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.