Bank of America Corp’s corporate and investment banking division agreed to pay US$42 million to settle a New York state probe into a masking scheme in which it misled clients about who was seeing and filling their orders, and who was trading in its dark pool.
Bank of America Merrill Lynch for years, starting in 2008, had trading agreements with electronic liquidity providers, such as Citadel Securities, Knight Capital and Madoff Securities that were hidden from customers, New York Attorney General Eric Schneiderman said in a statement on Friday.
The bank’s behavior made its electronic trading services appear safer and more sophisticated than they really were, he said.
The bank “systematically concealed from its clients over a five-year period that it was secretly routing its clients’ orders for equity securities to such firms for execution,” Schneiderman said.
It used the masking strategy for more than 16 million client orders between 2008 and 2013, representing more than 4 billion traded shares, Schneiderman said.
The bank began addressing what it describes as a communications issue with its institutional clients in 2013, Bank of America spokesman Bill Halldin said in a statement.
“The settlement primarily relates to conduct that occurred as long as 10 years ago,” he said. “At all times we met our obligation to deliver the best prices to clients.”
Regulators have been taking a closer look at how brokers make decisions about where to send client orders, with dark pool private trading platforms coming under greater scrutiny in particular. The EU has been clamping down too, banning hundreds of stocks from trading on dark pools just this month in a drive for greater transparency.
Under Friday’s deal, Bank of America Merrill Lynch admitted that it inflated claims about the amount of retail orders routed to and executed in its dark pool, called “Instinct X,” the statement said.
The bank’s marketing material also boasted about its “strategic” and “tactical” trading algorithms used to route client orders on an “order by order” basis, when in reality it did not use such analysis, Schneiderman said.
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