US watchdog investigates brokers

Wall Street's trading practices are under the spotlight again

US regulators have launched an inquiry into whether Wall Street's top brokers adopted trading practices which may have left their clients out of pocket.

The probe focuses on a dozen brokers including Merrill Lynch and Morgan Stanley, the New York Times reported.

It aims to establish whether the brokers executed clients' orders from their own inventory of shares.

This practice can put customers at a disadvantage when better prices are available on the open market.

New regime

Investigators from the Securities and Exchange Commission (SEC) are also reported to be looking at whether brokers sent client orders to be executed by third parties in return for a fee, creating a potential conflict of interest.

Under stock market rules, brokers are obliged to obtain the best possible price for clients, a requirement known as "best execution".

The SEC investigation is the latest in a series of high-profile inquiries into the practices of Wall Street firms

Earlier this year, several prominent firms paid hundreds of millions of dollars to settle an investigation by New York attorney general Eliot Spitzer into improper trading practices in the mutual funds industry.

Analysts say Wall Street banks and brokers have come under closer regulatory scrutiny following the excesses of the dotcom boom, and in the wake of the Enron and Worldcom scandals.