The US Securities and Exchange Commission has charged Merrill Lynch, Pierce, Fenner & Smith with misleading customers about the ways in which it handled their orders. The bank has agreed to settle the charges by admitting wrongdoing and paying a hefty penalty.

According to the SEC’s order, Merrill Lynch falsely informed customers that it had executed millions of orders internally when it had actually routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers.  Merrill Lynch called this practice 'masking.'

This manoeuvre entailed reprogramming Merrill Lynch’s systems to falsely report execution venues, altering records and reports and providing misleading responses to customers' inquiries. By 'masking' the broker-dealers who had executed customers’ orders, Merrill Lynch made itself appear to be a more active trading centre than it actually was and reduced the access fees that it typically paid to exchanges.

After Merrill Lynch stopped masking in May 2013, it did not inform customers about its past practices, taking further steps to hide its misconduct instead.  Altogether, the SEC says in its order that Merrill Lynch falsely told customers that it executed more than 15 million 'child' orders (portions of larger orders), comprising more than five billion shares, that actually were executed at third-party broker-dealers.

The SEC says that by misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships.