FULL TEXT HFT Dark Pool Complaint Online in NYS v. Barclays

June 26, 2014

On June 25, 2014, New York State Attorney General Eric Schneiderman filed a Complaint naming defendants Barclays PLC and Barclays Capital Inc.with fraud arising from the operation of a dark pool and other attendant electronic trading practices. READ the FULL TEXT COMPLAINT

NOTE: The a Complaint merely contains allegations and the defendants are presumed innocent unless and until proven guilty in a court of law.

As alleged in the Complaint:

1. This is a case about fraud and deceit by one of the world's largest banks. Barclays operates in fifty countries with particularly large business operations in New York and London. The facts in this case concern a major business division in Barclays' New York office,the Equities Electronic Trading division. In that division, Barclays operates a private securities trading venue known as a "dark pool." From 2011 to the present, Barclays embarked on a business strategy to dramatically increase the market share of its dark pool, with the goal of making it the largest dark pool in the United States. Barclays accomplished this through a series of false statements to clients and the investing public about how, and for whose benefit, Barclays operates its dark pool. In short, contrary to Barclays' representations that it implemented special safeguards to protect clients from "aggressive," "predatory," or "toxic" high frequency traders, Barclays has operated its dark pool to favor high frequency traders. Barclays has actively sought to attract such traders to its dark pool, and it has given them advantages over others trading in the pool.

2. As discussed in further detail below, Barclays' wrongdoing includes the following:

a) Barclays falsified marketing material purporting to show the extent and type of high frequency trading in its dark pool. That marketing material was false and misleading because, among other things, Barclays intentionally excluded from the material the dark pool's then-largest participant - a high frequency trading firm Barclays knew engaged in predatory behavior in the dark pool. Internally, Barclays acknowledged that it was "taking liberties" with the truth by suppressing the disclosure of this high frequency trading firm, but decided to falsify the analysis in order to "help ourselves";

b) Barclays falsely marketed the percentage of aggressive high frequency trading activity in its dark pool, asserting to clients and to the investing public that less than 10% of the trading activity in the pool was "aggressive," while at the same time secretly indicating to at least one high frequency trading firm that the level of such trading activity was at least 25%;

c) Barclays made a series of false representations to clients about its "Liquidity Profiling" service. Barclays claimed that its Liquidity Profiling service "analyzes each interaction in the dark pool" to "protect [clients] from predatory trading," to" continuously police . . . trading activity" and to "maintain quality flow" in the dark pool. In reality, and undisclosed to clients, Barclays failed to provide those services, because it (i) failed to remove known predatory traders from its dark pool; (ii) failed to regularly profile traders in its dark pool; (iii) granted liberal "overrides" to high frequency trading firms and to Barclays' own internal trading desks (which themselves employ "aggressive" trading strategies), in order to make them appear less "toxic" than they really are; (iv) failed to apply the protections of Liquidity Profiling to a significant portion of the trading in its dark pool; and (v) misled clients as to how Liquidity Profiling actually evaluated traders;

d) Barclays falsely represented that it routed client orders for securities to trading venues in a manner that did not favor Barclays' own dark pool. While representing that Barclays "treat[s] all venues the same based on execution quality," Barclays, in fact, routed a disproportionately high percentage of client orders to its own dark pool. When a detailed analysis of Barclays' order routing practices was conducted for a major institutional investor - showing that Barclays was routing and executing the vast bulk of this client's sampled orders to Barclays' own dark pool - Barclays senior executives directed that a written presentation to that client include falsified information, in an effort to mask Barclays' biased order routing practices; and

e) At the same time that Barclays marketed its dark pool to institutional investors as offering protection from high frequency traders, Barclays secretly gave high frequency trading firms informational and other advantages over other clients trading in the dark pool. For instance, Barclays provided detailed information regarding the structure and composition of its dark pool to high frequency trading firms, including information about the identity and trading activity of other traders in the pool. Such information would allow high frequency trading firms to maximize the effectiveness of their aggressive trading strategies in the dark pool. Barclays did not generally provide such information to its brokerage clients. Barclays also charged high frequency trading firms virtually nothing to trade in its dark pool.

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