New York Attorney General Eric Schneiderman has hit Barclays with a lawsuit, accusing the bank of fraudulent behavior in regards to dark pools and high frequency trading. The civic suit was filed on Wednesday.
When trading within a dark pool, buy and sell orders are, in a sense, anonymous. They do not have to be reported to the public. This allows investors to keep their trading interests hidden from competition. Stocks are bought and sold extremely quickly in this scenario, with the help of highly intelligent computer systems.
The Attorney General believes Barclays' dark pool, Barclays LX, unfairly favors high frequency traders. The filing claimed explicitly that Barclays "operated its dark pool to favor high-frequency traders." The suit also questions the routing of client orders, which the NYAG believes Barclays falsely portrayed. The NYAG's complaint goes further, claiming Barclays offered some clients more information than others, "Barclays has actively sought to attract such traders to its dark pool, and it has given them advantages over others."
Sources familiar with the trades in question told The Wall Street Journal that "internal disputes" were mounting at Barclays, as it seemed some clients were getting better deals than others when in the presence of elite high frequency trading firms. Clients were not always receiving clear explanations, or explanations at all. Hart Lambur, a former Goldman Sachs trader and co-founder of Openfolio, told The Wire in an email interview, that this trading platform can be difficult to verbalize. "Given that so few people actually understand how high frequency trading works and what the pros and cons are, it's going to be very difficult for banks to clearly communicate to their clients what services they offer for the high frequency trading community and how it is beneficial to the market." Lambur continues, "This is something the banks don't want to talk about – it's a red flag."