22nd June 2018

SEC fines Merrill Lynch for misleading customers about trading venues

The Securities and Exchange Commission (SEC) has charged Merrill Lynch, Pierce, Fenner & Smith with misleading customers about how it handled their orders. Merrill Lynch agreed to settle the charges, admit wrongdoing, and pay a $42m penalty.

According to the SEC’s order, Merrill Lynch falsely informed customers that it had executed millions of orders internally when it actually had routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers. Merrill Lynch called this practice ‘masking’.

Masking entailed reprogramming Merrill Lynch’s systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries. By masking the broker-dealers who had executed customers’ orders, Merrill Lynch made it appear to be a more active trading centre and reduced access fees it typically paid to exchanges.

After Merrill Lynch stopped masking in May 2013, it did not inform customers about its past practices, but instead took additional steps to hide its misconduct. Altogether, the SEC’s order found that Merrill Lynch falsely told customers that it executed more than 15 million ‘child’ orders (portions of larger orders), comprising more than five billion shares, that actually were executed at third-party broker-dealers.

“By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.”