Merrill Lynch Agrees to Pay $97,000 Fine to Settle Regulators’ Allegations

Merrill Lynch & Co. agreed to pay a $97,000 fine to settle regulators’ charges that the largest U.S. brokerage failed to properly display dozens of customer orders placed at specific prices.

The National Assn. of Securities Dealers also alleged the New York-based firm failed to properly execute dozens more orders at the best possible prices.

“These were unintentional errors that involved a very small fraction of the transactions that we executed,” said Merrill spokesman Joseph M. Cohen. “We have taken steps to address them, and continually work to comply with NASD regulations.”

Merrill failed to promptly display 41 so-called limit orders between November 1997 and December 1999, and to properly fill 70 orders at the best possible prices during the same period, the NASD alleged.

The NASD’s “limit order” and “best execution” rules seek to make sure that customers get the best possible stock prices. “These are serious violations because they involve the handling of customer orders, though they weren’t way beyond the pale,” said NASD Regulation Executive Vice President Steve Luparello.

Limit orders, which are placed by customers at a specific price rather than at the prevailing market price, must be immediately displayed when they improve on the best available quotes. They account for two-thirds of all quotes on the New York Stock Exchange and the Nasdaq Stock Market.

The NASD has filed about 60 cases in the last two years for limit-order display violations, including charges against Prudential Securities Inc. and Lehman Bros. last month. Prudential, the sixth-largest U.S. brokerage, agreed to pay a $10,000 fine, and Lehman, the 12th-largest, a $37,000 fine.

An SEC report in May found that many firms fail to promptly display customer limit orders, and that these practices often go undetected and unpunished because of lax oversight by stock and options markets.

Best-execution rules require firms to seek the best possible prices for customers while filling their orders as quickly, reliably and inexpensively as possible.

Securities and Exchange Commission Chairman Arthur Levitt has said many firms fail to get the best possible prices for customers when they internally match orders from their own inventory.

Merrill “internalized” most of the 70 orders that were cited for best-execution violations, Cohen said. The firm internally matches the majority of all its customer orders, he said.

Merrill, as part of the settlement, neither admitted nor denied the allegations.

The NASD, in other allegations Wednesday, also contended that Merrill failed to adequately try to avoid markets in which the buying price equals or exceeds the selling price, conditions known as “locked” and “crossed” markets, which can delay trading.

The brokerage also “engaged in a pattern” of reporting trades late to Nasdaq, and failed to adequately report customer short-selling of borrowed stock on the expectation that its price will fall, the NASD alleged.

The NASD said Merrill has taken steps to address its shortcomings in these areas.