Merrill Lynch admits short sales misinformation
05 June 2015 Washington DC
Image: Shutterstock
Merrill Lynch has admitted using inaccurate data when executing short sale orders, and agreed to a settlement of almost $11 million.
After an investigation by the US Securities Exchange Commission, Merrill Lynch admitted wrongdoing and agreed to pay the settlement. It must also appoint an independent compliance consultant to review the firm’s procedures.
Under the SEC’s order instituting a settled administrative proceeding, Merrill Lynch is required to ‘locate’ stock for customers for short selling, and to prepare an easy-to-borrow (ETB) list of stocks deemed accessible for granting loans.
The investigation found that in the course of a trading day some of Merrill Lynch’s ETB securities became no longer easily available, as determined by the landing desk professionals tracking market events.
Although personnel stopped using the ETB list in these instances, Merrill Lynch’s execution platforms were programmed to continue processing short-sale orders based on the list.
As systems still relied on the list, short sales were still executed, amounting to short sales of thousands of shares. The platforms would not trade accurate data again until the ETBs were updated the next day.
After the SEC began its investigation, Merrill Lynch started implementing systems enhancements to correct this problem.
The SEC also found that until 2012 a problem in Merrill Lynch’s systems meant that, on some occasions, day-old data was used when creating ETB lists. This caused some securities to be included in the list when they shouldn’t have been.
Andrew Calamari, director of the SEC’s New York regional office, said: “Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists.”
He added: “When firm personnel determine that a security should no longer be considered easy to borrow, the firm’s systems need to incorporate that knowledge immediately.”
Merrill Lynch admitted violating rule 203(b) of regulation SHO of the Securities Exchange Act, 1934. The financial repercussions include a $9 million penalty, plus $1.56 million in disgorgement and $335,000 in prejudgement interest.
After an investigation by the US Securities Exchange Commission, Merrill Lynch admitted wrongdoing and agreed to pay the settlement. It must also appoint an independent compliance consultant to review the firm’s procedures.
Under the SEC’s order instituting a settled administrative proceeding, Merrill Lynch is required to ‘locate’ stock for customers for short selling, and to prepare an easy-to-borrow (ETB) list of stocks deemed accessible for granting loans.
The investigation found that in the course of a trading day some of Merrill Lynch’s ETB securities became no longer easily available, as determined by the landing desk professionals tracking market events.
Although personnel stopped using the ETB list in these instances, Merrill Lynch’s execution platforms were programmed to continue processing short-sale orders based on the list.
As systems still relied on the list, short sales were still executed, amounting to short sales of thousands of shares. The platforms would not trade accurate data again until the ETBs were updated the next day.
After the SEC began its investigation, Merrill Lynch started implementing systems enhancements to correct this problem.
The SEC also found that until 2012 a problem in Merrill Lynch’s systems meant that, on some occasions, day-old data was used when creating ETB lists. This caused some securities to be included in the list when they shouldn’t have been.
Andrew Calamari, director of the SEC’s New York regional office, said: “Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists.”
He added: “When firm personnel determine that a security should no longer be considered easy to borrow, the firm’s systems need to incorporate that knowledge immediately.”
Merrill Lynch admitted violating rule 203(b) of regulation SHO of the Securities Exchange Act, 1934. The financial repercussions include a $9 million penalty, plus $1.56 million in disgorgement and $335,000 in prejudgement interest.
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