Merrill Lynch to Pay $12.5 Million Fine for Mini-Flash Crashes -- 2nd Update

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 [e-mail] and Aruna Viswanatha at [e-mail]

(END) Dow Jones Newswires

September 26, 2016 16:58 ET (20:58 GMT)

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