Merrill Fined $3M Over 'Deficient' Trade Surveillance

Also, at certain times during the relevant period, Merrill excluded from its surveillances trading in over-the-counter securities and warrants.

Wash Trading Failures

“Between July 2017 and October 2018, Merrill failed to have a surveillance system in place to detect wash trading. prearranged trades, matched trades or spoofing and layering in OTC securities because Merrill had failed to purchase the OTC data feed from its third-party vendor,” the order states.

Prior to January 2019, Merrill had no system to detect wash trading in warrants.

“Although Merrill’s surveillance system was capable of surveilling for wash trading in warrants in 2016, because of a coding error, Merrill did not include warrants in the surveillance modules until January 2019,” according to the order.

From October 2016 to August 2020, Merrill failed to review alerts generated by three of its wash trading and prearranged trading surveillance patterns in equities and options.

“The firm did not discover the issue until August 2020, when responding to a regulatory inquiry, even though there were numerous red flags, such as internal testing results, that should have alerted the firm to the fact that these alerts were not being reviewed,” FINRA said.

Overall, Merrill “did not review approximately 155 alerts representing approximately 700 potentially manipulative equity trades and approximately 1,000 alerts representing approximately 125,000 potentially manipulative options trades,” according to FINRA.