Bank of America to Pay $42 Million to Settle New York AG Probe in Electronic Trading -- Update

By Alexander Osipovich and Allison Prang

Bank of America Merrill Lynch will pay $42 million to New York state to settle allegations that it routed client orders to high-speed trading firms without telling the customers that it was routinely doing so.

New York Attorney General Eric Schneiderman said Friday that the bank had secret agreements with certain firms, such as Citadel Securities and Two Sigma Securities, to send them clients' orders to buy and sell stocks.

Those agreements were kept concealed from clients over a five-year period, the attorney general said.

Another one of the firms to which the bank sent orders was Madoff Securities, the trading firm run by convicted Ponzi-scheme operator Bernard L. Madoff, Mr. Schneiderman said.

Bank of America applied its "masking" strategy to more than 16 million client orders between 2008 and 2013, representing over 4 billion traded shares, the New York attorney general's office said.

"Bank of America Merrill Lynch went to astonishing lengths to defraud its own institutional clients about who was seeing and filling their orders, who was trading in its dark pool, and the capabilities of its electronic trading services," Mr. Schneiderman said.

Bank of America admitted violating the Martin Act, a broad New York state antifraud statute. A bank spokesman said the settlement "primarily relates to conduct that occurred as long as 10 years ago."

"At all times we met our obligation to deliver the best prices to clients and about five years ago we addressed the issues concerning communicating to clients about where their trades were executed," the spokesman said.

Big investors like pension funds are often wary of letting high-frequency trading, or HFT, firms see their orders, out of fear that the traders will infer that a large buyer or seller is at work in the markets. That can cause the speedy trader to adjust its price quotes in response, resulting in the investor getting a worse price for its trade.

The settlement order detailed various steps that Bank of America employees allegedly took to reassure clients that HFT firms weren't on the other side of their trades. One of them was systematically changing electronic ID codes that would have revealed the bank to be routing orders to venues run by high-speed traders, a practice that was internally called "masking," the order said.

In one February 2013 email exchange cited in the order, an unnamed bank employee asked colleagues how to respond to a client who had requested a list of the trading venues where Bank of America was routing orders. "[B]efore I send, is there anything you want to streamline or eliminate (i.e. the HFT stuff at the end of to whom do we route)?" the employee asked, according to the order.

Later that day, the client received a list from which high-speed traders had been deleted, the order said.

Bank of America also misled customers about how much trading activity in its Instinct X dark pool was coming from retail investors, claiming that retail investors accounted for 20% or 30% of order flow in the dark pool, when in fact they were only about 5%, the order said.

Dark pools are off-exchange trading venues, often run by Wall Street banks, in which big investors can attempt to buy or sell large quantities of shares without tipping off the broader market about their intentions.

The venues have come under scrutiny in recent years, after regulators found that some banks had misled customers about the degree of HFT activity in their dark pools.

In January 2016, Credit Suisse Group AG and Barclays PLC agreed to pay a combined $154.3 million to the Securities and Exchange Commission and the New York attorney general to settle investigations into their dark pools. The Swiss bank neither admitted nor denied wrongdoing, while Barclays admitted violating federal securities laws as part of the deal.

Shares of Bank of America were down 2% in midday trading.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com and Allison Prang at allison.prang@wsj.com

(END) Dow Jones Newswires

March 23, 2018 13:55 ET (17:55 GMT)

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