New York state and federal officials have announced that two major financial institutions have agreed to settlements related to the operations of their ‘dark pools’. Barclays fully admitted that it violated securities laws, while Credit Suisse is neither admitting nor denying allegations.
The settlements to which both financial institutions have agreed include federal and state charges according to which investors use the alternative trading systems (ATS) which are also known as ‘dark pools’.
Barclays has admitted to breaking the securities law and will be paying $70 million, while Credit Suisse will be paying $60 million to regulators and an additional $24.3 to the Securities and Exchange Commission (SEC) for disgorgement.
Investors are typically using ATSs as a means to mask the size of their orders. With the ‘dark pools’ offered by a variety of financial institutions not being regulated as exchanges, risks are opened for investors, such as front running.
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The settlements which U.S. authorities have reached with Barclays and Credit Suisse represent the largest fines that have been paid in relation to ‘dark pools’. The U.S. Securities and Exchange Commission and the New York state attorney general are the chief investigators of the matter.
According to the allegations, Barclays and Credit Suisse have misled clients using their dark pools, claiming that there is a protection against front running from high-frequency trading (HFT) shops. According to the charges Credit Suisse has executed 117 million illegal sub-penny orders in its Crossfinder dark pool. No specific information has been given about the dealings in Barclays LX.
The lawsuit is another result of the bestselling book by renowned author Michael Lewis, Flash Boys. High-frequency trading (HFT) shops have been using for years a number of dark pools and exchanges to front run the orders of regular traders by sending small orders to ‘probe’ the market for bigger chunks of shares.
The chairman of the SEC Chair Mary Jo White stated: “These cases are the most recent in a series of strong SEC enforcement actions involving dark pools and other alternative trading systems.”