SEC Says Merrill Lynch's Poor Internal Controls Caused "Mini-Flash Crashes"

Chris Gaetano
Published Date:
Sep 27, 2016
2010  flash crash

While certainly not as dramatic as the 2010 flash crash where markets lost, then partially regained, roughly one trillion dollars within the span of a few minutes, the SEC said that poor internal controls at Merrill Lynch caused a series of mini-flash crashes, for which the company has agreed to pay $12.5 million. 

By law, Merrill Lynch needed to have controls in place that prevented the entry of erroneous orders and orders that would exceed appropriate credit or capital thresholds. These controls, said the SEC, were set too high for them to be ineffective. It pointed to one stock where the controls would only trip when an order of 5 million share or more was placed, but noted the stock only traded around 79,000 shares per day. The SEC said that, as a result, Merrill Lynch was directly responsible for a number of wild price swings between 2012 to 2014. On two occasions, according to the SEC, 99 percent of a company's entire stock value was wiped due to the firm's activities. 

“Mini-flash crashes, such as those caused by Merrill Lynch, can undermine investor confidence in the markets,” said Andrew Ceresney, Director of the SEC Enforcement Division.  “It is essential that broker-dealers with market access have reasonable controls to prevent erroneous orders that disrupt trading.”

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