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William Byrnes (Texas A&M) tax & compliance articles

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Merrill Lynch Busted by SEC for Tailgating Client Trades

Posted by William Byrnes on March 16, 2011


Merrill Lynch has agreed to pay a $10 million penalty to the Securities and Exchange Commission (SEC) to settle charges that Merrill used information about customer trades to trade on its own behalf—in violation of its customers’ confidences.

According to the SEC, Merrill Lynch operated a proprietary trading desk—its “Equity Strategy Desk” (ESD)—from 2003 to 2005. The desk traded solely on the firm’s account and did not have any responsibility for customer orders.

The SEC says that, although Merrill represented to customers that their trading information would be kept on a need-to-know basis, the ESD had access to and used institutional customers’ information when executing trades on Merrill’s behalf.

The activity that resulted in the SEC investigation is known as “tailgating”—related to the illegal act of “front running.” Front running is the practice of executing proprietary trades using information about pending customer trades to the broker’s advantage. Tailgating is similar to front running, except that the broker executes its own trade after executing the related customer trades.

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