The Securities and Exchange Commission has charged Merrill Lynch, Pierce, Fenner & Smith Inc. with misleading customers about how it handled their orders. The broker-dealer has agreed to settle the charges, admit wrongdoing, and pay a $42 million 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,” the SEC explains.
By masking the broker-dealers who had executed customers’ orders, Merrill Lynch made itself appear to be a more active trading center and reduced access fees it typically paid to exchanges.
After the brokerage firm stopped masking in May 2013, the SEC claims that 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 were actually executed at third-party broker-dealers.
“Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage,” said Joseph Sansone, chief of the enforcement division’s market abuse unit. “Because of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions.”
The SEC’s order censures Merrill Lynch and requires it to pay a $42 million civil penalty.