The SEC has charged Barclays and Credit Suisse, in separate cases, over dark pool violations, leading to collective fines of more than $150 million – the largest ever penalty of this kind issued by the SEC.
Dark pools are alternative trading systems, offering private forums for institutional investors to trade securities. Named for their lack of transparency, they allow investors to trade large volumes of shares while keeping the process hidden, therefore avoiding a wider affect on the markets.
The SEC charged the two banks with violating federal securities laws surrounding dark pools. Barclays admitted wrongdoing and will pay $35 million apiece to the SEC and to the New York Attorney General’s office.
Credit Suisse agreed to settle the charges, paying $30 million to the SEC in penalties, $30 million to the New York Attorney General’s office, and $24.3 million in repayments and prejudgement interest to the SEC.
SEC Chair Mary Jo White said: “These cases are the most recent in a series of strong SEC enforcement actions involving dark pools and other alternative trading systems.”
She added: “The SEC will continue to shed light on dark pools to better protect investors.”
The charges mainly relate to the misleading of dark pool subscribers. According to the SEC allegations, Barclays suggested that its liquidity profiling feature was continuously policing dark pools for predatory trading and that surveillance reports were running weekly, when in fact, neither was accurate.
Barclays is also accused of failing to adequately disclose the fact that it would override liquidity profiling, moving subscribers from the most aggressive categories to the least aggressive. This meant that those traders that elected not to interact with aggressive subscribers ended up interacting with them anyway.
Credit Suisse is accused of misrepresenting its Crossfinder dark pool, suggesting that it used a feature, Alpha Scoring to characterise subscriber flows objectively and transparently, on a monthly fact. In fact, the SEC found, the feature used subjective elements and was neither transparent nor conducted monthly.
According to the SEC, Credit Suisse suggested to clients that the Alpha Scoring system would remove opportunistic traders from its electronic communications system, Light Pool. However the feature was not running throughout the first year of Light Pool being in operation, and subscribers deemed to be opportunistic were given the opportunity to continue trading using a different system ID.
The bank also allegedly failed to treat subscriber order information confidentially, and transmitted confidential order information out of the dark pool to other Credit Suisse systems without informing subscribers. External high-frequency trading firms were also alerted to orders submitted for execution, without subscribers being informed, it is alleged.
Joseph Sansone, co-chief of the SEC’s market abuse unit, said: “Two Credit Suisse alternative trading systems failed to operate as advertised, and failed to comply with numerous regulatory requirements over a multi-year period.”
He added: “The Commission’s action today sends a strong message that the agency will continue to scrutinise ATSs for compliance with the securities laws.”
Andrew Ceresney, director of the SEC’s enforcement division, said: “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.”
He continued: “These largest-ever penalties imposed in SEC cases involving two of the largest alternative trading systems show that firms pay a steep price when they mislead subscribers.”
