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SEC Fines ITG for Dark Pool Proprietary Trading

The SEC settled charges with ITG last week that the company “operated a secret trading desk and misused the confidential trading information of dark pool subscribers.” The release states that ITG was operating a proprietary trading desk for over a year while it promoted itself as an “agency-only” broker with no conflicts. Further, the Commission notes that ITG kept the existence of the trading desk confidential, even from the customer-facing side of its own business. According to the order, the trading desk was meant to be a pilot program to determine “whether ITG should launch a fully-scaled and disclosed proprietary trading operation.”

From April 2010 to July 2011, the trading desk traded approximately 1.3 billion shares, 262 million of which were traded with ITG dark pool subscribers. The trading desk utilized an algorithm that traded based on a live feed of information from orders of dark pool subscribers, to which the subscribers themselves did not have access. Additionally, according to the SEC, “one of the proprietary trading desk’s strategies involved identifying sell-side subscribers with which the desk wanted to trade in [the dark pool], and ensuring that those subscribers’ orders were configured to trade ‘aggressively.’”

To settle the charges, ITG agreed to disgorge its profits from the proprietary trading desk ($2,081,034 plus interest of $256,532) and pay an $18 million penalty. According to the release, the amount represents the largest penalty to date levied by the SEC against an alternative trading system.