New York attorney general accuses Barclays of 'dark pool' fraud

Thu Jun 26, 2014 8:45am EDT
 
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By Karen Freifeld, John McCrank and Steve Slater

NEW YORK/LONDON (Reuters) - New York's attorney general has filed a securities fraud lawsuit against Barclays, accusing the British bank of giving an unfair edge in the United States to high-frequency traders, while claiming to be protecting other clients from them.

News of the lawsuit, which relates to Barclays' LX Liquidity Cross 'dark pool' alternative trading system, drove a 5 percent fall in Barclays shares on Thursday. It also hit shares in Europe's Credit Suisse, Deutsche Bank and UBS as traders fretted about the possibility they could also be targeted.

The New York State attorney general's lawsuit alleges that Barclays promised to get the best possible prices for customers looking to buy or sell shares but instead took steps that maximized the bank's profits and executed nearly all of its customers' stock orders on LX instead of on exchanges or other venues that might have offered better prices.

The action is the highest profile case yet to emerge in the U.S. authorities' efforts to ensure that dealers are not ripping off investors in increasingly automated stock markets.

These probes have been progressing for up to a year, but took on additional urgency in recent months, after best-selling author Michael Lewis released the book "Flash Boys: A Wall Street Revolt" which contends that markets were rigged.

Dark pools were originally created to allow investors to execute big trades without tipping off the market. But ever-larger volumes of trades have been shunted into dark pools and their critics say the opacity of the markets may be resulting in more and more investors getting ripped off.

Barclays' London-listed shares were down 5.2 percent at 218.25 pence by 1155 GMT (7.55 a.m. ET) on Thursday, their lowest level since November 2012 and extending their fall this year to 20 percent. Shares in Deutsche Bank were down 2.2 percent, with UBS and Credit Suisse 1.8 and 2.9 percent lower respectively.

Barclays could suffer a litigation cost of $163 million from the activities and Deutsche Bank and UBS could face similar costs from an industry wide investigation, said analysts at Credit Suisse. They gave no estimate for their own bank.   Continued...

 
Raindrops are seen on the logo of a rental bicycle sponsored by Barclays in London May 8, 2014.    REUTERS/Stefan Wermuth