Merrill Lynch and its parent company, Bank of America, have agreed to a $3 million fine by Finra for failing to adequately protect against manipulative trading, according to the regulator.
Since at least December 2015 for Merrill and 2019 for BofA, the two firms failed to have a supervisory system that could detect and prevent potentially wash and prearranged trading by the firm’s customers, according to the Finra consent agreement released yesterday.
In wash trading, a stock is bought and sold simultaneously to give the impression of heightened activity, and in prearranged trading, which can give the impression of sales without actually changing the trader’s market position.
The firms have agreed to a censure, the $3 million fine, of which $669,000 will go to Finra, and a six-month deadline for remediating the deficiencies, according to Finra.
As is typical with such agreements, the firms consented to the final order without admitting to or denying the accusations.
Bank of America's press office said there was "no client harm" involved in the matter and released the following statement: “We have been enhancing our surveillance program and will continue to implement improvements to ensure we meet regulatory requirements.”
Both firms “relied on a number of third-party automated surveillances to surveil for potentially manipulative activity, including wash trading and prearranged trading. These surveillances were deficient in several respects,” the settlement said.
The search parameters were too narrow and limited the surveillance for potential wash trades to trades that were made within the same account and executed simultaneously, or to trades that occurred for the same volume and price and were reversed back to the same account, Finra said.
“Manipulative trade washing is not limited to trades that occur in the same account and execute simultaneously, or occur for the same volume and price and involve reversals,” the regulator said.
At no point during the period in question did either Merrill Lynch or BofA revisit or question the parameters, Finra said.
“The firm could not explain why it initially selected the particular modules that it used or why it did not select other modules that were available from the vendor,” the letter said.
Merrill also sometimes excluded from its surveillance trading in OTC and warrants, Finra said.
“Between July 2017 and October 2018, Merrill failed to have a surveillance system in place to detect wash trading, prearranged trades, matched trades or spoofing and layering in OTC securities because Merrill had failed to purchase the OTC data feed from its third-party vendor,” Finra said.
In addition, Finra said, “Although Merrill’s surveillance system was capable of surveilling for wash trading in warrants in 2016, because of a coding error, Merrill did not include warrants in the surveillance modules until January 2019.”
Also, from October 2016 and August 2020, Merrill failed to review alerts generated by three of its wash trading and prearranged trading systems. Only when a regulatory inquiry was launched did it prompt the firm to look at the issue.
“There were numerous red flags, such as internal testing results, that should have alerted the firm to the fact that these alerts were not being reviewed,” the letter said. “Overall, the firm did not review approximately 155 alerts representing approximately 700 potentially manipulative equity trades and approximately 1,000 alerts representing approximately 125,000 potentially manipulative options trades.”