The Securities and Exchange Commission is investigating whether more than a dozen big brokerage firms failed to execute certain trades at the best possible prices for individual investors, sources familiar with the probe said.

The investigation, which is in an early stage, is focusing on trades over the past four years in stocks listed on the Nasdaq Stock Market. Investigators are looking at two practices, known in the securities industry as internalization and payment for order flow.

Internalization occurs when a brokerage firm executes a customer's stock order using shares the firm already owns. Payment for order flow refers to brokerage houses aggregating small customer orders and sending them to an outside firm, known as a market maker, for execution. Brokerage firms sometimes receive a small fee per share for sending trades to an outside market maker.

Neither practice is illegal, but brokerage firms are required by law to always seek out the best prices for their customers, regardless of whether the brokerage firm could profit by executing a trade at an even slightly inferior price.

Sources said the investigation, which was first reported by the New York Times, is focusing on about a dozen firms, including Merrill Lynch & Co., Morgan Stanley, AmeriTrade Holding Corp., E-Trade Financial Corp. and Charles Schwab Corp. All of those firms declined to comment on the probe.

Sources briefed on the probe, who spoke only on the condition that they not be identified by name since the investigation is ongoing, said the SEC's compliance division, which monitors Wall Street practices, sent deficiency letters to the firms about two week ago and referred the issue to the agency's enforcement division.

The enforcement division has sent questionnaires to all the targeted firms asking them to explain certain trades and to document whether individual investors received the best possible prices. If the enforcement division determines that investors did not receive the best price, the brokerage firms could face sanctions, including significant fines. No charges against the firms are expected for at least several months.

The probe is focusing only on Nasdaq stocks because, until recently, Nasdaq did not have firm opening prices for its listed securities. Sources said this ambiguity may have given the brokerage firms the opportunity to execute certain trades at slightly inferior prices, taking advantage of price confusion when the Nasdaq opened for trading in the morning.

The sources said that no single investor would have lost more than a few pennies per trade based on the questionable practices. But the brokerage firms could have earned significant profits based on the activities.

Reports of the probe come after Wall Street has been battered by repeated instances of conflicts of interest, in which firms profited at the expense of individual investors. These conflicts have included research analysts writing overly bullish reports on questionable companies to earn banking fees and mutual funds engaging in abusive practices that harmed long-term investors.

Shares in several companies included in the probe dropped Monday. AmeriTrade fell 71 cents, or 5.1 percent, to $13.16. E-Trade sank 42 cents, or 3.2 percent, to $12.77.