Eric Schneiderman for Attorney General

More Dark Pool Investigations Under Way, Says New York’s Top Cop

May 18, 2016

As published in Bloomberg News on February 1, 2016.

Additional actions are likely against private trading venues run by some of Wall Street’s biggest banks, the nation’s top securities regulator and New York state’s attorney general said today as they announced record settlements with two global banks over their so-called dark pools.

Solidifying their oversight of these trading platforms, the U.S. Securities and Exchange Commission and New York Attorney General’s office announced that Barclays Plc and Credit Suisse Group AG would pay more than $154 million in all to settle allegations that they misled investors about how their venues were managed.

New York Attorney General Eric Schneiderman and the SEC’s enforcement director, Andrew Ceresney, said their agencies continue to focus on such venues, where about 20 percent of shares in the U.S. change hands.

“We do have ongoing investigations” into dark pools, Schneiderman said at a Manhattan news conference announcing the settlements, without providing further details. Ceresney declined to comment on any active investigations. “This is an area where both of our institutions are focused,” Ceresney said.

Barclays will pay $70 million, split evenly between the two enforcers, the largest fine levied on a dark pool operator, the SEC said in a statement. Credit Suisse will pay $84.3 million, according to the SEC. That payment includes $24.3 million to the SEC for disgorgement and interest, with the remainder shared evenly between the two authorities.

The dispute centered on whether the banks disclosed enough to their clients about trading in their dark pools. Barclays misrepresented to clients how it monitored its dark pools for high-frequency trading, according to the SEC’s statement. Credit Suisse systematically routed orders to its own dark pool, but told clients that it didn’t prioritize one trading venue over another, Schneiderman’s office said.

“These cases mark the first major victory in the fight against fraud in dark pool trading that began when we first sued Barclays: coordinated and aggressive government action, admissions of wrongdoing, and meaningful reforms to protect investors from predatory, high-frequency traders,” Schneiderman said in a statement. “We will continue to take the fight to those who aim to rig the system and those who look the other way.”

Independent Consultant

Barclays agreed to settle the charges by admitting that it misled investors and violated securities laws, according to the SEC statement. The London-based bank also agreed to install a third-party consultant to report to the SEC and New York Attorney General how the firm manages certain aspects of its dark pools business.

“Barclays is pleased to have reached agreement with both the SEC and the New York Attorney General to conclude their investigations concerning our U.S. equities ATS practices and Market Access controls,” Barclays’s spokesman Mark Lane said in a statement e-mailed on Sunday after details of the settlements became public.

Zurich-based Credit Suisse didn’t admit or deny wrongdoing in the settlement, which involved two of its trading platforms, Crossfinder and Light Pool. “We are pleased to have resolved these matters with the SEC and the New York attorney general,” Nicole Sharp, a bank spokeswoman, said in a statement on Sunday.

“These largest-ever penalties imposed in SEC cases involving two of the largest ATSs show that firms pay a steep price when they mislead subscribers,” Ceresney said in the statement.

The private trading venues are the first to be sanctioned by Schneiderman, who almost two years ago began investigating whether U.S. stock exchanges and Wall Street dark pools provide improper advantages to high-frequency traders. He sued Barclays in June 2014, alleging it lied to customers about what high-frequency trading firms were doing inside its platform in an effort to expand the venue’s business.

Dark Pools

Dark pools sprung up in the 1980s to give market participants the ability to trade big blocks of stock without tipping off other traders. Over the years, they have garnered a greater portion of U.S. equity volume, accounting for almost 20 percent of daily trading. Hosted by some of the world’s biggest banks, dark pools allow traders to keep their offers to buy and sell stocks largely private.

The settlements will effectively establish the New York attorney general as an enforcer in the business of private trading venues. Under the settlement, Barclays is acknowledging that the attorney general had jurisdiction under the Martin Act, a New York law that gives him broad powers to pursue white-collar crime.

For the SEC, the record dark-pool penalties serve as a counterpoint to critics who’ve said it has been lax in overseeing the U.S. equities market. In 2014, an SEC official publicly rebutted criticism that the agency wasn’t doing enough in the era of light-speed trading after the Schneiderman investigation began.

“The SEC will continue to shed light on dark pools to better protect investors,” SEC Chairman Mary Jo White said in the statement detailing the settlement.

White announced plans for greater oversight of stock trading in a June 2014 speech. The high-profile cases to date have focused not on the trading itself, but on disclosures and practices by those who cater to the firms.

In August, Investment Technology Group Inc. agreed to pay $20.3 million for operating a proprietary trading desk that used knowledge of customers’ requests to trade for its own benefit, among other infractions. Last January, UBS Group AG paid $14.4 million for lack of disclosures about how its dark pool operated.