“This is a case about fraud and deceit by one of the world’s largest banks.” – NY Attorney General

It seems that every other month we are writing a note about another scandal that has rocked the market structure world.  The Barclays dark pool case brought by the NY Attorney General yesterday is another black eye for our industry and another example of our broken market structure.  The case is really a case about trust.  Barclay’s is accused of violating that trust and is now most likely going to pay a steep price for that violation. We won’t recap the entire case (you can read it here  ) but we would like to point out a couple of the key accusations in the Barclays case:

– Barclays liquidity profiling service was essentially a sham with numbers that were inaccurate and not updated.

– Barclays’ representations about its order routing practices were false and misleading. ​

– Barclays disclosed detailed, sensitive information to major high frequency trading firms in order to encourage those firms to increase their activity in Barclays’ dark pool.

The HFT community is likely to try to distance themselves from this case and try to isolate this as a banking/brokerage issue. They will likely say it has nothing to do with them.  But when you read the AG’s case, it becomes readily apparent that what Barclay’s was trying to do was hide the bad behavior of their HFT clients from their institutional clients.  How does the HFT community defend these statements made by the NY AG:

–          Barclays has operated its dark pool to favor high frequency traders. 

–          At the same time that Barclays represented to clients that it is working to keep them safe from predatory high frequency trading tactics, Barclays supplied high frequency trading firms with advantages over more traditional investors trading in its dark pool. 

–          Barclays provided detailed information regarding the structure and composition of its dark pool to high frequency trading firms, including information about the identity and trading activity of other traders in the pool.  

–          Tradebot Systems had historically been, and was at that time, the largest participant in Barclays’ dark pool, with an established history of trading activity that was known to Barclays as “toxic.” 

Barclay’s is accused of deceiving their own institutional clients to benefit their own high frequency trading clients.  While HFT firms are not the accused in this case, their fingerprints are all over the case.   We wonder why it took so long for Barclays to be exposed?  We also wonder what other (if any) dark pools are engaging in similar behavior to Barclays?  We wonder if our regulators have any clue what goes on in the dark?  If it wasn’t for the efforts of the NY Attorney General and a few Barclays insiders, it is likely that Barclays behavior would have not been exposed.  We think it long overdue that the SEC proposes some stringent disclosure rules for the dark pools.  They can start by dusting off the 2009 proposal “Regulation of Non-Public Trading Interest” which was never approved.

Trust has once again been shattered by some firms who don’t seem to care about the overall health of our equity market. The real story here is that if our market structure wasn’t so complex and filled with conflicts of interest, firms like Barclays would have never even had the opportunity to engage in this type of behavior.  The Barclays case yet again proves that our market structure is broken and in desperate need of repair.