The Securities and Exchange Commission charges Merrill Lynch, Pierce, Fenner & Smith with misleading customers about how it handles their orders. Merrill Lynch agrees to settle the charges, admit wrongdoing, and pay a $42 million penalty.
According to the SEC’s order, Merrill Lynch falsely informs customers that it executes millions of orders internally. The reality, however, is that Merrill Lynch actually routes the orders for execution at other broker-dealers. This includes proprietary trading firms and wholesale market makers. Merrill Lynch calls this practice “masking.” Masking entails reprogramming Merrill Lynch’s systems to falsely report execution venues. In doing so, records and reports are altered which causes misleading responses to customer inquiries. By masking the broker-dealers who actually execute customers’ orders, Merrill Lynch makes itself appear to be a more active trading center. This activity reduces the fees Merrill Lynch pays to exchanges.