October 7, 2014 / 6:29 PM / 3 years ago

Barclays says New York 'dark pool' suit oversteps legal bounds

A Barclays sign hangs outside a branch of the bank in the City of London July 30, 2014.Toby Melville

NEW YORK (Reuters) - Barclays PLC on Tuesday urged a New York court to toss the state attorney general's fraud case over how the bank ran its private U.S. trading venue, saying the case oversteps state securities laws and offers no proof any investors were hurt.

New York Attorney General Eric Schneiderman filed a lawsuit on June 25 accusing the London-based bank of giving an unfair edge to high-frequency traders and lying to other customers about it. It is the highest-profile case in a recent raft of investigations by authorities into the fairness of high-speed, automated trading practices and alternative trading systems, or "dark pools."

Barclays said in its court filing that Schneiderman was trying to dramatically expand the powers of a New York statute known as the Martin Act, which aims to protect investors when the purchase, sale, or exchange of a security is misrepresented. It said Schneiderman had conceded in an earlier filing that the lawsuit was based on claims that Barclays had misrepresented how it operated its dark pool rather than about any particular security transaction.

"The NYAG's reading of the Martin Act would render the Act virtually unlimited in scope," Barclays said in the filing, a response to Schneiderman's Sept. 16 filing disputing an earlier motion to dismiss the case.

Schneiderman spokesman Matt Mittenthal declined comment.

Dark pools are used to trade big blocks of shares anonymously. The market is not informed of the trades until they are completed, minimizing the risk that others will get wind of the trade and move against it.

Barclays had promised investors they would be protected from "predatory" and "toxic" trades inside its dark pool. Schneiderman said he had evidence the bank falsified marketing materials and misled big institutional clients in an effort to grow its dark pool to increase revenues and bonuses.

The Barclays filing said Schneiderman's arguments were "creating a perception of wrongdoing where none exists," and said that nowhere in the lawsuit does the attorney general allege Barclays' customers failed to get quality executions.

It pointed to one example in which the attorney general said Barclays had told clients that no more than 6 percent of trading in its dark pool was "aggressive," while separately telling some high frequency traders that 25 percent of the orders that took liquidity, or bought shares, were "aggressive."

Barclays said Schneiderman failed to distinguish the difference between liquidity-taking orders in the later figure, versus all trading activity in the former figure.

"This is akin to the NYAG bringing a fraud claim against a grocer who tells one customer that 6 percent of all food he sells are apples, and another customer that 25 percent of all fruit he sells are apples. There is simply no fraud," Barclays said.

Reporting by John McCrank; additional reporting by Karen Freifeld

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