Merrill Lynch pays $65k penalty

Merrill Lynch Equities (Australia) Limited has paid a penalty of $65,000 to comply with an infringement notice relating to a breach of the Corporations Act 2001. 

The Australian Securities and Investments Commission’s Markets Disciplinary Panel (MDP) found that on 8 August 2011, a Merrill Lynch Designated Trading Representative (DTR) entered an order into the Australian Securities Exchange (ASX) Trading Platform for the sale of 6985 of a Rio Tinto Tailor-Made Combination (RIO TMC), at a net price of one cent each, which saw the company’s share price fall by 98 per cent. 

The Relevant Order comprised an instruction to sell 6985 units, being 698,500 ordinary shares in Rio Tinto, and buy 6985 $77 call option contracts that expired on 27 October 2011 (RIOWV7). 

However the Relevant Order was erroneous, because the Merrill Lynch DTR had intended to enter an order to sell one RIO TWC, comprising an instruction to sell one unit (100 ordinary Rio Tinto shares) and to by one RIOWV7, at a net price of $69.85. 

The execution of the Relevant Order resulted in 337 Market Transactions for the sale of RIO at prices from $71.40 to $1.43, of which 162 Market Transactions for the sale of 270,600 RIO executed at prices from $1.91 to $1.43 through trading of the RIO Sell Orders with Bids in the market for RIO, although not necessarily in price/time priority (Relevant Transactions). 

But for the entry of the Relevant Order, the RIO Sell Orders would not have been generated and would not have been able to trade in the market for RIO at prices between $1.91 and $1.43, as described above. 

The execution of the Relevant Order resulted in a significant decrease in the price of RIO which did not accurately reflect material information relevant to the price of RIO in that the price of RIO decreased by $69.99 or 98% below the last price at which RIO had traded immediately prior to the entry of the Relevant Order, and the market for RIO varied significantly having regard to the market for RIO which existed immediately before and after the Relevant Order. 

The error was identified by Merrill Lynch’s trading desk and Merrill Lynch compliance monitoring. At approximately 11.36 am (approximately 12 minutes after the order was entered), Merrill Lynch contacted the ASX, advised that the Relevant Order had been entered in error and requested that the error be referred to the ASX Dispute Governors Committee (DGC). The DGC subsequently convened and recommended that all Market Transactions in RIO at $64.35 or below be cancelled. 

ASX directed the cancellation of all Market Transactions in RIO which had been executed between 11.24 am and 11.27 am, at or below $64.35. One hundred and seventy two of the 337 Market Transactions, including 10 Market Transactions executed against opposing Orders for RIO TMC and each of the 162 Relevant Transactions, were cancelled pursuant to ASX’s direction. A further 28 Market Transactions for RIO, which executed at prices above $64.35, were cancelled with counterparty agreement.  

By reason of Merrill Lynch’s entry of the Relevant Order into the ASX Trading Platform on 8 August 2011, the MDP had reasonable grounds to believe that Merrill Lynch contravened MIR 5.9.1, and thereby contravened subsection 798H(1) of the Corporations Act 2001 which requires compliance with the market integrity rules. The MDP issued Merrill Lynch with an infringement notice specifying a penalty of $65,000.