Credit Suisse and Barclays have agreed to pay a record $154m to settle investigations by regulators into their share trading venues known as “dark pools”.
Barclays will pay $70m, the largest ever penalty for a dark pool operator, with the fine split evenly between the Securities Exchange Commission and New York attorney-general’s office. The fine also settles a legal battle brought against the bank by the NY attorney-general in June 2014.
Credit Suisse Securities will pay $60m, with half going to each regulator, as well as an additional $24.3m in disgorgement — a fine designed to make the bank pay back any wrongfully earned income.
It comes after heightened scrutiny of dark pools — private trading venues designed to allow investors to trade large numbers of shares without moving the price against them — by US regulators. More than a third of daily US trading is executed away from public exchanges.
“These cases mark the first major victory in the fight to combat fraud in dark pool trading and bring meaningful reforms to protect investors from predatory, high-frequency traders,” said attorney-general Eric Schneiderman.
“This effort, which began when we first sued Barclays, includes co-ordinated and aggressive government action which forced admissions of wrongdoing from the parties. We will continue to take the fight to those who aim to rig the system and those who look the other way.”
In early 2014, the attorney-general’s office launched its “Insider Trading 2.0” initiative, aiming to ensure fairness in electronic trading markets, prompted by the rise of high-frequency trading — the topic of Michael Lewis’s bestselling book Flash Boys.
The settlements are the largest since Investment Technology Group, an agency broker, was hit with a $20.3m fine by the SEC in August. In January, UBS paid more than $14m to settle allegations about inadequate disclosures over its dark pool.
Barclays admitted to making material misrepresentations to investors about its platform, called Barclays “LX”, including how it monitored its venue for high speed, predatory trading, according to the statement. An independent monitor will conduct a review of the bank’s electronic trading business, with a view to further reform.
Credit Suisse did not admit wrongdoing as part of the settlement. The NY attorney-general said the bank misled investors using its Crossfinder and Light Pool platforms. According to the settlement, Credit Suisse told clients that it did not preference any trading venue over another. However, the bank has been found to have prioritised Crossfinder, its own dark pool, over others, regardless of the quality of execution, the attorney-general’s statement said.
Crossfinder is the second-largest dark pool, according to data from the Financial Industry Regulatory Authority. Barclays’ LX is the eighth largest.
Credit Suisse and Barclays declined to comment.
“Dark pools have a significant role in today’s equity marketplace, and the firms that run these venues must ensure that they do not make misstatements to subscribers about their material operations,” said Andrew Ceresney, director of the SEC’s enforcement division.
(Published by Financial Times - January 31, 2016)