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 |  Subject: Barclays sued over high-frequency trading  Wed Jun 25, 2014 9:57 pm | |
| New York's top law enforcement office Wednesday accused British banking giant Barclays of "fraud and deceit" for operating an alternative trading venue that improperly favored high-frequency trading.
Barclays operates a so-called dark pool, a private electronic venue away from traditional stock exchanges where the size and price of trading orders are not disclosed to participants.
Dark pools are a frequent venue for high-frequency trading, a technique that enables traders using lightning fast computers to execute transactions in milliseconds. Those tactics have raised public concern that high-frequency traders have an improper advantage over other financial market participants.
Barclays falsely told clients and the investing public that it had implemented special safeguards to protect them from "aggressive," "predatory" or "toxic" high frequency traders, the new lawsuit filed by Attorney General Eric Schneiderman charged.
Instead, "Barclays has actively sought to attract such traders to its dark pool, and it has given them advantages over others trading in the pool," the lawsuit alleged. Filed in New York State Supreme Court in Manhattan, the 30-page complaint charged that the bank:
Issued "falsified" marketing material that didn't disclose one of the dark pool's traders was Tradebot, a high-frequency trading firm that "with an established history of trading activity that was known to Barclays as "toxic." The bank acknowledged the omission amounted to taking "liberties" with the truth.
Told clients and the investing public that less than 10% of the trading in its dark pool was conducted by aggressive high-frequency traders, far lower than the actual 25% trading share.
Routed a "disproportionate share" of trading clients' orders to its own dark pool, despite representations that the pool would not get any favoritism.
Secretly gave high-frequency trading firms detailed information about the identity and activity of other traders, and charged the high speed firms "virtually nothing to trade in its dark pool."
The allegations come amid examinations of high-frequency trading by the Securities and Exchange Commission and other investigators. The New York lawsuit is also among the first legal attacks on high-frequency trading since the recent publication of Flash Boys, a book in which author Michael Lewis argued that stock markets are rigged.
"The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,"said Schneiderman. "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."
"We take these allegations very seriously," said Mark Lane, a bank spokesman in New York. "Barclays has been cooperating with the New York Attorney General and the SEC and has been examining this matter internally. The integrity of the markets is a top priority of Barclays."
The new lawsuit is based in part on information provided by what the court complaint described as "former high-level Barclays insiders."
Beginning in 2011, the bank embarked on a rapid expansion to build its dark pool, Barclays LX, into the largest in the U.S. Expanding the trading venue, known internally as "The Franchise," would raise as much as $50 million in new annual revenue, the lawsuit charged.
In order to carry out the expansion, the bank "had to increase the number of orders that Barclays, acting as a broker, executed" in the trading venue, the lawsuit charged. Additionally, the bank allegedly "looked to attract high frequency traders to its dark pool to meet this need."
The effort ultimately succeeded. Barclays LX handled more than 282 million trades during the week of June 2, ranking it as the second-largest dark pool in the U.S., according to data compiled by the Financial Industry Regulatory Authority, a Wall Street self-regulator.
The lawsuit charged that Barclays' marketing materials, media statements and sales meetings with existing and potential clients represented that the bank "provides a safe, transparent trading environment," while providing protection "from the risks of aggressive high frequency traders."
However, a January 2014 analysis the lawsuit said was provided to senior leaders of the bank's equities electronic trading division identified characteristics of more than a dozen high-frequency trading firms that had significant activity in the Barclays dark pool.
One was described as "historically ... very toxic. Another "was described as having (trading activity that) is very toxic, and the client is up-front about this."
Despite Barclays' claims that it policed high-frequency trading to protect other traders from such activity, "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," the lawsuit charged.
http://www.usatoday.com/story/money/business/2014/06/25/ny-ag-lawsuit-barclays/11365909/ |
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