BofA Merrill to Pay $42M Over Secret Electronic-Trading Deals That Included Madoff Securities

Rather than tell clients it was routing millions of equity orders to ELPs like Citadel, BofA Merrill told institutional clients their orders were being executing in-house, according to the investigation.

The bank reprogrammed its electronic trading systems “to automatically doctor the trade confirmation messaging sent back to its clients after executions by these firms, in a process that [bank] employees referred to internally as ‘masking,’” the attorney general’s office explained.

It used the “masking” strategy on more than 16 million client orders between 2008 and 2013, representing over 4 billion traded shares. Plus, it altered post-trade reports, client invoices and other written documents concerned with the trades.

The bank inflated the level of retail orders being routed to and executed in its dark pool of private exchanges, “Instinct X.” It claimed that between 20% and 30% of the orders in its dark pool originated from retail traders, but the investigation found that the bank’s client orders accounted for no more than 5% of Instinct X orders.

“The settlement primarily relates to conduct that occurred as long as 10 years ago,” BofA Merrill said in a statement. “At all times we met our obligation to deliver the best prices to clients. About five years ago, we addressed the issues concerning communicating to clients about where their trades were executed.”