Yesterday morning the SEC charged the Boston-based LEVEL ATS (eBX LLC) with failing to protect its customers’ confidential trading information, and failing to disclose to all subscribers that it allowed an outside firm to use that information. The SEC fined eBX LLC $800,000. Level ATS is owned by Citigroup, Credit Suisse, Barclays, and Bank of America.

First off, know that there is a conference call hosted by Level at 8:30am EST. The dial-in is 855-225-2059. The call is open to all who dial in. Just ask to be connected to the Level ATS conference call when you dial in. We will listen to the call, and if appropriate ask some questions. Please do the same. And know that there are certainly great people at LEVEL ATS, as well as many other firms, who will be adversely affected by this SEC action and announcement.

The Facts (as per the SEC) are here.

–          The bank consortium-owned dark pool (partially owned by Citigroup), Level ATS, uses the infrastructure of Lava, who at the time was also owned by Citigroup.

–          Lava in addition to operating Level’s ATS infrastructure also operated its own smart order router (SOR) – Colorbook.

–          Level claimed to its subscribers that it did not share any information about any customer order flow with any party outside Level. It also represented that to regulators.

–          From 2008-2011 Level did actually share customer order flow information with parties outside Level – namely Lava.

–          Lava states they used this information (retained memory) to make its Colorbook router “smarter”; Lava would route more of its order flow through Level, as it was able to see Level order book information, including resting orders. This resulted in higher fill rates for Lava customers.

–          Level completed between 30-70% of IOC orders routed to it by LAVA, while only 1-2% of IOCs routed from other brokerage firms’ SORs.

–          Level did not disclose this new relationship with LAVA, and its information sharing, although it was discussed internally.


Level’s issue is not, in our mind, as egregious as the issues surrounding another prominent dark pool, and its fall from grace (Pipeline), which hid a proprietary trading arm, which had insider information and know-how, AND traded against that customer flow.

The issue with Level seems to be more about disclosure of routing relationships.  Certainly Lava clients benefitted from having orders more “smartly routed” to Level than other firms’ SOR clients. They were not harmed. But the issue also is whether Level, whom Citigroup partially owned, unfairly gave another Citigroup division access and information not available to other Level subscribers? I guess we will find out more tomorrow first-hand on Level’s conference call.

This morning we take the opportunity to discuss conflicts and inconsistencies in our markets in general.

Both stock exchanges and dark pools have interesting ownership arrangements. Witness:


–          Direct Edge is owned by Citadel, Knight, and Goldman Sachs

–          BATS is owned by Tradebot, Getco, Citigroup, Credit Suisse, Morgan Stanley, Deutsche Bank, and JP Morgan.

–          Level ATS is owned by Citigroup, Credit Suisse, Barclays, and Bank of America.

–          BIDS is owned by Barclays, BofA, Citi, Credit Suisse, Deutsche Bank, Goldman,  Knight, Morgan Stanley, UBS, and even Bloomberg.

–          Most bulge bracket brokerage firms also own their own dark pools, in addition to stakes in consortium-owned pools.


While the last few weeks has brought a flurry of attention on the stock exchanges – for their releasing market data to colocated clients before the public, as well as conflicted order types and data feeds, little attention has been paid to dark pools and their transparency.

–          Who owns stakes in which dark pools?

–          How do their matching engines work?

–          Do they only have resting orders, or are they also seeded with certain players who respond to pings and IOIs?

–          Who gets the prices on the bid? The offer? The midpoint? The ¼ and ¾ points? All of the other sub-penny price points?

–          Who sees the flow in the dark pools?

–          Do owners of the pools get favorable viewing standpoints? Favorable economics?

–          Is there payment for order flow there too?

And while stock exchanges have a regulatory burden (we call it a duty) to disclose their workings, and even order types (we hope all of them), ATSs have no such burden. Do ATSs disclose exactly how their matching logic works to their clients and the public? All of it? Is that fair for the stock exchanges? Is it fair for the investing public? Since the SEC proposed regulating non-public interest (dark pools) in 2009, nothing has been done on this front; the proposal has yet to be approved nearly three years later. I suppose we will keep waiting and hope it all works out for the best?

We truly have taken one of the most elegantly simple processes – that of matching real buyer with real sellers – and perverted it to the detriment of our capital system.

Think about it.