Move deals another blow to efforts to restore bank's reputation
The New York State's attorney general has filed a securities fraud lawsuit against Barclays, accusing the British bank of giving an unfair edge in the United States to high-frequency trading clients 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 maximized 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.
These probes have been progressing for up to a year, but took on additional urgency in recent months, after best-selling author Michael Lewis released the book "Flash Boys: A Wall Street Revolt" which contends that markets were rigged.
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 and more investors getting ripped off.
Barclays'London-listed shares were down 4.5 per cent at 219.65 pence by 0753 GMT on Thursday, their lowest level since November 2012 and extending their fall this year to 20 per cent.
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 in fact 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. "Barclays' dark pool was full of predators - there at Barclays' invitation."
"We take these allegations very seriously," Barclays said in an emailed statement. It added 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.
Schneiderman is looking at dark pools, which are typically owned by brokers, including all of the big banks, and where participants are anonymous and trading information is hidden until after the trades are completed.
The US Securities and Exchange Commission has also taken an increased interest in issues surrounding dark pools and high-frequency trading. SEC Chair Mary Jo White earlier this month said her agency was developing a series of rules that would seek to make markets more transparent and fair for all investors, and the agency has also stepped up enforcement actions against dark pool operators.
Banks have admitted to bad behaviour in other markets, after probes showed collusion in currency trading and short-term interest rate products, among other areas.
Jenkins took over as Barclays chief executive in August 2012, replacing Bob Diamond who was ousted after the bank was fined for the alleged manipulation of Libor benchmark interest rates.
Jenkins is trying to improve profitability by cutting costs, including the axing of around a quarter of investment bank jobs, while pushing for the change in culture.