There can be no doubt that Barclays, as one of the world’s largest FX dealers, is a financial tour de force, and stands tall in London’s vast interbank FX sector.
Recently, the bank has been the subject of various lawsuits and fiscal penalties for transgressions which include manipulation of FX benchmarks, a matter which six banks have so far been issued with a cumulative $4.3 billion in fines, but with Barclays’ fate yet to be decided by global regulatory authorities and law enforcement agencies.
This week, the financial giant has gone head to head with New York Attorney General Eric Schneiderman on a legal matter relating to high frequency trading (HFT) and the use of dark liquidity.
Attorney General Schneiderman alleges that the bank misled users of its private trading venue, commonly referred to as its ‘dark pool’ and that the company understated how many other dark pool users were high frequency traders seeking to exploit small information advantages.
The bank vehemently denies these allegations, and this week has begun to take further steps to tackle the complaint leveled against it, the bank’s aim being to ensure that a judge dismisses the complaint out of court.
Investor protection is paramount in North American law, and New York State is no exception, with the Martin Act having been incorporate into the legal system in 1921, empowering the Attorney General to pursue any bank, broker or asset manager which misrepresents or omits material information when promoting or providing securities.
Dark pools by their very nature are anonymous, therefore certain behavior within dark pools could be categorized under the Martin Act, and unlike federal US law, there is no requirement to prove that any misrepresentations or omissions were intential, that investors rely on them or that any actual damage to other traders or investors occurred.
New York’s senior counsels have used this in prior cases. One example is former Attorney General Elliot Spitzer having won plaudits from small investors when he revealed evidence that bank research analysts were publicly recommending the purchase of stocks that they privately showed disinterest in.
This resulted in a $1.4 billion fiscal penalty from 12 investment banks, which at the time was a record figure. Knowing the legitimacy of the Martin Act, very rarely do banks attempt to tackle it in court, instead paying any penalty that is issued.
On this basis, it is unusual that Barclays took the initiative to counter Attorney General Schneiderman’s complaint. Mr. Schneiderman’s perspective is that marketing materials for the dark pool provided customers with a false sense of security, in particular customers which were aiming to avoid very aggressive methods of HFT.
Demonstrating that orchestrating the Martin Act against firms in the manner which has previously been conducted is not the open and shut case that many firms and legal counsels have considered it to be.
According to a report by the Financial Times, Justice Shirley Werner Kornreich expressed scepticism because the complaint did not identify anyone who had been hurt. “You’re saying there were marketing materials. How do I know? Who saw these marketing materials? Who were they given to? By whom? This is a fraud claim, but there are absolutely no specifics,” she said.
In reply, state lawyers suggested she was setting up unfair hurdles. “That’s the point of the Martin Act, it’s about enforcing the law against practices, not about any one particular client,” said Chad Johnson, who heads the investor protection bureau.
Should Barclays succeed in overturning this case, it will set a precedent which could change the way algorithmic and high frequency trading is conducted in the United States.