Bank of America Corp. is dismantling an electronic market-making unit created last year to serve the lender’s Merrill Lynch wealth-management division, said two people with knowledge of the decision.
Increased regulatory scrutiny of U.S. equity markets and managers’ concerns for the potential perception of a conflict of interest killed the project, said the people. The desk advanced to a testing phase before being abandoned in recent weeks and two executives hired to run it, Jonathan Wang and Steven Sadoff, were told to seek new jobs within the firm, the people said, requesting anonymity because the matter is private.
Businesses such as the shuttered Bank of America unit usually execute equity orders internally, rather than sending them to the public stock market. Critics including Kor Group LLC’s Dave Lauer say the practice may cause harm by keeping some supply and demand private, distorting prices. Bank of America’s decision coincides with a renewed examination by regulators of whether trading in the $22 trillion U.S. stock market is fair.
For Bank of America, “this is either not a profitable business anymore or they don’t want to deal with the regulatory scrutiny that’s coming,” said Joe Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. “It definitely tells you they’re concerned and maybe they’re hearing things we haven’t.”
Brokerages serving individual investors typically don’t execute clients’ orders and prefer to sell that right to third-party specialists such as Citadel LLC and KCG Holdings Inc. (KCG), which view the orders as valuable to trade against. The Bank of America unit was created to execute retail orders from another part of the company.
Sadoff and Kerrie McHugh, a spokeswoman for Charlotte, North Carolina-based Bank of America, declined to comment on the change in strategy. Wang didn’t return calls seeking comment. Wang worked at Citadel from 2005 to 2011, according to his LinkedIn profile. Sadoff was at KCG’s predecessor, Knight Capital Group Inc., from 2002 to 2013, according to his LinkedIn profile.
Bank of America’s decision doesn’t necessarily indicate similar businesses will also close, Saluzzi said. Citadel, KCG, Citigroup Inc. and UBS AG are among the biggest firms that execute stock trades for retail brokerages.
Like Bank of America, E*Trade Financial Corp. used to own a business that handled equity orders for its customers. E*Trade sold the unit, G1 Execution Services LLC, for $75 million last year to Susquehanna International Group LLP. The sale was announced two months after E*Trade said the Financial Industry Regulatory Authority was looking into how G1 Execution and another division, E*Trade Securities LLC, routed orders.
The fairness of stock trading has been under unprecedented scrutiny since the March 31 publication of “Flash Boys,” the Michael Lewis book that argues the stock market is rigged. The Securities and Exchange Commission is reviewing its rules and New York Attorney General Eric T. Schneiderman has opened an investigation into whether certain services at exchanges and other venues give high-frequency traders an unfair advantage.
Parts of the business Wang and Sadoff created will be used by the bank’s equities execution services and client solutions teams, said one of the people, who added that the firm’s existing automated market-making unit remains intact. Bank of America, the second-largest U.S. lender, acquired Merrill Lynch in 2009.