Coverage: Barclays, Credit Suisse to pay $154 million over dark pools

Barclays and Credit Suisse agreed to pay a record-breaking, combined $154.3 million to settle investigations into share trade venues known as dark pools, officials announced Sunday.

Bradley Hope and Jenny Strasburg of The Wall Street Journal had the day’s news:

Credit Suisse Group AG and Barclays PLC agreed to pay $154.3 million combined to settle investigations by regulators into their “dark pools,” officials said.

The record settlements are with the U.S. Securities and Exchange Commission and the New York attorney general. The agencies announced the agreements in news releases Sunday, after The Wall Street Journal published a report about the impending settlements.

“These cases mark the first major victory in the fight against fraud in dark-pool trading that began when we first sued Barclays: coordinated and aggressive government action, admissions of wrongdoing, and meaningful reforms to protect investors from predatory, high-frequency traders,” said Eric T. Schneiderman, the New York attorney general, in a statement.

“We will continue to take the fight to those who aim to rig the system and those who look the other way,” he said.

The SEC’s enforcement chief, Andrew Ceresney, said in a separate statement that the penalties show “firms pay a steep price when they mislead subscribers.” The SEC alleged that Barclays and Credit Suisse repeatedly failed to police their trading venues, gave some clients inaccurate information about the venues and violated SEC rules aimed at ensuring market fairness and accurate pricing of securities.

The SEC “will continue to shed light on dark pools to better protect investors,” the agency’s chairman, Mary Jo White, said in the statement.

A Credit Suisse spokeswoman said the bank was “pleased to have resolved these matters” with the regulators.

Sarah Lynch of Reuters explained what dark pools are and why they carry such hefty penalties:

Dark pools are trading venues that differ from public exchanges because orders are not visible to other traders until they are executed.

The lack of pre-trade price information is designed to help institutional investors trade large blocks of shares without the market moving against them.

The pending settlement with Barclays marks a dramatic end to a high-stakes public legal battle between the bank and New York state Attorney General Eric Schneiderman.

Schneiderman’s office filed a lawsuit against Barclays in June 2014 alleging fraud in its dark pool.

The lawsuit alleged that the bank told investors it had a “liquidity profiling” service that was meant to let traditional investors opt out of trading with high-speed traders.

In fact, Schneiderman’s office said, the program was riddled with “exceptions” that favored high-speed traders.

The bank also disseminated trading analysis materials to investors that intentionally deleted its largest and most aggressive trader, Schneiderman’s office said.

The lawsuit came in the wake of the furor over Michael Lewis’s book “Flash Boys,” which claimed the stock market is rigged in favor of high-frequency traders.

Barclays lost a bid to have the case dismissed last year.

Joe Rennison of the Financial Times detailed each company’s wrongdoing:

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.

We will continue to take the fight to those who aim to rig the system and those who look the other way

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.