Credit Suisse Securities (USA) LLC (CS) and Barclays Capital Inc. (BARC) will settle their respective cases brought against them by the U.S. Securities and Exchange Commission and the New York Attorney General. The firms are accused of violating federal securities laws will running dark pools. At issue is whether the banks disclosed enough information to clients about the trading that took place in their dark pools.
Barclays will pay $35M to the SEC and $70M to the NY AG. It has admitted wrongdoing in the Commission’s case. The bank had said that a Liquidity Profiling feature in its LX dark pool was going to “continuously police” the alternative trading system. The firm also stated that it would conduct weekly surveillance reports to look for order flow that was toxic.
Instead, contends the SEC, Barclays did not continuously regulate the dark pool with the tools it promised it would use nor did it conduct the surveillance runs. The firm also failed to properly disclose that it occasionally overrode the Liquidity Profiling feature when it transferred subscribers from categories that were the most aggressive to the ones that were the least aggressive. Because of this, said the regulator, subscribers that chose to block trading with subscribers that were aggressive ended up dealing with them anyways. Barclays is also accused of misrepresenting the kinds and amounts of market data feeds that it utilized to determine the Best Bid and Offer in the dark pool.
Meantime, Credit Suisse, which is not denying or admitting to the charges against it, will pay $84.3M I total—$24.3M to the SEC as disgorgement and prejudgment interest, along with a $30M penalty, and $30M to the NY AG.
In the Credit Suisse case, the SEC is accusing the firm of stating that says its Crossfinder dark pool utilized the Alpha Scoring Feature to characterize the order flow of subscribers every month and did so in a way that was transparent and objective. Instead, said the Commission, the Alpha Scoring feature came with subjective elements, did not categorize subscribers monthly, and lacked transparency.
Credit Suisse purportedly claimed that Alpha Scoring would be able to find traders who were opportunistic and eradicate them from LightPool when the scoring system wasn’t for the first year that the pool was in operation. Also, subscribers who were deemed opportunistic could still trade as long as they used other system IDs while direct subscribers could keep trading.
The SEC said that Credit Suisse did not tell subscribers that its order routing system prioritized its Crossfinder venue over other venues, nor did it notify them that the dark pool was systematically prioritized over other venues during certain phases of dark-only routing.
The SEC says that the firm accepted and ranked more than 117 million illegal sub-penny orders in its Crossfinder dark pool and allowed them to go through. Also, subscriber data was not treated confidentially and was transmitted from the dark pool into other Credit Suisse systems.
At a news conference in New York City announcing the settlements, NY Attorney General Eric Schneiderman said that the state was conducting other probes into dark pools.
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Barclays, Credit Suisse Charged With Dark Pool Violations, SEC, January 31, 2016