A Merrill Lynch prop trader sent an IM to his colleague 3 minutes after an (anonymous) client placed an order to sell 40,000 shares of Teva Pharmaceuticals, (allegedly) informing him of the trade.Moments later, according to the SEC, the prop trader placed an order to buy 10,000 shares of Teva, and wrote in an electronic message:
“I always like to do what the smart guys are doing.”
The SEC doesn’t name the prop trader who sent the electronic message, but the Wall Street Journal‘s sources says a man named Robert H. May ran the desk.
From the WSJ:
People familiar with the situation said the proprietary traders, who worked on what Merrill called its Equity Strategy Desk, were led by Robert H. May. Mr. May was among four traders from Bank of America hired last week by boutique-trading firm First New York Securities.
Of course the two branches that were communicating, proprietary trading (Merrill’s Equity Strategy Desk) and client trading, aren’t supposed to discuss their trades. If they did, prop traders could learn about a big client order that’s coming in and “front-run” it — potentially earning millions off of a momentary uptick in price when the client’s purchase order goes through, for example.
Because the firm’s prop trades took place after the client’s, says the SEC, what Merrill Lynch did is not front-running, but it was still (allegedly) trading over the “Chinese Wall” that is meant to be in place.
And, even though the SEC didn’t charge Merrill with front-running, what happened might be just as bad, because the SEC also alleges that when the prop traders learned about the client trades, they executed their own trades at a better price than the firm charged its clients. So the fact that Merrill’s clients were not front-run offers little relief; they still (allegedly) suffered paying an unfair price.
On top of all this — Merrill might have earned MUCH more than $10 million, the amount the firm paid to settle the charges. So in sum, this settlement is a big fat score for the firm.
It’s no wonder the Wall Street Journal suspects that the firm’s light punishment (a $10 million settlement – names of the traders kept anonymous) will stoke more suspicions.
From the WSJ:
Such enforcement cases are rare, and the Merrill settlement is likely to fuel longstanding suspicions among many investors that Wall Street firms tap the continuous flow of orders from customers for their own benefit. Securities firms are lobbying U.S. regulators over the wording of the “Volcker rule,” part of last year’s Dodd-Frank financial law that is expected to force banks to wind down or sell their proprietary-trading desks.
The firm (now owned by Bank of America) settled for $10 million without admitting or denying wrongdoing.
With the SEC’s doling out such light punishment, it’s a wonder Goldman Sachs had enough confidence in the former director of both its CDO prop trading and client trading desk, Jerry Ouderkirk, to observe the Chinese wall. Before the firm removed him from the post of director of the CLO prop trading desk in May, he managed both desks.