New York state Attorney General Eric Schneiderman filed a civil suit Wednesday against Barclays that alleged the large British bank mislead investors about how it operated its "dark pool" — a stock-trading venue outside major exchanges — and about how it routed its clients' stock trades.
The suit alleges that Barclays "falsely represented that it routed client orders for securities to trading venues" and did not specifically favor its own dark pool. Instead, Schneiderman claims, Barclays put a "disproportionally" high percentage of clients to its dark pool. The suit also claimed that Barclays' marketing materials were "falsified" because they did not show how much frequency traders were using the firm's dark pool, Barclays LX. Barclays, according to the suit, told clients that less than 10% of the trading was "aggressive," and told a high frequency trading firm that it was actually 25%.
"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," Schneiderman said in a statement.
Dark pools, technically known as "alternative trading systems," are venues for stock trading where prices for stocks are not publicly posted. One purpose for dark pools run by the large brokerages is to provide a venue where large clients like pension funds or hedge funds can make big trades.
A Barclays spokesperson did not respond to a request for comment.
The suit alleges that Barclays "secretly gave high frequency trading firms information and other advantages over other clients trading in the dark pool," including "detailed information regarding the structure and composition of its dark pool" that allowed those traders "to maximize the effectiveness of their aggressive trading strategies in the dark pool."
The civil suit uses New York's Martin Act, which gives the state wide berth to prosecute financial firms civilly for misrepresentations, even if they don't have the bad intent required for making a fraud claim. The law has allowed many New York attorneys general, most notably Eliot Spitzer, to go after Wall Street.
The complaint says the attorney general's investigation was aided by "a number of high-level former Barclays insiders."
Barclays' "dark pool" had the second largest share trading volume of any of the more than 40 dark pools that trade stocks in the U.S., with over 282 million shares traded in the week ending June 2, according to data collected by FINRA, the securities industry self-regulator. At times, it's been the largest dark pool in the country. Dark pools account for nearly 40% of all U.S. equities trading.
The increasingly fractured market structure for trading stocks has come under regulatory scrutiny, with the Justice Department investigating some high-speed traders. The Securities and Exchange Commission chair Mary Jo White said while announcing a set of market structure reforms in a speech earlier this month that she is "concerned by the lack of [transparency] in these dark venues." Schneiderman's office also has reportedly subpoenaed several high speed traders and requested information from some banks that run dark pools.