Barclays at center of dark pool lawsuit as government officials bear down

The European Parliament’s financial markets lawmakers began to take a dim view of the use of dark pools along with the practice of high frequency trading last year, with Germany’s BaFIN being among the first of the regulatory authorities within the European Union member states to set forth a restriction on it.

The main European Commission itself then embarked on a series of consultations and government-level rulings on how to put a stop to this practice, whilst American proprietary trading desks continued to make hay, as well as Australian and Singaporean authorities actually recognizing dark liquidity as a genuine part of the financial landscape, its legislature on the subject actually permitting it as a regulated methodology.

Today, discourse in Europe on the subject of dark liquidity has taken a futher step, this time in the form of a lawsuit from New York Attourney General Eric Schneiderman gainst British financial giant Barclays which charges the bank with fraud relating to the marketing and operation of its equities dark pool, Barclays LX.

Mr. Schneiderman’s filing against the bank asserts that Barclays falsified marketing material which was supposed to show investors about how, and for whose benefit, Barclays operates its dark pool, demonstrating a “disturbing disregard for its investors in a systematic pattern of fraud and deceit”.

The complaint states Barclays purported to protect clients from “aggressive or predatory high-frequency trading” in its dark pool, but in fact actively sought them out and offered them advantages to others trading in the pool. The bank has said it is co-operating with Schneiderman and federal regulators, and is also conducting an internal enquiry. Goldman Sachs’ dark pool Sigma X has also come under regulatory scrutiny. On Tuesday, the US bank agreed to pay the Financial Industry Regulatory Authority (Finra) an $800,000 fine for mis-pricing almost 400,000 trades in Sigma X, and it returned $1.67 million to disadvantaged customers, according to a Finra statement.

As well as certain regulators casting a dim view on the use of dark pools and high frequency trading, some companies in the jurisdiction have voluntarily added a ‘latency floor’ in order to make their liquidity unattractive to such participants, as exemplified last year by EBS having taken this approach, therefore absolving itself of any potential regulatory probes on the matter.

Whilst the practice of dark liquidity usage continues to prevail, regulatory contempt such as this does not appear to have dissuaded FX trading desks, as a number of sources, including Euromoney, cite that the use of dark pools in FX is on the increase.


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