The lawsuit was lodged yesterday by Attorney General Eric Schneiderman who in a press briefing laid out a damning catalogue of allegations against the bank.
He said Barclays “dramatically increased the market share of its dark pool through a series of false statements to clients and investors about how, and for whose benefit, Barclays operates its dark pool”.
The office added that, contrary to representations it implemented special safeguards to protect clients from “aggressive” or predatory high-frequency traders, Barclays is accused of operating its dark pool to favour high-frequency traders.
“The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,” Schneiderman said.
“Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays’ dark pool was full of predators – there at Barclays’ invitation.”
Barclays acknowledged the lawsuit, with a spokesman saying: “We take these allegations very seriously. Barclays has been cooperating with the New York Attorney General and the SEC and has been examining this matter internally. The integrity of the markets is a top priority of Barclays.”
Dark pools are privately run securities exchanges designed largely for the use of institutional investors which want to make trades, without alerting the wider market.
While they are intended to be less transparent than public stock exchanges, Barclays had assured investors it was monitored and that any predatory traders would be identified and barred.
The fact this didn’t happen is key to the Attorney General’s allegations. Barclays allegedly heavily promoted a service called Liquidity Profiling, which the bank claimed was a surveillance system which tracked every trade in its dark pool in order to identify predatory traders and to hold them accountable for engaging in predatory practices.
Toxic traders
Contrary to this, it is alleged that Barclays never prohibited any trader from participating in its dark pool and even assigned “safe” ratings to its own traders which were engaged in high-frequency trading and would otherwise have been deemed “toxic”.
Rather than protecting investors, it is alleged Barclays in fact ran the dark pool to favour more predatory traders who were invited by the bank to trade there and provided with systematic advantages over other traders.
The lawsuit is the latest in a long line of actions against the bank. Last month it was fined £26m by UK regulators after one of its traders was found to have manipulated the daily gold price fix.
In April, it agreed to a $280m (£167m) settlement with the US Federal Housing and Finance Authority (FHFA) for misleading mortgage lenders Fannie Mae and Freddie Mac. And in 2012 it was fined £290m by UK regulators for attempting to manipulate LIBOR.
