First high profile HFT firms sued directly and indirectly!!!

In today's FT: Top NY securities regulator sues Barclays over ‘dark pool’:

New York’s top securities regulator has sued Barclays alleging the UK bank favoured high-speed traders using its “dark pool” trading venue while misleading institutional investors.
Eric Schneiderman, the state attorney-general, said Barclays had expanded its dark pool, Barclays LX, to one of the biggest off-exchange venues “by telling investors they were diving into safe waters . . . Barclays’ dark pool was full of predators – there at Barclays’ invitation”.

The lawsuit, which alleges the bank violated New York’s powerful Martin Act, is seeking an unstated amount of damages and restitution.
Dark pools allow investors to trade large blocks of shares anonymously, with prices posted publicly only after deals are done. They were created as a way for institutional investors to place large orders without disadvantaging themselves by signalling to the wider market any market-moving trades.
Regulators, including the Securities and Exchange Commission, are concerned that dark pools have grown too quickly – to about 50 venues – without supervision or transparency and have pledged to increase oversight.
Barclays said: “We take these allegations very seriously. Barclays has been co-operating with the New York attorney-general and the SEC and has been examining this matter internally.”
The bank pulled a $1.5bn debt offering on Wednesday after news of the lawsuit emerged.
The lawsuit is the latest legal setback for the UK bank, which was embroiled in the Libor rate-fixing scandal and recently resolved claims that one of its traders had manipulated the London gold fix.
According to the lawsuit filed in New York on Wednesday, Barclays allegedly falsified marketing materials to institutional investors concerning its “surveillance” system called Liquidity Profiling, which it told investors enabled it to identify predatory trading and ban “toxic” traders.
In the marketing document, the bank removed the identity of the dark pool’s largest customer, named on Wednesday as high-frequency trading firm Tradebot, whose trading Barclays had categorised as “toxic”, to minimise the appearance of high-speed traders, the lawsuit said. Tradebot, which could not be reached for comment, is not accused of any wrongdoing.
In an email discussing the removal of Tradebot one Barclays trader said: “I had always liked the idea that we were being transparent, but happy to take liberties if we can all agree.”
The UK bank also falsely claimed it did not favour its own dark pool when routing client orders to trading venues, the lawsuit alleges. One director was fired and another resigned after Barclays changed statistics in a client presentation that showed 75 per cent of all orders were routed to its dark pool despite being required to get the best price for the trade. The version shown to an investor was changed to 35 per cent.
It is the first action by Mr Schneiderman’s office since he announced in March his concerns over high-speed trading. The state attorney-general has opened an inquiry into whether US stock exchanges and other trading platforms had given high-speed traders an unfair advantage over rivals. Six high-frequency trading firms have been subpoenaed as part of its investigation.
Carl Levin, a senior Democratic senator from Michigan and chairman of the Senate permanent subcommittee on investigations, said action was needed to end conflicts of interest in the US stock market.
“The behaviour described in this complaint would put a bank’s financial interest in marketing its dark pool and profiting by providing access to predatory high-speed traders ahead of the interests of investors,” Mr Levin said.
SEC chairman Mary Jo White announced a series of proposals to overhaul market structure this month and highlighted her concerns about the lack of transparency in dark pools, suggesting new rules to increase disclosures would follow.
Ms White also recommended that dark pools register with the Financial Industry Regulatory Authority, Wall Street’s self-appointed regulator, to increase oversight.

 

It's not surprising to me, given that dark pools are now executing lots of small trades, rather than the blocks they were supposedly created to trade. It seems to me that if you're an institution trying to move a big block, your intentions get broadcast anyway on today's dark pools (as they would on an exchange), but in the case of dark pools it's a system no one but the insiders understand (along with, possibly, a few top HFT customers).

Then there's the issue of potential information leakage to other parts of the dark pool owner, or its "affiliates". (Did everyone forget the Pipeline scandal so quickly?)

I think all trades should take place on independent, lit exchanges, unless the trade is a genuinely large block (say $1 million+ in value) between bona fide asset managers.

 

mkt a giant sleight of hand show. i c it