Barclays faces charges for alleged “dark pool” fraud

Barclays will be subject to a fraud lawsuit filed by the New York attorney general.

New York’s attorney general has filed a lawsuit against Barclays over alleged fraud related to “dark pool” operations – where clients trade big blocks of shares while keeping prices private.

According to a statement from Eric Schneiderman’s office, Barclays is accused of boosting its dark pool’s market share by making false claims about its operations. Rather than safeguarding clients from “aggressive” high-speed traders as it has claimed, the bank allegedly ran its dark pool so that it favoured them. The rest of the charges also look very serious.

Barclays promoted a service known as “liquidity profiling” which is claimed tracked every trade to identify overly aggressive trades and hold them accountable.

But the attorney general claims the evidence suggests no trader was ever stopped from using the dark pool, and Barclays did not regularly update the ratings of the high-speed traders it was tracking.

Worst of all, some toxic traders apparently had their liquidity profiling ratings altered to make them appear safe – a practice allegedly also extended to some of its own internal trading desks.

“The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,” attorney general Mr Schneiderman says.

“Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays’ dark pool was full of predators – there at Barclays’ invitation.”

The lawsuit has been put together with help from ex-senior traders at Barclays, according to the attorney general, and could potentially come with a hefty price tag – the amount of damages and restitution being sought by the authorities has not yet been announced.

Barclays has already cancelled a $1.5 billion (£880 million) debt offering after the news emerged – unsurprising given that shares dropped by more than five per cent in London’s 26 June afternoon trading session.

New York and London’s stock exchanges are known as “light markets” for their high levels of transparency, but that means that firms can sometimes do themselves damage when the news spread of a market-moving large order they have just spread. That’s why dark pools have become popular – but as Barclays has discovered, they come with risks of their own.