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Merrill Gets $10 Million Fee For Commingling Prop And Flow Traders And Frontrunning Clients

Tyler Durden's picture




 

Ever since Zero Hedge's advent just over two years ago, one of the most improper things we claimed happened routinely on Wall Street, was that the big banks' prop traders would consistently, and completely against regulations, populate their massive trading floors with both flow and prop traders, who often sat side by side, within earshot and front run the big clients' orders. Some may recall that point #8 of our follow up query to Goldman's Lucas van Praag in December 2009 was precisely a request to get the seating chart together with assigned responsibilities of all Goldman traders. To wit: "we are still hoping to get a seating chart of Goldman's trading floor (via legitimate channels) which clearly discloses flow and prop traders' seats in order to disclose to the general public that flow and prop traders do not share the same information flow, especially that emanating from core clients who tend to move markets the second they announce their trading axes to Goldman's flow traders." The reason we bring it up is that once again we seem to have been just a year ahead of the curve. In a just announced settlement, the SEC has fined Merrill, and supposedly its insolvent Bank of Calcutta taxpayer funded holdco, $10 million for doing precisely this! From Bloomberg: "The SEC found that Merrill operated a proprietary trading desk from 2003 to 2005 on the firm’s main equity-trading floor in New York, where market makers received and executed customer orders. While Merrill told clients their order information would be used on a need-to-know basis, proprietary traders got information and used it to place trades on Merrill’s behalf after executing the customer orders, according to the statement"...... So... does everyone finally understand how Goldman's (et al) prop group has no trading loss day (at near 50% margins) every single day year after year now?

The justification for this criminal act is surreal: everyone was doing it.

“These kinds of practices were probably pretty widespread
in the industry,” said Phillip Phan, professor at the Johns
Hopkins Carey Business School in Baltimore. “Merrill probably
won’t be punished overly by the market -- and I find it hard to
imagine institutions were completely naïve about this.”

It's all good though: see, Bank of RMBS Fraudulent Representation promises it will never do it again:

“Merrill Lynch adopted a number of policy changes to ensure separation of proprietary and other trading and to address the SEC’s concerns,” said Bill Halldin, a spokesman for Bank of America. “Merrill Lynch also voluntarily implemented enhanced training and supervision to improve the principal trading processes at the firm.”

That said, we would still looooove to get the Goldman trading floor seating chart, with names, and functions clearly defined. And there would be no need to hide anything anymore.... Because the firm obviously no longer has a prop trading group, right? After all Paul Volcker got rid of all that.

 

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Tue, 01/25/2011 - 15:53 | 903685 Malcolm Tucker
Malcolm Tucker's picture


MUST SEE VIDEO of an Egyptian protester stand up to a water cannon truck, ALONE, and getting blasted in the face!!!

Reminiscent of "tank man" in Tienanmen Sqaure! So inspiring!

http://fedupmontrealer.blogspot.com/2011/01/egypt-boiling-over.html

In the same link there is another video of a badly beaten police officer being carried to an ambulance

Tue, 01/25/2011 - 15:56 | 903692 Sudden Debt
Sudden Debt's picture

All I could think off when I watched this was...

 

FUCK SKIING IN MARCH!! WE'RE BOOKING A NILE CRUISE!!!

I BET THE PRICES WILL DROP BIGTIME!!

 

DISCOUNTS BITCHEZ!!!!

 

Tue, 01/25/2011 - 15:59 | 903704 JW n FL
JW n FL's picture

Thats funny when I was watching it... all I could think of was, "why doesnt he have a thump gun?"

Tue, 01/25/2011 - 15:54 | 903686 Sudden Debt
Sudden Debt's picture

10 million...

they must be shaking right now...

 

How manny billions did they make hustling those chumps again?

Tue, 01/25/2011 - 15:54 | 903687 Sarah Conner
Sarah Conner's picture

BofA couldn't have made two better acquisitions than Countrywide and Merrill Lynch...

Tue, 01/25/2011 - 16:05 | 903701 Sudden Debt
Sudden Debt's picture

It's the first time I bought puts on a stock that was 1 cent away from it's top before it crashed :)

PUTS ARE NOW UP 265%!!!

 

I'M SO HAPPY I COULD CRY :)

 

It's like watching while the Titanic is sinking, and I'm the only one that made it in a lifeboat WITH A HD CAMERA TO FILM IT ALL AND KNOWING I'LL BE ABLE TO SELL THE TAPE FOR A LOT OF MONEY WHILE THE REST OF THE IDIOTS ARE STILL CLAPPING FOR THE BAND THAT KEEPS ON PLAYING!!!

Tue, 01/25/2011 - 16:18 | 903789 Sarah Conner
Sarah Conner's picture

Thanks for sharing...

Tue, 01/25/2011 - 15:55 | 903689 topcallingtroll
topcallingtroll's picture

Sneaky boogers arent they?

