Merrill adds new trading-error policy

Brokers will pay into 'insurance' fund

Jan 7, 2008 @ 12:01 am

By Dan Jamieson

Merrill Lynch has implemented a new policy covering trading errors.

The firm has set up what brokers say is a system of "self-insuring" against mistakes.

Brokers are put into one of four risk groups based on their error rates over the past three years — zero errors, low risk, medium risk and high risk — and pay into a fund based on their category. Higher-risk reps pay more.

As of press time last week, Merrill reps were unsure exactly what they would be paying.

But they'll be charged a set amount each month to cover future trading mistakes, said a Merrill rep in Southern California who asked not to be identified.

Mark Herr, a spokesman for Merrill Lynch & Co. Inc. of New York, declined to comment.

Brokers say the move comes in response to a wage-and-hour suit filed in California against the firm that alleged, among other things, that making brokers pay for errors violated state labor laws. Merrill settled that case in 2005.

Other firms have faced similar suits. Beginning in December, Morgan Stanley began paying for trade errors (InvestmentNews, Dec. 3). Smith Barney did the same in January 2007.

Most Wall Street firms have historically made brokers pay for mistakes out of net pay. That practice has long been a sore point among producers.

Under Merrill's new policy, im-plemented this month, brokers will still pay, although indirectly.

"If you're paying a flat premium that covers all errors, what's your motivation to be extra careful?" asked a Merrill broker based in the Northeast who asked not to be identified.

Dan Jamieson can be reached at djamieson@crain.com.

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