Federal prosecutors are nearing a decision on whether to indict a top executive at AB Watley, the small daytrading firm that allegedly had illegal access to so-called squawk box communications at three big Wall Street firms, sources say.

A decision on whether to indict the Watley executive will be made by March 17, say people familiar with the investigation. Three former brokers who were indicted last summer on charges they sold access to their firm's squawk box systems are scheduled to return to federal court in New York on March 17.

The Watley executive in the prosecutorial crosshairs is Robert Malin, the New York-based brokerage's co-founder, president and vice chairman. Sources say prosecutors also are mulling whether to seek an indictment against Linus Nwaigwe, the firm's former compliance officer.

In September, the Securities and Exchange Commission notified both men that they could face possible civil fraud charges stemming from their role in the squawk box matter.

Lawyers for both Malin and Nwaigwe did not return telephone calls. Malin declined to comment. Nwaigwe could not be reached for comment. Last summer, prosecutors informally notified Nwaigwe that he could face indictment in the investigation, sources say.

In recent weeks, prosecutors have interviewed a number people in deciding whether to pursue indictments against Watley officials. People familiar with the inquiry say one person interviewed was a former lawyer for the brokerage.

Federal prosecutors declined to comment. But earlier this year, prosecutors told U.S. District Judge I. Leo Glasser that they anticipated filing a superseding indictment that would either add new defendants to the case or add additional charges against the three brokers, Timothy O'Connell, Kenneth Mahaffy Jr. and David Ghysels.

An indictment against Malin could spell the end for Watley, which went public in 1999, when daytrading was all the rage. For many years, Watley's daytrading software was highly rated and popular with fast-fingered traders. A year ago, the firm reported having fewer than 5,000 online customers.

At their peak, shares of Watley traded in the low $20s. The stock now trades sporadically on the unregulated pink sheets. It most recently traded around a penny. The brokerage hasn't filed updated financial reports since last May.

In all, sources say, prosecutors are considering filing charges against six new defendants, including several former Watley traders and possibly additional brokers.

The superseding indictment will likely mean the end of a nearly two-year investigation into allegations that brokers at Merrill Lynch ( MER), Lehman Brothers ( LEH) and Citigroup ( C) permitted daytraders at Watley and another small brokerage to listen in to the internal squawk box systems used by each firm's institutional trading desk. With the unusual access, the daytraders were able to overhear information about impending block trades made by institutional customers of the three Wall Street firms.

Prosecutors contend that the daytraders at Watley and Millennium Brokerage, which is defunct, used those trading tips to engage in front-running, an illegal practice in which a person buys or sells shares ahead of a trade he suspects will move a stock's price. In return for the access, the daytraders at Watley allegedly paid bribes to the brokers in the form of cash or trading commissions.

The squawk box investigation began in the spring of 2004. A big break came when prosecutors indicted John Amore, the former Watley CEO, on an unrelated securities offense. Amore, who is cooperating with prosecutors, allegedly was the mastermind of the squawk box scheme at Watley. Amore used Watley's access to Merrill Lynch's squawk box system as a recruiting tool in wooing skilled daytraders to the firm.

Though the SEC has filed civil fraud charges against Amore, prosecutors have never confirmed his involvement in the investigation.

A person close to Watley says Malin and Nwaigwe contend it would be unfair for prosecutors to indict them, since they went to regulators in the summer of 2004 with their concerns about Amore, who was fired from Watley in September 2003. Shortly after he was fired, Watley sued Amore, claming he misled the brokerage about his background and committed a wide array of "improprieties." The lawsuit, however, did not contain any allegations about the squawk box scheme.

To date, three people have pleaded guilty in the investigation, including former Citigroup broker Ralph Casbarro and Benjamin Grimaldi, a former Merrill Lynch senior compliance officer.

But despite the guilty pleas, securities experts says prosecutors may have a tough time convincing a jury that the tips the daytraders overheard were confidential inside information. They note that at Merrill Lynch and Citigroup, dozens of retail brokers had access to those firms' institutional trading squawk boxes, to which the brokers were selling access. In addition, experts say many of the tips gleaned from the squawk box were of dubious quality.

"It's not certain a jury would find this information to be material,'' says Ron Geffner, a partner with Sadis & Goldberg and a former SEC enforcement attorney. "The traders with whom I've spoken say this information is not something they were easily able to exploit.''

In fact, people familiar with Amore say the former Watley executive had justified the practice, saying it was common for hedge funds to get tips on big block trades from brokers. But to date, no hedge fund has been implicated in the investigation.

More from Stocks

Has Wall Street Completely Lost Its Mind on General Electric?

Has Wall Street Completely Lost Its Mind on General Electric?

Tesla CEO Elon Musk Is Cracking Under Immense Stress and Investors Should Worry

Tesla CEO Elon Musk Is Cracking Under Immense Stress and Investors Should Worry

10 Questions for PayPal Ahead of Its Big Investor Day

10 Questions for PayPal Ahead of Its Big Investor Day

Trump Tariff Threat, Deutsche Bank, Elon Musk and Apple - 5 Things You Must Know

Trump Tariff Threat, Deutsche Bank, Elon Musk and Apple - 5 Things You Must Know

High-Flying Mutual Funds Begin to Favor Energy but Tech Still Reigns Supreme

High-Flying Mutual Funds Begin to Favor Energy but Tech Still Reigns Supreme