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SEC Settles Dark Pool Charges with Credit Suisse, Barclays

The SEC announced this week that it had settled charges against Barclays and Credit Suisse for alleged misrepresentations related to the firms’ dark pools, collecting the largest-ever fines against alternative trading systems (ATSs). The investigation was conducted in parallel with the New York Attorney General’s Office.

The SEC’s charges against Barclays involved the dark pool’s liquidity profiling tool which was designed to permit liquidity profiling that would categorize subscribers from most aggressive to least aggressive. It also was supposed to permit subscribers to block trading with other subscribers in certain categories. However, the SEC found that Barclays overrode the feature to move certain subscribers from the most aggressive category to the least aggressive (including Barclays own market-making desk). Additionally, though Barclays claimed to have weekly surveillance for toxic trading, the SEC alleges that Barclays did not conduct actually conduct the surveillance on a weekly basis. Lastly, Barclays mispresented its method for calculating the National Best Bid and Offer, using a combination of direct feeds and other slower feeds. To resolve the charges, Barclays agreed to pay a $35 million penalty and to engage a consultant to review its compliance with certain rules. Barclays will also pay a $35 million penalty to the New York Attorney General. According to the New York Times, the issues were first brought to the New York Attorney General by Barclays whistle blowers.

The SEC alleges that Credit Suisse “failed to disclose that it operated a technology called Crosslink that alerted two high frequency trading firms to the existence of orders that [its] customers had submitted for execution.” The release notes that Credit Suisse did not inform customers that confidential order information was transmitted from the dark pool to other Credit Suisse systems, and further did not inform customers that its “order router systematically prioritized Crossfinder over other venues in certain stages of its dark-only routing process.” The SEC also charges that Credit Suisse “accepted, ranked, and executed over 117 million illegal sub-penny orders” in its dark pool.

In addition, the SEC charges that Credit Suisse misrepresented a feature in its dark pool that was intended to “characterize subscriber order flow monthly in an objective and transparent manner” when it actually “included significant subjective elements, was not transparent, and did not categorize all subscribers on a monthly basis.” The SEC also notes that the scoring was not utilized for the first year of operation for one of its trading venues and that those subscribers that were identified as “opportunistic” (and thus removable) could continue to trade. To resolve the charges, Credit Suisse agreed to pay $30 million in penalties, along with $20.6 million in disgorgement and $3.6 million in interest. Credit Suisse will also pay a $30 million penalty to the New York Attorney General.

Andrew Ceresney, Director of the SEC’s Enforcement Division, said that “[d]ark pools have a significant role in today’s equity marketplace” and that they will “pay a steep price when they mislead subscribers.”