Barclays and Credit Suisse are fined over US 'dark pools'
- 1 February 2016
- From the section Business
Barclays and Credit Suisse have been fined a total of $154m (£108m) by US regulators for their US "dark pool" trading operations.
"Dark pool" operations allow investors to trade large blocks of shares but keep the prices private.
Barclays has admitted misleading investors and violating securities law in the way it operated the pool. It will pay a $70m fine.
Credit Suisse will pay $60m and another $24.3m relating to other violations.
The fines will be split between the State of New York and the Securities and Exchange Commission (SEC).
The New York Attorney General and the SEC have both censured the two banks for their misconduct.
Ralph Silva, banking analyst from SRN, told BBC News: "The fines are a message, not a punishment. The levels are insignificant compared to the profits in this line of business."
"Regulators are telling the banks to close the vulnerabilities, something the banks have been reluctant to do because answers come with high operational price tags."
Analysis by BBC economics correspondent Andrew Verity:
The "dark" in "dark pools" is supposed to be a good thing. If you want to buy and sell shares - especially a large amount of them - transparency's a disadvantage. You could lose big money.
Say you're a pension fund and you're planning to buy 10 million shares in Tesco - a big order that's bound to push the price up.
You place your order with a stockbroker - then watch with dismay as the Tesco share price rises before your broker can actually buy them.
You lose: the shares will now cost more to buy. And your unknown nemesis out there on the market wins because they bought their shares before you could buy the shares yourself - and can now sell them at a higher price - to you.
In the old days you might suspect insider trading: your broker, or someone else with insider knowledge, has illegally tipped off a mate.
But these days your nemesis is just as likely to be a high frequency trader. When the order is made public, a computer programmed with the right algorithm can see the order before any human trader and buy the shares at near light-speed, long before any old-fashioned human trader can even register the information in their brain - let alone press the "buy" key.
Dark pools were meant to address that - alternative trading systems that let investors place buy and sell orders out of sight.
The appeal was that they kept the high-frequency traders out. Instead the traders found a way in - and were even welcomed. The problem with the dark pools was that they were too damn light.
Thorsten Beck, professor of banking and finance at Cass Business School, said the fines "might make the banks more reluctant to invest in this specific type of trading, but might just divert their appetite towards other money-making activities".
"I am a bit critical of these fines as they seem rather ad-hoc without looking at the bigger question of what banks should, and should not, be doing."
New York Attorney General Eric Schneiderman said: "These cases mark the first major victory in the fight against fraud in dark pool trading that began when we first sued Barclays."
He added that "co-ordinated and aggressive government action" had led to "admissions of wrongdoing, and meaningful reforms to protect investors from predatory, high-frequency traders".
"We will continue to take the fight to those who aim to rig the system and those who look the other way."
Meanwhile Andrew Ceresney, director of the SEC's enforcement division said: "Dark pools have a significant role in today's equity marketplace, and the firms that run these venues must ensure that they do not make mis-statements to subscribers about their material operations.''
Credit Suisse will neither admit nor deny the allegations.
A spokeswoman said the bank was "pleased to have resolved these matters" with the SEC and the New York attorney general.
A Barclays representative said: "the agreement will enable us to focus all of our efforts on serving our clients".
Last year Barclays lost an attempt to have the case dismissed.
'Technology is the answer'
Part of the point of dark pool trading systems is to allow institutions to sell large numbers of shares privately, helping to make sure their actions don't result in a cut in the price they can get.
But Mr Silva said technology was already making that impossible.
"While banks have impressive networks, some independent traders have faster networks and systems that can undercut transactions," he said.
"The minute an algorithm identifies a large transaction, they send trade orders that reach trade systems before dark pool transactions. The answer is technology, but banks are inundated by operational changes and simply don't have the resources to get this done."
"This message from regulators might raise the priority."