U.S. regulators looking into UBS, Deutsche Bank speed trading operations

FRANKFURT/ZURICH Tue Jul 29, 2014 8:18am EDT

Logos of Deutsche Bank AG are seen in Tokyo July 16, 2014.  REUTERS/Toru Hanai

Logos of Deutsche Bank AG are seen in Tokyo July 16, 2014.

Credit: Reuters/Toru Hanai

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FRANKFURT/ZURICH (Reuters) - Germany's Deutsche Bank and Switzerland's UBS said they were caught up in an inquiry by U.S. regulators, who are looking into whether broker-run stock exchanges gave an unfair advantage to high-frequency traders.

The investment banks, which said on Tuesday that they were cooperating with inquiries, also faced class action suits that alleged they violated U.S. securities laws, allowing high-speed traders to make a profit at the expense of institutional investors, such as pension funds and insurance companies.

UBS said in its second-quarter earnings report it was responding to inquiries from U.S. authorities over the operation of its 'dark pool'.

Deutsche Bank, which also reported earnings on Tuesday, said it had received requests for information from certain regulatory authorities related to high frequency trading but did not give further details.

Dark pools are broker-run trading venues that let investors trade shares anonymously and only make trading data available afterwards, reducing the chance of information leaking about trade orders.

The lack of transparency has drawn the scrutiny of regulators, concerned that brokers and proprietary trading firms that use aggressive high-frequency trading strategies have an unfair advantage over other clients.

Barclays is facing allegations in the U.S. that it lied to clients about its 'dark pool'. The bank has urged the dismissal of the lawsuit in New York.

Credit Suisse, one of the biggest players in 'dark pools', said last week it is working with regulators to stamp out potential abuses in alternative trading exchanges.

Barclays' dark pool, known as LX, is the second most active alternative trading system in the United States after Credit Suisse's, according to regulatory data.

UBS said the inquiries came from various U.S. authorities, including the Securities and Exchange Commission (SEC), the New York Attorney General and the Financial Industry Regulatory Authority (FINRA), adding that the regulators were pursuing similar investigations industry-wide.

"These inquiries include an SEC investigation that began in early 2012 concerning features of UBS’s ATS (alternative trading system), including certain order types and disclosure practices that were discontinued two years ago," UBS said.

The suits mainly allege that the defendants favoured high frequency trading firms at the expense of other market participants, UBS said, adding that the litigation was at a very early stage.

Reuters reported earlier this month that the SEC was seeking information on 10 registered broker dealers as part of an ongoing investigation into high frequency trading strategies.

The SEC told its staff in late March that it was interested in seeing any tips, complaints, or referrals that they receive concerning the brokers and high frequency trading.

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