HFT shenanigans: NY sues Barclay's for dark pool fraud

[Winehole23]

According to data from the Financial Industry Regulatory Authority, Barclays' dark pool, often shortened to LX, was nearly the largest in trading volume, second only to Credit Suisse's dark pool, Crossfinder. So, it was something of a serious matter when, two weeks ago, New York state's Attorney General Eric Schneiderman filed what the New York Times called "a scathing lawsuit" (http://www.nytimes.com/2014/06/29/opinion/sunday/lawsuit-against-barclays-shows-need-for-more-scrutiny.html?_r=0) against Barclays over "demonstrated persistent fraud" (http://go.bloomberg.com/assets/content/uploads/sites/2/Schneiderman-Barclays-complaint.pdf) and repeated violations of the Martin Act.

"The particularly egregious behavior was that they marketed this as a protected dark pool," Todd Cipperman of Cipperman Compliance Services told Crain's Pensions & Investments (http://www.pionline.com/article/20140707/PRINT/307079982/barclays-suit-another-black-eye-for-dark-pools) (an excellent gift (https://sec.crain.com/PI/QuickOrder.aspx?PromotionCode=W4PIWBN) for grandma or grandpa).
Integral to this deception, according to the suit, was a complete misrepresentation of Barclays' "Liquidity Profiling" service which promised to police "each interaction in the dark pool" to "protect [clients] from predatory trading" but in practice, well, didn't do shit. The suit alleges that Barclays "granted liberal 'overrides' to high-frequency trading firms and to Barclays' own internal trading desks (which themselves employ 'aggressive' trading strategies), in order to make them appear less 'toxic' than they really are."


Citing internal emails between senior executives of Barclays' Equities Electronic Trading division, Schneiderman's office states that the firm intentionally "de-emphasized" high-frequency traders in a promotional chart of the pool's liquidity landscape. They also altogether removed data about Tradebot Systems, an ominously generic firm that "had historically been, and was at that time, the largest participant in Barclays' dark pool, with an established history of trading activity that was known to Barclays as 'toxic.'"


As described by one former senior-level Director within the division:


Barclays was doing deals left and right with high frequency firms to invite them into the pool to be trading partners for the buy side. So the pool is mainly made up of high frequency firms. [...]


[T]he way the deal would work is [Barclays] would invite the high frequency firms in. They would trade with the buy side. The buy side would pay the commissions. The high frequency firms would pay basically nothing. They would make their money off of manipulating the price. Barclays would make their money off the buy side. And the buy side would totally be taken advantage of because they got stuck with the bad trade [...] this happened over and over again.http://blackbag.gawker.com/barclays-dark-pool-trading-scandal-sounds-bad-becaus-1602189211/+tcberman

[Winehole23]

Citigroup ran a bespoke stock exchange for dark pool traders in 2011-2015, paid a token fine, admits no wrongdoing.


Last Friday, the Securities and Exchange Commission issued a 372-word press release that carried the title SEC Charges Citigroup for Dark Pool Misrepresentations (https://www.sec.gov/news/press-release/2018-193). Buried within that press release was a brief sentence casually mentioning that a division of Citigroup had “failed to register as a national securities exchange.”

Since the thrust of the SEC’s press release was that the big travesty Citigroup had committed was to allow high frequency traders to operate within one of its Dark Pools while lying to its customers about that, this became the sole focus in multiple news articles on the matter. See here (https://www.nytimes.com/2018/09/14/business/citigroup-sec-dark-pools.html) and here (https://www.bloomberg.com/news/articles/2018-09-14/citigroup-pays-almost-13-million-to-settle-sec-dark-pool-probe?srnd=markets-vp).


The SEC also buried the information that Citigroup was running an illegal stock exchange within its cease-and-desist order and settlement document (https://www.sec.gov/litigation/admin/2018/33-10545.pdf). In fact, what the SEC actually did was to dump two vastly different violations of security law – lying to customers and running an illegal stock exchange – into one enforcement announcement and impose a meaningless $12.9 million fine on Citigroup for disparate violations.
http://wallstreetonparade.com/2018/09/sec-citigroup-ran-a-secret-unregistered-stock-exchange-for-more-than-three-years/


related thread:https://www.spurstalk.com/forums/showthread.php?t=153520&page=3&p=4356461&viewfull=1#post4356461

[Winehole23]

According to the SEC’s order, “from at least December 2011 to April 30, 2015,” a unit of Citigroup called Citi Order Routing and Execution, LLC (CORE) operated as a stock exchange “by virtue of providing Citi Match as a marketplace for NMS [National Market System] stocks.” During that more than 3-year period when CORE was operating as an illegal stock exchange, without ever registering with the SEC as an exchange, Citi Match executed more than 7 billion shares of stock according to the SEC order.

[Winehole23]

Citigroup’s CORE division was previously known as Automated Trading Desk Financial Services (ATD).


ATD is profiled in Scott Patterson’s seminal book of 2012, Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market (https://www.amazon.com/Dark-Pools-Machine-Traders-Rigging/dp/0307887170/ref=tmm_hrd_swatch_0?_encoding=UTF8&qid=1537366563&sr=1-1). Patterson writes that “by the mid 2000s, just four firms – Automated Trading Desk, Renaissance, Tradebot, and Getco – accounted for roughly 25 to 30 percent of all stock trading in the United States.”

[Winehole23]

other related threads:

https://www.spurstalk.com/forums/showthread.php?t=160580
https://www.spurstalk.com/forums/showthread.php?t=230878