Merrill Lynch to Pay $12.5 Million Fine for Mini-Flash Crashes -- 2nd Update
September 26 2016 - 5:13PM
Dow Jones News
By Joshua Jamerson and Aruna Viswanatha
Merrill Lynch agreed to pay $12.5 million to settle allegations
that it failed to stop 15 large, faulty trades that allegedly
caused stocks, including Google Inc. and Diageo PLC, to move
abruptly, the Securities and Exchange Commission said.
The agency said the trades at issue occurred between 2012 and
2014 because internal controls to prevent erroneous trading orders
were set at such a high level that they were ineffective. The
internal controls included limits on trading volume, among other
things.
In 2013, for example, the brokerage unit of Bank of America
Corp. caused the price of Anadarko Petroleum Corp. and Qualys Inc.
to drop by 99%, the agency said. The SEC said its investigation
found that a Merrill trader entered an order to sell 381,020 shares
using an algorithm intended for a different order. The executed
order was 483% of the average daily trading volume of the stock for
the previous 20 days, the SEC said.
A representative from Merrill Lynch said erroneous trades were
canceled by the relevant exchanges in most instances, and the
company is "not aware of any client who was harmed as a result." He
added the company believes it complies with regulators'
expectations. The company neither admitted nor denied the findings,
according to the SEC settlement.
Six exchanges also said they collectively fined Merrill Lynch $3
million for violating their respective supervision rules. The
penalties were initiated by the Financial Industry Regulatory
Authority on their behalf.
The SEC established a mechanism in 2012 intended to prevent
extreme price swings in stocks by halting trading when quotes
exceed preset bands. That mechanism has limited the number of
so-called flash crashes in recent years, but some firms have said
the protections exacerbated market turmoil in some cases by
preventing prices from quickly recovering.
The system was set up after the so-called flash crash of May 6,
2010, when the Dow Jones Industrial Average fell 700 points in
eight minutes before recouping much of the loss.
The SEC cited other instances of faulty controls, including one
in which Merrill allegedly applied a limit of 5 million shares per
order for one stock that traded about 79,000 shares a day. In the
Google instance, a Merrill trader in April 2013 entered an order to
sell 50,070 shares after a client had "incorrectly submitted an
order to sell on swap 50,070 shares instead of 5,700 shares," the
SEC said.
Robert Cohen, co-chief of the SEC enforcement division's market
abuse unit, said the penalty was a record SEC fine for violations
of the Market Access Rule. Previous cases include a $4 million
penalty paid by Morgan Stanley in 2014 and a $12 million penalty
paid by Knight Capital in 2013.
Write to Joshua Jamerson at joshua.jamerson@wsj.com and Aruna
Viswanatha at Aruna.Viswanatha@wsj.com
(END) Dow Jones Newswires
September 26, 2016 16:58 ET (20:58 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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