And whatever the outcome of Mr. Schneiderman’s case, which charges Barclays, the big British bank, with fraud in its operation of a dark pool that secretly catered to high-frequency traders, the suit has already prompted an exodus of customers from the Barclays trading operation.Two-faced bank?
The suit should also be a signal to clients of all dark pools, which account for an estimated 40 percent of total trading volume, according to the attorney general’s complaint. Those customers are mostly large institutions, like pension funds, asset managers and fund companies, which hold and manage the savings of millions of Americans.
Particularly juicy is the notion that Barclays pledged transparency, protecting "large institutional investors from these very predators," but did the opposite, according to Schneiderman's complaint, writes Stewart:
While representing to institutional clients that only 6 percent of the trading in its dark pool could be classified as “aggressive,” an internal document described it as “50 percent aggressive.” Though the bank promised to “police” aggressive trading, it did little or nothing to protect clients, the complaint claims.And who were the suckers?
And far from shunning predatory traders, Barclays courted them, the suit contends. It allowed high-frequency traders to connect directly to its servers; it processed orders so slowly that high-frequency traders had plenty of opportunity for latency arbitrage; and it charged high-frequency traders little or nothing to trade.
As one former Barclays director told the attorney general, far from protecting its institutional clients, the bank was “almost ensuring that every counterparty would be a high-frequency trading firm.” He added, “It’s almost like they are building a car and saying it has an air bag and there is no air bag or brakes.”
One way Barclays made money was to execute trades in its dark pool, rather than on someone else’s trading platform. But that meant it had to have counterparties in the pool for its large institutional clients, or the trade wouldn’t execute and would have to be routed elsewhere.Barclays says it's cooperating with Schneiderman but hasn’t responded to the complaint. It looks like the AG has some juice; as stated in the complaint:
Who were the counterparties with that kind of liquidity? The high-frequency traders, who love being on the other side of trades with big institutions. “They’re like widows and orphans” to high-frequency traders, Professor [John] Coffee said, because they’re so slow and easy to take advantage of.
The Attorney General’s investigation has been aided significantly by a number of high-level former Barclays insiders, each of whom was in a position to observe much of the conduct described in this Complaint.