BofA Securities, Inc. + Merrill Lynch, Pierce, Fenner & Smith, Inc.
The findings stated that the firms 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. Specifically, the parameters in the firms’ automated surveillance system were too narrow to identify potentially manipulative wash trading and prearranged trading.
Further, the firms did not take reasonable steps to determine whether the 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.
In addition, although the firms’ 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.
At certain times, Merrill Lynch excluded from its surveillances trading in OTC securities and warrants. Between July 2017 and October 2018, Merrill Lynch failed to have a surveillance system in place to detect wash trading, prearranged trades, matched trades or spoofing and layering in OTC securities because it had failed to purchase the OTC data feed from its third-party vendor.
Although Merrill Lynch’s surveillance system was capable of surveilling for wash trading in warrants in 2016, because of a coding error, the firm did not include warrants in the surveillance modules until January 2019. Furthermore, the firms failed to review alerts generated by three of its wash trading and prearranged trading surveillance patterns in equities and options.
The firms did not discover the issue until they responded to a regulatory inquiry, even though there were numerous red flags, such as internal testing results, that should have alerted them to the fact that these alerts were not being reviewed.
