Damning allegations about the way Barclays treated customers in its "dark pool" trading operations sparked a sharp fall in the bank's share price on Thursday.
Shares in Barclays – whose new chief executive Antony Jenkins is trying to bolster the bank's reputation following the 2012 Libor-rigging crisis – were the biggest fallers in the FTSE 100, tumbling 5% to 218p, and wiping almost £2bn off its stockmarket value.
The fall came after a lawsuit filed overnight by the New York attorney general Eric Schneiderman, who accused Barclays of "a systematic pattern of fraud and deceit" over the way it operated its dark pool private trading system.
Schneiderman said the dark pool – a means by which traders can remain anonymous and which was publicised in a recent book on Wall Street by Michael Lewis– was used to favour high-frequency traders. These are the professional investors who use complex computer systems to buy and sell huge volumes of stocks in milliseconds to profit from tiny movements in share prices.
Barclays issued a statement in which it "noted" the allegations about the dark pool, officially known as an alternative trading system. Many big banks operate such systems and Barclays' is called LX Liquidity Cross.
"The complaint makes a number of allegations, including fraud and deceptive practices. Amongst other relief, the complaint seeks unspecified monetary damages and injunctive relief," Barclays said. "Barclays will update the market, if appropriate, in due course," the bank added.
Sandy Chen, banking analyst at Cenkos, believes that the US authorities might be considering injunctions on dark pool trading – and suggested that Barclays' banking licence in New York could be reviewed. He said: "If attorney general Schneiderman executes this according to plan, we would expect him to review Barclays Libor non-prosecution agreement and Barclays New York banking licence in due course." She added: "Barclays' response noted that the complaint seeks 'injunctive relief'- which we think signals that the New York attorney general and Barclays are already debating whether injunctions on dark pool trading should be imposed," he added.
The bank's run-in with regulators in June 2012 over Libor rigging – for which it was fined £290m – left Barclays with a promise that is would not face prosecution in the US provided it broke no more rules in the next two years. The Libor fine was issued at the end of June 2012.
Referring to the latest allegations, 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. 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 allegations are being made at a time when other European banks are facing action from US regulators, notably BNP Paribas, and when Barclays is also fighting allegations by the City regulator the Financial Conduct Authority that it behaved "recklessly" during a 2008 fundraiding.
The New York attorney general had already been looking at dark pools before the publication of Lewis' book – Flash Boys: A Wall Street Revolt – which illustrated how professional investors could trade more quickly to make profits.