ITG Inc. and affiliate AlterNet Securities will pay $20.3M to resolve Securities and Exchange Commission charges accusing them of running a secret trading desk and misusing dark pool subscribers’ confidential trading information. As part of the settlement, ITG admitted to wrongdoing.
According to the regulator, even though it told the public it was an “agency-only” broker with interests that were not in conflict with the interests of customers, the firm ran Project Omega, an undisclosed proprietary trading desk, for over a year. The SEC’s probe found that even though ITG said that it protected dark pool subscribers’ trading information, for eight months, the trading desk accessed feeds of order and execution data and used the information to put into place its strategies for high-frequency algorithmic.
The SEC’s order said that Project Omega traded about 1.3B shares—including 262 million with subscribers in its own dark pool, known as POSIT—and used an algorithmic strategy that allowed it to make trades based on the live information about orders that sell-side subscribers had sent to algorithms for handling. The Commission found that in 2010, the algorithmic trading strategy, called the Facilitation Strategy, was set up to identify open orders of sell-side subscribers. Project Omega would then open positions on the same side of the market in which orders had been identified and then close these positions in its own dark pool. It would then trade against the orders that were detected. This allowed the undisclosed dark pool to grab the complete “bid-ask spread” between the NBBO.
To be able to garner this spread, Project Omega had subscribers that it traded with in POSIT configured to aggressively trade so that they would “cross the spread” and trade with the undisclosed dark pool. Omega made sure that sell-side subscribers were configured to make aggressive trades in POSIT.
The SEC said that Project Omega had another main strategy, the Heatmap Strategy. This involved trading in other markets that were based on the live feed of confidential data about the customer executions happening in different pools.
According to SEC Enforcement Division Director Andrew J. Ceresney, by setting up a secret trading desk and misusing confidential information about customer orders and trading information, ITG abused its customers’ trust and engaged in behavior that has led to the sanctions it must now pay. ITG’s $20.3 million settlement includes an $18 million penalty, $256,532 of prejudgment interest, and disgorgement of $2,081,034.
Dark pools are privately owned. These securities trading venues do not publicly display trading orders, which is unlike what happens on public stock exchanges. Because of this, big blocks of shares can be traded anonymously until the trade has been completed. This lowers the risk of price movement, which would normally place a trader at a disadvantage.
Read the SEC Order (PDF)
UBS Settles SEC Dark Pool Case for $14M, Stockbroker Fraud Blog, January 16, 2015
SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations, Institutional Investor Securities Blog, June 6, 2014