BARCLAYS SUED BY US ATTORNEY OVER ALLEGED 'DARK POOL' FRAUD

The New York attorney general has sued Barclays, accusing the British bank of misrepresenting the safety of its US-based alternative trading system, or "dark pool", to investors.

Eric Schneiderman said on Wednesday that contrary to its own assurances the bank had operated its dark pool system to favor high-frequency traders – firms that use complex computer systems to buy and sell huge volumes of stocks in milliseconds to take advantage of often tiny movements in share prices.

“The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,” Schneiderman said. “Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays’ dark pool was full of predators – there at Barclays’ invitation.”

Schneiderman is currently conducting a sweeping investigation into broker-run trading systems known as dark pools at a time when some experts calculate high-frequency trading accounts for the majority of US stock market trading.

Scrutiny of the practice intensified following the March release of best-selling author Michael Lewis' book, Flash Boys: A Wall Street Revolt, which argues that high-frequency traders have rigged the stock market by taking advantage of systems unavailable to others.

Barclays' dark pool, LX, was the second largest alternative trading system in the US for the week of 2 June, according to data from the Financial Industry Regulatory Authority, trading more than 282m shares during the period.

Schneiderman alleges that Barclays made false claims about the extent and type of high-frequency trading in its dark pool. In one example he said the bank removed the name of a high-frequency trading firm, then the fund’s largest participant, from its marketing material. The attorney general claims the bank knew the trader engaged in predatory behavior. In response to the change, Schneiderman said, one employee stated: “I had always liked the idea that we were being transparent, but happy to take liberties if we can all agree.”

“Barclays heavily promoted a service called Liquidity Profiling, which Barclays claimed was a ‘surveillance’ system that tracked every trade in Barclays’ dark pool in order to identify predatory traders, rate them based on the objective characteristics of their trading behavior, and hold them accountable for engaging in predatory practices,” Schneiderman’s office said in a statement.

Contrary to those promises, the attorney general alleges that:

• Barclays has never prohibited any trader from participating in its dark pool, regardless of how predatory its activity was determined to be.

• Barclays did not regularly update the ratings of high-frequency trading firms monitored by Liquidity Profiling.

• Barclays “overrode” certain Liquidity Profiling ratings – including for some of its own internal trading desks that engaged in high-frequency trading – by assigning safe ratings to traders that were otherwise determined to be toxic.

Contrary to Barclays’ claims that it protects clients from aggressive or predatory high-frequency trading in its dark pool, Schneiderman alleges that Barclays operates its dark pool to favor high-frequency traders and has given them systematic advantages over others trading in the pool in order to attract them.

Schneiderman said the investigation was aided significantly by a number of former Barclays’ employees. Barclays was not immediately available for comment.

This article was written by Dominic Rushe in New York and Jill Treanor, city editor, for The Guardian on Thursday 26th June 2014 00.40 Europe/London