New York’s state attorney general is suing Barclays over dark pool trades.
Eric Schneiderman alleges Barclays ‘dramatically’ increased the market share of its dark pool through a series of false statements to clients and investors about how, and for whose benefit Barclays operates the unit.
Contrary to Barclays’ representations that it has implemented special safeguards to protect clients from ‘aggressive’ high frequency trading, Barclays is accused of operating its dark pool to favour this very type of trader.
‘The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,’ Schneiderman said.
‘Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays’ dark pool was full of predators – there at Barclays’ invitation.’
Dark pools allow investors to trade large tranches of shares anonymously to minimise market impact, with prices quoted once deals are done.
The lawsuit alleges Barclays falsified marketing material to show the extent and type of high frequency trading in its dark pool.
It cites an example where Barclays removed from a marketing document intended for institutional investors the dark pool’s then-largest participant – a high frequency trading firm Barclays knew engaged in predatory behaviour in the dark pool.
In response, one employee is said to have stated: ‘I had always liked the idea that we were being transparent, but happy to take liberties if we can all agree.’
The lawsuit also highlighted Barclays heavy promotion of a services called Liquidity Profiling, described by the bank as a system that tracked every trade in Barclays’ dark pool to protect against predatory traders.
According to the bank, the system rated traders based on the objectives and characteristics of their behaviour.
However, Schneiderman claimed this Liquidity Profiling service was ‘misrepresented’ and failed ‘to provide many of the benefits marketed with the service’.
A number of former Barclays employees assisted Schneiderman’s investigation.
‘No regulator – no matter how broad their authority – can succeed on its own,’ said Schneiderman said. ‘I want to personally thank those that have courageously reported wrongdoing to our office and encourage others to do the same.’