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Study Says Broker Rebates Cost Investors Billions

The rules governing Wall Street generally force stockbrokers to seek out the best prices for clients who pay them to buy and sell shares.

In recent years, though, brokers have had another enticement that can pull them in a different direction: payments from stock exchanges in return for sending them business.

The practice has attracted criticism from several industry participants and former regulators who say the so-called rebates that the exchanges pay Wall Street firms could give those firms an incentive to profit at the expense of investors. Now a new study using industry data says that the rebates could be costing mutual funds, pension funds and ordinary investors as much as $5 billion a year.

The 75-page study, being released this week, was written by Woodbine Associates, a financial consulting firm that does business with players on all sides of the issue. Woodbine said the report was done independently, without support from industry participants.

Some financial firms criticized Woodbine’s calculations and said the cost to investors was overblown, but did not dispute that the potential for a conflict of interest exists.

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