Brooks said. “The effort needs to be more robust than thatif we are really going to go after this,” he said.

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