New York Attorney General Eric Schneiderman has sued Barclays, alleging that its dark pool operated to favor high frequency traders.
The suit is surprising, because it does not make the usual generic complaints about dark pools: That they are opaque, that they provide perverse incentives for trading.
The suit alleges very specific instances of outright fraud by Barclays Equities Electronic Trading Division, which operated the dark pool, and that they committed these frauds as part of an effort to become the largest dark pool in the U.S., which was a principal goal of that division.
Specifically, Schneiderman is alleging that Barclays:
1) falsified marketing material purporting to show the extent and type of high frequency trading that occurred in their dark pool;
2) falsely marketed the percentage of aggressive high frequency trading activity in its dark pool;
3) routed a disproportionately high percentage of client orders to its own dark pool;
4) senior execs presented falsified information to a client in an effort to mask Barclays' biased order routing practices;
5) gave information on its dark pool to high frequency traders, including info on the identity and trading activity of other traders
6) committed fraud in connection with the marketing and operation of its dark pool
7) gave clients a false understanding of their exposure to predatory high frequency trading.
Notice the language: Committed fraud. Falsified information. Gave clients a false understanding. Falsified marketing materials.
These are very serious allegations.
It's especially shocking that Barclays gave information on its dark pool to high frequency traders, including info on the identity and trading activity of other traders.The whole point of a dark pool is complete confidentiality! Talk about a violation of trust!
Barclays was supposed to be protecting participants in its pool from perceived predatory behavior, but Schneiderman says Barclays has never prohibited a single firm from participating in its dark pool, no matter how toxic or predatory its activity was determined to be.
Schneiderman goes out of his way to say that he has had the cooperation of former employees. He quotes a former senior Barclays Director: "There was a lot going on in the dark pool that was not in the best interests of clients."
Schneiderman wants Barclays to:
1) provide an accounting of all fees, revenues, or other compensation received from Barclays' Equities Electronic Trading division;
2) pay damages;
3) disgorge all amounts obtained in connection with any violations of the law;
4) make restitution of all funds obtained from investors.
Two issues stand out to me:
1) this is a LAWSUIT (technically it's a summons), not a settlement. Is this because there was no attempt at a settlement, or both sides could not agree?
2) does this kind of activity alleged exist at other dark pools? Are clients elsewhere being misled or deceived? If perverse incentives existed at Barclays, did they not likely exist elsewhere?
One bigger issue: Will this decrease dark pool volume? It's roughly 40 percent of overall trading now, and the SEC has clearly indicated that is a concern. There are roughly 45 dark pools in operation...will any of them close as a result of this?