Barclays faces lawsuit over ‘dark pool’ fraud in US

Jun 27 2014, 12:55 IST
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SummaryBank allegedly gave unfair advantage to high-frequency trading clients

The New York state's attorney general has filed a securities fraud lawsuit against Barclays, accusing the British bank of giving an unfair edge to high-frequency trading clients in the United States even as it claimed to be protecting other customers from such traders.

The lawsuit, which relates to Barclays’ LX Liquidity Cross ‘dark pool’ alternative trading system, alleges that the bank promised to get the best possible prices for customers looking to buy or sell shares, but instead took steps that maximised the bank’s profits and executed nearly all of its customers’ stock orders on LX instead of on exchanges or other venues that might have offered better prices.

The New York attorney general’s action is the highest profile case yet to emerge in the US authorities’ efforts to ensure that dealers are not ripping off investors in increasingly automated stock markets.

Dark pools were originally created to allow investors to execute big trades without tipping off the market. But ever-larger volumes of trades have been shunted into dark pools and their critics say the opacity of the markets may be resulting in more investors getting ripped off.

The lawsuit delivers another blow to chief executive Antony Jenkins' efforts to restore the bank's reputation after a series of scandals.

He has said its culture, which has been criticised as “high risk, high reward”, had to change and that systems and controls are improving, but the emergence of past sins are hampering his efforts.

New York attorney general Eric Schneiderman said Barclays told customers who chose to trade in its dark pool that they would be protected from “predatory traders”, which use their speed advantage to deprive other investors of small profits on every trade.

But, in fact, customers were not protected at all, and the bank courted predatory high-frequency traders in part by charging them virtually nothing, Schneiderman alleged.

“Barclays grew its dark pool by telling investors they were diving into safe waters,” Schneiderman said.

“We take these allegations very seriously,” Barclays said in an emailed statement, adding that it was cooperating with the authorities, looking at the matter internally, and that the integrity of markets was a top priority for the bank.

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