Deutsche Bank Ends Dark Pool Probe with $37M Settlement to the NY AG and the SEC, as well as a $3.25M Fine to FINRA

Deutsche Bank AG (DB) has agreed to pay $37M to conclude the US government probes into its handling of trades in dark pool trading venues. The German bank also admitted that between 1/2012 and 2/2014 traders were misled about the way the it ranked its SuperX dark pool and other trading venues. The government settlements were reached with the US Securities and Exchange Commission and the New York Attorney General. Meantime, the Financial Industry Regulatory Authority fined Deutsche Bank $3.25M, noting “deficient disclosures” involving dark pool trading.

According to the NY AG and the SEC, Deutsche Bank told investors that it ranked its dark pools according to a number of factors, including transaction costs. However, some its technology purportedly wasn’t functioning correctly which means that the order-routing choices were not organized according to the factors noted. The German bank also is accused of disregarding its own method for ranking dark pools and placing its own dark pool in a preferred tier.

The government believes that between 1/2012 and 2/2013, Deutsche Bank employed outdated dark-pool rankings to decide how to route orders rather than updating its ranking model on a regular basis.The bank discovered the technical glitch in 2013, but did not fully correct the issue and waited until the following year to notify clients.

As of 2016’s third quarter, Deutsche Bank’s SuperX was the third-largest dark pool with 4.7 billion shares traded during the period. Credit Suisse- (CS) and UBS Group AG (UBS) -operated dark pool venues were the only ones to handle more trades in that time.

Dark Pools
By retaining more orders in-house when it comes to dark pools, banks can lower the fees to stock exchanges. Dark pools, which are stock trading venues that are privately run, allow sellers and buyers to trade shares more anonymously. It also allows them to deal in order sizes larger than what traditional exchanges permit. However, dark pools have come under closer investigation in recent years over concerns that high-speed professional traders may be gaining unfair advantages in these venues.

The SEC’s order in Deutsche Bank’s case accuses the German bank of making materially misleading statements and omissions about the Dark Pool Ranking Model Feature on its SuperX+ order router. The model was supposed to assess the liquidity and execution quality of venues where the orders were sent.  The regulator said that a coding error caused Deutsche Bank to update its ranking model just once in two years. Because of this, claims the Commission, at least two dark pools were given inflated rankings, affecting where the SuperX order router sent millions or orders.

Meantime, FINRA said that it fined Deutsche Bank Securities $3.25M because the bank did not give all of its Alternative Trading System clients the same information about its features and services, as well as committed other violations. An ATS executes securities trades for brokerage firms and other traders. One requirement is that the ATS operator has to disclose certain information in a Form ATS to the SEC. FINRA said that that the German bank represented in its form that all ATS users would receive the same exact access to all of its features and services. However, the SRO contends, Deutsche Bank did not fully or timely disclose to all users the “availability of Certain ATS services and features.” Because of this, some clients, including high-frequency trading firms, were able to ask for and get services that other clients may not have known they also could receive. FINRA also accused Deutsche Bank of not having adequate supervisory procedures to make sure these disclosures were given to clients.

Despite settling, however, Deutsche Bank has not denied or admitted to the FINRA charges.

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Read the SEC Order in the Deutsche Bank Case (PDF)

 Read the NY Attorney General’s press release in the Deutsche Bank Case 

Finra Fines Deutsche Bank $3.25M for Deficient Disclosures Concerning the Operation of Its ATS, FINRA, December 15, 2016