BofA Said to Abandon Market-Making Unit Amid Industry Scrutiny

May 21, 2014 4:47 pm ET

May 21 (Bloomberg) -- 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.

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., which view the orders as valuable to trade against. Critics such as Kor Group LLC’s Dave Lauer say the practice, known as payment for order flow, may harm the market by keeping those orders off public exchanges.

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.

Equities Execution

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.

The $22 trillion U.S. equities market has been under heightened scrutiny since publication of “Flash Boys” by Michael Lewis, whose book alleged 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.

Last year, E*Trade Financial Corp. put a market-making unit that handled orders for its customers up for sale. The online brokerage sold G1 Execution Services LLC to Susquehanna International Group LLP for $75 million. The deal 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 customer orders.