Tue, 01/25/2011 - 15:55 | 903693 ciscokid
ciscokid's picture

I want in.

Tue, 01/25/2011 - 15:58 | 903694 Cognitive Dissonance
Cognitive Dissonance's picture

The reason we bring it up is that once again we seem to have been just a year ahead of the curve.

Tyler,

Just remember that when you're one step ahead of the herd you're considered a genius. When you are two steps ahead, as Zero Hedge has always been, you're considered lunatic fringe.........until everyone jumps on the bandwagon that is.

I hope there's more room on the ZH server because I suspect it's going to get even more crowded around here very soon.

Tue, 01/25/2011 - 15:56 | 903695 JW n FL
JW n FL's picture

Art!

Tue, 01/25/2011 - 15:57 | 903696 Cheesy Bastard
Cheesy Bastard's picture

I think this 9 second clip sums it up nicely.

http://www.youtube.com/watch?v=AIX_0nMlIBU

Tue, 01/25/2011 - 16:00 | 903707 JW n FL
JW n FL's picture

i am shocked! lmfao!!

Tue, 01/25/2011 - 17:35 | 904073 blind squirrel
blind squirrel's picture

touche, CB

Tue, 01/25/2011 - 16:00 | 903705 Overpowered By Funk
Overpowered By Funk's picture

Fooking Wanking Bankers!

Tue, 01/25/2011 - 16:06 | 903724 gpsnodgrass@cox.net
gpsnodgrass@cox.net's picture

We must have faith in our financial companies. The future of their bonuses depends upon us.

Tue, 01/25/2011 - 16:07 | 903729 DarAdder
DarAdder's picture

While Merrill told clients their order information would be used on a need-to-know basis, proprietary traders got information and used it to place trades on Merrill’s behalf after executing the customer orders, according to the statement"

'After' obviously being a euphemism for 'before'.

 

Tue, 01/25/2011 - 16:10 | 903742 Rainman
Rainman's picture

Merrill placed its own orders after executing the customer's orders...??

Hahaha....if the SEC said that, it must be true. Okie-dokie.

Tue, 01/25/2011 - 16:25 | 903817 TruthInSunshine
TruthInSunshine's picture

That's soooooooo Merrill Lynch.

Tue, 01/25/2011 - 16:30 | 903840 Iam Rich
Iam Rich's picture

NICE....I want to front run!

Tue, 01/25/2011 - 16:51 | 903928 Yen Cross
Yen Cross's picture

 Ahhh Front Running! Every Sunday @ 2:00 P.M. WCT I get front run. Yes those very sparce and also known as Ill-liquid Asian markets open. Gaps and all! I know front running well! I feel for you EQUITES traders. Really I do.

Tue, 01/25/2011 - 17:10 | 903992 tellsometruth
tellsometruth's picture

This is why I have been coming here for a long time... ZH has the moxie to put it out there

Tue, 01/25/2011 - 17:27 | 904047 jmoney
jmoney's picture

It's even worse that you think (or write about here).  On many credit trading floors you have desks that are ostensibly client-facing operations taking big prop positions at the same time (many distressed desks do this).  The information is all comingled, but I would venture to guess the profits from the prop stuff far outweigh the P&L from crossing customer orders.  The size of these bets goes well-beyond "providing liquidity".  Yes, these desks do provide liquidity, but they also take prop positions that are certainly informed by what they see on the client side.

Tue, 01/25/2011 - 17:32 | 904066 blind squirrel
blind squirrel's picture

After 10 yrs on the buyside, I have lots of firsthand experience of this sort of front running (and picking off stops in illiquid market hours).  Hell, I expect it. But... doesn't mean I like it or approve.

The Street seems to attract greasy, self-dealing, liar types.

Tue, 01/25/2011 - 17:41 | 904096 Byte Me
Byte Me's picture

The justification for this criminal act is surreal: everyone was doing it.

Maybe if everyone burnt a banker they'd have no problem with that either since everyone would be doing it?

Tue, 01/25/2011 - 17:50 | 904133 maneco
maneco's picture

Looks like crime has paid once again! Why can't they send anyone to jail? 

Tue, 01/25/2011 - 18:02 | 904155 tellsometruth
tellsometruth's picture

"Gosh! Was Madoff not enough for you!"

-gov

Tue, 01/25/2011 - 18:06 | 904163 Downtoolong
Downtoolong's picture

When a large investment banking firm is running a proprietary trading operation anywhere it ultimately has only one client - it's them.

 

Wed, 01/26/2011 - 02:32 | 905428 Gannic
Gannic's picture

I used to work at Goldman's in the early to mid part of last decade in the FICC group in London....

The prop desk sat on the floor in a corner, and would regularly wander over to the various trading desks. As such client business was never a secret to them. One PMD was even more than happy to wander through the chinese wall to the IBD side, get information on deal flow then cheerfully disseminate to the prop guys.

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