BAML slapped a second time with $42 million fine for masking orders

Bank of America Merrill Lynch admits masking millions of orders and will pay $42 million for the second time this year.

Bank of America Merrill Lynch (BAML) has been fined $42 million for the second time this year after confessing that clients had been misled on where millions electronic orders were routed.

BAML told clients that it had executed orders internally, when in fact orders had been routed to proprietary trading firms, market makers and other broker-dealers, according to the Securities and Exchange Commission (SEC). 

The investment bank reprogrammed its systems to carry out the scheme, known as masking, and to falsely report execution venues, alter records and reports, and provide untrue responses to client inquiries. 

“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.”

This is the second time BAML has admitted to masking orders. Earlier this year, it was handed a $42 million fine for secretly routing orders to high-frequency trading firms such as Citadel Securities, Two Sigma, Knight Capital and Madoff Securities.

By 2013, BAML had stopped masking but did not inform its clients and instead falsely told customers that it had executed more than 15 million child orders comprising of more than five billion shares, when in fact they had been executed at third-part broker-dealers.

“Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage,” Joseph Sansone, chief of the enforcement division’s market abuse unit, commented.  “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 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.

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.