News Column

Barclays investigated over 'dark pool' activities: New York attorney general alleges systematic fraud: Private trading system at bank 'invited predators'

June 26, 2014

Jill Treanor, City editor and Dominic Rushe in New York

Barclays was last night facing a fresh blow to its reputation after receiving a lawsuit over its "dark pool", the specialist trading system publicised by the author Michael Lewis in his latest book about Wall Street.

In the latest setback for the bank as it battles to restore its reputation following the Libor-rigging scandal, the New York attorney general accused Barclays of misrepresenting the safety of its dark pool, a trading system under which trades can be conducted in private.

Eric Schneiderman accused Barclays of "a systematic pattern of fraud and deceit" by operating its dark pool to favour high-frequency traders - firms that use complex computer systems to buy and sell huge volumes of stocks in milliseconds to take advantage of often tiny movements in share prices.

Schneiderman is conducting a sweeping investigation into these trading systems at a time when some experts calculate high-frequency trading accounts for most of US stock market trading.

Scrutiny of the practice intensified following the March release of Lewis's book, Flash Boys: A Wall Street Revolt, which argues that high-frequency traders have rigged the stock market by taking advantage of systems unavailable to others.

Dark pools are a type of private market through which investors can deal without revealing their identities. Barclays' dark pool, LX, is one of the biggest. Recent data shows that in one week in June it traded more than 282m shares.

Barclays said it took the allegations seriously and had been co-operating with the attorney general and other regulators. "The integrity of the markets is a top priority for Barclays," the bank said.

Schneiderman said: "The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit." He added: "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."

The action by the US attorney general comes as Barclays attempts to clean up its public image after the June 2012 fine for Libor rigging which forced out then chief executive Bob Diamond and led to Antony Jenkins being promoted to replace him.

But Jenkins's attempts to show the culture of the bank is changing have been impeded by a number of issues, including a pounds 26m fine last month for failings relating to the way the price of gold is "fixed".

Like others, Barclays is part of a global investigation into the way currencies are priced. It also fighting a pounds 50m fine from the City regulator, the Financial Conduct Authority, over information it disclosed during a fundraising in 2008 that allowed it to avoid a taxpayer bailout.

The FCA says the bank "acted recklessly" but Barclays is contesting the findings, also subject to investigations by the Serious Fraud Office.

Schneiderman alleged Barclays made false claims about the extent and type of high-frequency trading in its dark pool. In one example he said the bank removed the name of a high-frequency trading firm, then the fund's largest participant, from its marketing material. The attorney general claimed the bank knew the trader engaged in predatory behaviour.

"Barclays heavily promoted a service called Liquidity Profiling, which Barclays claimed was a 'surveillance' system designed to hold traders accountable for engaging in predatory practices," Schneiderman's office said in a statement.

The latest accusations by the attorney general allege that:

* Barclays never prohibited any trader from participating in its dark pool, no matter how predatory.

* Barclays did not regularly update the ratings of high-frequency trading firms monitored by Liquidity Profiling.

* Barclays "overrode" certain Liquidity Profiling ratings.

Schneiderman alleged Barclays operated its dark pool to favour high-frequency traders and gave them systematic advantages to attract them. He said the investigation was aided "significantly" by a number of former Barclays employees.


The latest claims are a further blow to Barclays as it fights to restore its reputation in the wake of the Libor-rigging scandal

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Guardian (UK)

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