Goldman Sachs fined over trade rule violations in dark pool

WASHINGTON Tue Jul 1, 2014 11:56am EDT

A Goldman Sachs sign is seen above the floor of the New York Stock Exchange shortly after the opening bell in the Manhattan borough of New York January 24, 2014.  REUTERS/Lucas Jackson

A Goldman Sachs sign is seen above the floor of the New York Stock Exchange shortly after the opening bell in the Manhattan borough of New York January 24, 2014.

Credit: Reuters/Lucas Jackson

WASHINGTON (Reuters) - Wall Street's self-funded regulator fined a unit of Goldman Sachs (GS.N) on Tuesday over pricing rule violations stemming from its "dark pool," marking the latest in a string of recent enforcement actions targeting anonymous trading platforms.

Goldman Sachs Execution & Clearing L.P. agreed to pay an $800,000 fine and settle the case with the Financial Industry Regulatory Authority, or FINRA, without admitting or denying the charges.

FINRA said that Goldman's dark pool SIGMA-X executed nearly 400,000 trades between July 29 and August 9 in 2011 that were at inferior prices, in violation of investor protection rules designed to ensure customers are getting the best deal.

In addition, FINRA said that between November 2008 and August 2011, the bank did not have adequate policies in place to protect stock quotes.

In addition to paying the fine, FINRA said Goldman has since returned $1.67 million to harmed customers.

"FINRA has no tolerance for firms that fail to have robust policies and procedures to protect against trading through protected quotations," said Thomas Gira, the executive vice president of FINRA's Market Regulation unit.

A spokeswoman for Goldman Sachs declined to comment beyond the details spelled out in the settlement with the regulator.

FINRA's settlement with Goldman on Tuesday comes less than a week after the New York Attorney General filed a lawsuit against LX, a rival dark pool operated by Barclays (BARC.L).

That case alleges more grave violations, including claims that Barclays lied to investors by giving high-speed traders unfair advantages, even though the bank had pledged to police the pool for "predatory" trading.

Barclays is fighting the lawsuit and has retained the high-profile law firm Wilmer Cutler Pickering Hale and Dorr LLP to assist in its defense.

The U.S. Securities and Exchange Commission, meanwhile, is also in the midst of conducting a variety of probes into dark pools and other alternative trading systems over potential pricing concerns.

Such venues allow investors to trade stocks anonymously and report trade data after the deals are done, which can be helpful for investors who do not wish to tip their hand to the market about large trades.

But critics say they are harmful to price discovery. That's because the rise of dark pools has reduced trading on exchanges that publicly quote prices, potentially eroding market quality.

The SEC recently settled a case with another dark pool called Liquidnet over charges that the venue improperly shared confidential client data in marketing materials.

SEC Chair Mary Jo White also recently announced that agency staff is working to craft new rules that would require dark pools and other brokerages that execute trades internally to disclose more information about how they operate.

FINRA also last month for the first time starting a new reporting initiative that gives the public more data about the trading volumes of dark pools.

(Reporting by Sarah N. Lynch; Editing by Susan Heavey)

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