ASIC: Merrill Lynch Equities (Australia) Limited Pays $120,000 Infringement Notice Penalty

Merrill Lynch Equities (Australia) Limited (Merrill Lynch) has paid a penalty of $120,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP). The penalty was for not ensuring that it had in place:

• organisational and technical resources for its system for the automated processing of orders, including appropriate automated filters, and
• processes to record any changes to the filters to enable automated orders to be submitted into the ASX’s trading facility, without interfering with the efficiency and integrity of ASX’s market or the proper functioning of that facility.

Background and circumstances

1. On 24 May 2011 Merrill Lynch Global Wealth & Investment Management (GWIM) entered an order through Merrill Lynch’s system to sell 50 million ordinary shares in Future Corporation Australia Limited (ASX Code: FUTDA), at a price of $0.002, on a deferred settlement basis. At the time GWIM was not aware of a 1:10 reconstruction of the shares and as a result entered the order at $0.002 instead of $0.02.
2. The order was automatically routed to the ASX trading platform despite it being 13 price steps and 86.7% lower than the highest bid in the market.
3. The order resulted in 13 transactions at prices from $0.015 to $0.002, resulting in an 86.7% decrease in the price of FUTDA. Eleven of the transactions were subsequently cancelled.
4. In March 2009, unknown to Merrill Lynch, changes were made to its systems which enabled certain orders manually entered by GWIM, to be automatically routed to the ASX without being reviewed by Merrill Lynch’s trading desk, or being subject to any price tolerance or price step filters or other checks.

As a result of Merrill Lynch’s failure to ensure that its system had in place adequate organisational and technical resources between 1 August 2010 to 24 May 2011, the MDP had reasonable grounds to believe that Merrill Lynch contravened Rule 5.6.3(a) of the ASIC Market Integrity Rules (ASX Market) 2010 and thereby contravened section 798H(1) of the Corporations Act 2001 (Corporations Act). The MDP issued Merrill Lynch with an infringement notice specifying a penalty of $120,000.

In deciding this matter, the MDP noted the following:

• Merrill Lynch failed to ensure that its organisational and technical resources were such that filter changes to its system could only be made with its knowledge and authorisation, and that any unauthorised changes were promptly detected, rectified and prevented.
• Merrill Lynch’s failure to ensure that each of these elements were in place had the potential to damage the efficiency and integrity of the market and cause loss to third parties.
• The contravention occurred over an unacceptable period of time, from 1 August 2010 (when the ASIC market integrity rules commenced) to 24 May 2011 (when the unauthorised change to Merrill Lynch’s system was detected).
• Merrill Lynch had a poor compliance history including a failure to address a comparable contravention. The ASX Disciplinary Tribunal previously emphasised to Merrill Lynch in 2010 the importance of ensuring that it has appropriate measures in place to prevent any further misconduct.
• The ASX Disciplinary Tribunal also noted at the time that Merrill Lynch had taken significant remedial action to prevent a recurrence of such contravention through a range of measures, including upgrading its corporate governance, risk management, supervision and compliance structures. However, those measures failed to prevent this further breach.
• Merrill Lynch has taken further remedial action to prevent a recurrence of this incident.
• Merrill Lynch co-operated with ASIC throughout its investigation and did not dispute any material facts.

The Markets Disciplinary Panel

Download the infringement notice