Merrill Lynch will pay $7 million as part of a settlement with the Securities and Exchange Commission over the use of squawk boxes, the intercom systems that sit on the desks of traders, brokers and sales people and are commonly used to bark out orders and other internal communications.
Under the settlement, which the S.E.C. announced Wednesday, Merrill Lynch agreed to a censure but did not admit or deny the S.E.C.’s allegations that it violated securities laws from 2002 to 2004 for having “inadequate policies and procedures” for controlling access to institutional customer order flow through the squawk boxes.
The settlement relates to a broader series of “squawk box” cases, in which the S.E.C. sued former employees of Merrill and other brokerages, as well as day traders.
In its complaint, the S.E.C. said that Merrill failed to control the distribution of the squawk boxes. It alleged that from 2002 to 2004, several Merrill Lynch retail brokers, who had no reason to have the boxes, illegally permitted day traders to hear confidential information regarding unexecuted orders by Merrill Lynch’s institutional customers.
The brokers would place their telephone receiver next to the squawk box for the entire trading day and collect a fee from the day trader, the S.E.C. said. The day traders used the customer order information to “trade ahead” of the institutional customer orders and, in many instances, profited from price movements that were caused by the market effects of the order, according to the complaint.
Merrill Lynch, which Bank of America acquired on Jan. 1, has agreed to take steps to protect customer order information transmitted on the squawk boxes, the S.E.C. said.
