Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $12.5 million to resolve an enforcement action brought by the Securities and Exchange Commission claiming that, from July 14, 2011, through December 2014, the firm failed to have adequate risk management controls reasonably designed to prevent the entry of erroneous orders or orders that exceeded preset credit or capital controls for several of its trading desks. During the relevant period (as is the case now), such controls were mandatory, said the SEC, for all broker-dealers, such as ML, that had direct access to trading in securities on an exchange or through an alternative trading system under the SEC’s market access rule (click here to access SEC's Market Access Rule, its Rule 15c3-5). According to the SEC, during the relevant time, ML utilized maximum share quantity and maximum notional value controls as its principal means to control trading access. However, charged the SEC, “because the thresholds were set at such high levels, the controls were not reasonably designed to prevent erroneous orders from entering the market.” As a result, said the SEC, during the relevant time, ML sent many erroneous orders to marketplaces, causing multiple sudden increases and decreases in the prices of stocks and exchange-traded funds – in some cases, short-term price swings of 10 percent or more. The SEC claimed that ML did not begin to address its market access controls until May 2013, after some erroneous orders caused a 99-percent decline in one stock’s price. Separately, six exchanges also announced a settlement with ML related to the firm’s alleged violation of Regulation MAR during the same approximate time period as well as the exchanges’ own supervision requirements. ML agreed to pay, in aggregate, US $3 million to resolve disciplinary actions brought by Bats BZX Exchange, Bats BYX Exchange, Bats EDGX Exchange, the New York Stock Exchange, NYSE Arca and the NASDAQ Stock Market.
Compliance Weeds: In April 2014, the Securities and Exchange Commission’s Division of Trading and Markets issued helpful answers to frequently asked questions related to Regulation MAR (click here to access). This regulation, adopted in 2010, generally requires a broker or dealer with access to trading securities directly on an exchange or alternative trading system to have procedures and controls that limit their financial exposure as a result of such access, and ensure compliance with all applicable regulatory requirements. In its Q&As, the SEC provides a concise summary of the relevant regulation as well as answers to 19 questions regarding it. These questions include: does MAR apply to quotes (yes, MAR applies to all orders, including market maker quotes); and security futures products (yes, for broker-dealers that trade security futures on an exchange or alternative trading system but not for Notice-registered futures broker-dealers); and may a broker-dealer that provides access to an affiliate broker-dealer grant the affiliate control over its risk management controls and supervisory procedures (no).