Merrill Fined $3M Over 'Deficient' Trade Surveillance

The Financial Industry Regulatory Authority has fined Merrill Lynch $3 million for failing to have a supervisory system reasonably designed to detect and prevent potentially manipulative trading by the firm’s customers.

According to FINRA’s order, from December 2015 to the present, Merrill “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 order states that $669,000 of the $3 million must be paid to FINRA and the rest to several stock and option exchanges.

First, the parameters in the firm’s automated surveillance system “were too narrow to identify potentially manipulative wash trading and prearranged trading,” the order states.

For example, the parameters unreasonably limited the firm’s surveillance “for potential wash trades to trades that (1) occurred between the same account and were executed simultaneously (or later during the relevant period, in some cases, within ten seconds); or (2) occurred for the same volume and price, and were reversed back to the original account.”

Merrill also did not take reasonable steps during the relevant period to determine whether these parameters were reasonable or whether changes to the parameters or additional surveillances were necessary to reasonably surveil for wash trades and potentially manipulative prearranged trading.

“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 order states.

Further, “although the firm’s procedures included a review process for one of its surveillance systems, the procedures provided insufficient guidance regarding how parameter change decisions should be made or documented.”