BAML fined $42 million for ‘masking’ electronic order routing

BAML made agreements with HFT firms including Citadel Securities and Two Sigma to secretly route client orders.

Bank of America Merrill Lynch (BAML) has been fined $42 million after it admitted to New York authorities that it sent orders electronically to certain liquidity providers secretly as part of a ‘masking’ scheme.

The investment bank confessed it systematically hid where dark pool orders were being sent as part of undisclosed agreements with high-frequency trading firms such as Citadel Securities, Knight Capital, Two Sigma Securities and Madoff Securities.

Over a five-year period, BAML reprogrammed its electronic trading systems, doctored trade confirmations sent to clients and altered post-trade reports to avoid detection, claiming orders sent to those liquidity providers were instead being executed in-house.

Authorities in New York found BAML applied its ‘masking scheme’ to more than 16 million client orders between 2008 and 2013, representing over four billion traded shares.

“Bank of America Merrill Lynch went to astonishing lengths to defraud its own institutional clients about who was seeing and filling their orders, who was trading in its dark pool, and the capabilities of its electronic trading services,” New York Attorney General Eric Schneiderman said.

“As Wall Street firms offer increasingly complex electronic trading services, they cannot use new technology to exploit their clients in service of their business relationships with large industry players, like Bank of America Merrill Lynch did here.”

The settlement is the latest in a string of regulatory actions against major financial institutions related to electronic, dark pools and high frequency trading.

In 2016, Barclays was fined $35 million for misleading investors about its dark pool operations and exposing orders to ‘predatory’ traders despite leading clients to believe it would protect orders from them.

At the same time, Deutsche Bank and Credit Suisse paid fines worth $18.5 million and $30 million respectively for similar fraudulent pool and electronic trading operations.

“I urge all members of the financial community to evaluate and if necessary reform your practices around electronic trading services, to ensure that you treat each and every client, big and small, ethically and loyally. For those financial institutions that refuse to do so, we will hold you accountable,” concluded Attorney General Schneiderman.

Concerns around potential broker conflicts has seen asset managers urge the sell-side to provide full order routing transparency. Last year, The TRADE investigated if the buy-side should be doing to more to find out where their orders are being sent.