(Updates with Barclays, Deutsche Bank, UBS and Credit Suisse
By Karen Freifeld, John McCrank and Steve Slater
NEW YORK/LONDON, June 26 New York's attorney
general has filed a securities fraud lawsuit against Barclays
, accusing the British bank of giving an unfair edge in
the United States to high-frequency traders, while claiming to
be protecting other clients from them.
News of the lawsuit, which relates to Barclays' LX Liquidity
Cross 'dark pool' alternative trading system, drove a 5 percent
fall in Barclays shares on Thursday. It also hit shares in
Europe's Credit Suisse, Deutsche Bank and UBS as traders fretted
about the possibilty they could also be targeted.
The New York State attorney general's lawsuit alleges that
Barclays promised to get the best possible prices for customers
looking to buy or sell shares but instead took steps that
maximized the bank's profits and executed nearly all of its
customers' stock orders on LX instead of on exchanges or other
venues that might have offered better prices.
The action is the highest profile case yet to emerge in the
U.S. authorities' efforts to ensure that dealers are not ripping
off investors in increasingly automated stock markets.
These probes have been progressing for up to a year, but
took on additional urgency in recent months, after best-selling
author Michael Lewis released the book "Flash Boys: A Wall
Street Revolt" which contends that markets were rigged.
Dark pools were originally created to allow investors to
execute big trades without tipping off the market. But
ever-larger volumes of trades have been shunted into dark pools
and their critics say the opacity of the markets may be
resulting in more and more investors getting ripped off.
Barclays' London-listed shares were down 5.2 percent at
218.25 pence by 1155 GMT on Thursday, their lowest level since
November 2012 and extending their fall this year to 20 percent.
Shares in Deutsche Bank were down 2.2 percent, with
UBS and Credit Suisse 1.8 and 2.9 percent
Barclays could suffer a litigation cost of $163 million from
the activities and Deutsche Bank and UBS could face similar
costs from an industry wide investigation, said analysts at
Credit Suisse. They gave no estimate for their own bank.
The lawsuit delivers another blow to Chief Executive Antony
Jenkins' efforts to restore Barclay's reputation after a series
of scandals. He has said its culture, criticised as high-risk,
high-reward, had to change and that systems and controls are
improving, but the emergence of past sins are hampering his
New York Attorney General Eric Schneiderman said Barclays
told customers who chose to trade in its dark pool that they
would be protected from "predatory traders," which use their
speed advantage to deprive other investors of small profits on
every trade. But in fact customers were not protected at all,
and the bank courted predatory high-frequency traders in part by
charging them virtually nothing, Schneiderman alleged.
"Barclays grew its dark pool by telling investors they were
diving into safe waters," Schneiderman said. "Barclays' dark
pool was full of predators - there at Barclays' invitation."
"We take these allegations very seriously," Barclays said in
an emailed statement. It added that it was cooperating with the
authorities, looking at the matter internally, and that the
integrity of markets was a top priority for the bank.
Schneiderman is looking at dark pools, which are typically
owned by brokers, including all of the big banks, and where
participants are anonymous and trading information is hidden
until after the trades are completed.
The U.S. Securities and Exchange Commission has also taken
an increased interest in issues surrounding dark pools and
high-frequency trading. SEC Chair Mary Jo White earlier this
month said her agency was developing a series of rules that
would seek to make markets more transparent and fair for all
investors, and the agency has also stepped up enforcement
actions against dark pool operators.
Banks have admitted to bad behavior in other markets, after
probes showed collusion in currency trading and short-term
interest rate products, among other areas.
NO AIRBAG, NO BRAKES
Jenkins took over as Barclays chief executive in August
2012, replacing Bob Diamond who was ousted after the bank was
fined for the alleged manipulation of Libor benchmark interest
Jenkins is trying to improve profitability by cutting costs,
including the axing of around a quarter of investment bank jobs,
while pushing for the change in culture.
But the bank continues to be dogged by issues around past
conduct, however. Last month it was fined 26 million pounds
($43.8 million) for past failures in internal controls that
allowed a trader to manipulate the setting of gold prices.
The New York Attorney General's complaint against Barclays,
which is based on internal communications provided by former
employees, says while the firm told its clients it would keep
high-frequency traders that engage in "predatory" trading
practices out of its dark pool, it never actually prevented any
trader from participating.
For example, the complaint alleged that Barclays falsified
marketing material it said showed the extent and type of
high-frequency traders in its dark pool by not including
high-frequency trading firm Tradebot Systems. Barclays had
already identified Tradebot, which at the time was the largest
participant in the dark pool, as having been engaged in
aggressive trading behavior.
A spokeswoman for Tradebot, of Kansas City, Missouri, said
the firm had no comment.
Barclays wooed high-frequency traders by disclosing
detailed, sensitive information about other customers to the
firms to help ensure their aggressive trading strategies were
effective, and by charging them almost nothing, the complaint
said. HFT accounts for around half of all U.S. trading volume.
The complaint did not specify the amount of damages being
sought from Barclays.
Barclays also told its clients it does not favor its own
dark pool when routing client orders to trading venues, when in
reality it was doing just that, the complaint said. One former
Barclays employee told the Attorney General's office that based
on the high amount of client orders Barclays was sending to its
own dark pool, better trading opportunities may have been missed
There was a lot going on in the dark pool that was not in
the best interests of Barclays clients, one former director
said, according to the complaint. "The practice of almost
ensuring that every counterparty would be a high-frequency firm,
it seems to me that that wouldn't be in the best interest of
their clients ... It's almost like they are building a car and
saying it has an airbag and there is no airbag or brakes."
The SEC is considering forcing dark pools and firms that
match customers' orders internally to tell regulators and the
public how they operate. In early June, the SEC filed a civil
lawsuit against dark pool operator Liquidnet for allegedly
improperly using its subscribers' confidential trading
information to market its services.
The SEC declined to comment on the lawsuit.
(Additional reporting by Herb Lash in New York and Steve Slater
in London; Editing by Greg Mahlich and Sophie Walker)