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In Latest Market-Rigging Scandal, ITG Busted For Frontrunning Clients In Its Dark Pool

Tyler Durden's picture




 

Last year, first in the aftermath of NYAG's lawsuit against Barclays followed promptly by Michael Lewis' "Flash Boys" (which over a year later is still a better seller than "GS Elevator's" attempt to be this generation's Tucker Max) exposing High Frequency Trading for being nothing more than a sophisticated gimmick enabling market rigging and bulk order frontrunning while pretending to "provide liquidity", the revulsion against HFTs hit a fever pitch that forced Virtu to postpone its IPO.

Several months later, because the market kept going higher, people quickly forgot why they were angry at a bunch of vacuum tubes, and Virtu not only re-IPOed (adding another year without a single trading day loss to its roster) but it was taken public by that "humanitarian" protagonist of Flash Boys, Goldman Sachs itself (which was so aghast at the scourge that is HFT it almost, almost, ended its own dark pool and HFT ambitions... before it decided to double down on HFT).

However, since the market is once again on the verge of a terminal liquidity seizure with its associated side-effects (see China for details), the authorities needed to remind the "market" just who the scapegoat will be when the next crash finally does come. Which is why earlier today in an unexpected "preliminary second quarter guidance" release, ITG, owner of the Posit dark pool, was just busted with a $22.6 million potential SEC settlement for what appears to have been blatant frontrunning of company clients in its own prop trading pod.

From the release:

During the second quarter of 2015, ITG commenced settlement discussions with the Staff of the Division of Enforcement of the SEC (the “SEC Enforcement Division”) in connection with the SEC’s investigation into a proprietary trading pilot operated within ITG’s AlterNet Securities, Inc. (“AlterNet”) subsidiary for sixteen months in 2010 through mid-2011. The investigation is focused on customer disclosures, Form ATS regulatory filings and customer information controls relating to the pilot’s trading activity, which included (a) crossing against sell-side clients in POSIT and (b) violations of ITG policy and procedures by a former employee. These violations principally involved information breaches for a period of several months in 2010 regarding sell-side parent orders flowing into ITG’s algorithms and executions by all customers in non-POSIT markets that were not otherwise available to ITG clients.

This would not be the first time a dark pool was busted for admitting it abused fragmented markets to frontrun clients. As Bloomberg reminds us, last year, the agency fined Liquidnet Holdings Inc. $2 million for not living up to client secrecy standards. In 2011, Pipeline Trading Systems LLC agreed to pay $1 million, in part because it had a proprietary trading unit that was secretly trading against client orders. Then there was of course NY AG Schneiderman's lawsuit against Barclays alleging the UK bank which has been busted for manipulating pretty much everything under the sun at least once falsely claimed that it closely monitored and shut off certain types of traders.

Still, the $22 million proposed settlement would be a record for a private Wall Street trading platform, surpassing the $14.4 million that UBS Group AG agreed to pay in January. More importantly, as Bloomberg also observes, the latest lawsuit "shows the steps authorities are taking against alternative trading systems such as dark pools."

In other words, everyone now knows HFTs are fair game for rigging and manipulation, and with the banks having already been bled dry by over a quarter trillion in litigation charges, it is now the HFTs' turn to pay their kickbacks to the government for allowing them to frontrun sheep for 7 years since the advent of Reg NMS.

What is particularly amusing in this case is that while everyone knows that when it comes to HFT's, it is never called "rigging" - the proper nomenclature is "glitch", so now we learn a new term to use instead of "criminal frontrunning" - drumroll... trading experiment, or as it is known in legal parlance "proprietary trading pilot."

From Bloomberg:

ITG disclosed the discussions and potential fine in a statement Wednesday, saying the situation concerned an experimental market-making unit that a subsidiary ran in 2010 and 2011. The division traded using information not available to other customers of ITG’s private stock-trading system, which is against Securities and Exchange Commission rules.

 

ITG Chief Executive Officer Bob Gasser said the firm shut the trading experiment and hasn’t run a similar one since.

So let's get this straight: ITG had an in house prop trading group, or "pilot", which operated for nearly two years, whose only signal was client order flow, which it would frontrun, and make millions in profits. In other words, once again precisely what we have claimed since 2009. But oh yes, not everyone is guilty of such manipulation. Only Liquidnet... and Pipeline... and ITG... and countless other ATS and HFT firms for whom clients are better known as either "easy money" or muppets.

And yes, we get the "trading experiment" narrative: calling it "criminal market manipulation and order frontrunning scheme" just does not sound like something the Modern Markets Initiative would spend millions of dollars to get Congressmen to agree on.

But where the ITG client frontrunning case goes truly surreal and takes the cake, is that in addition to the fine, it also announced that one of its directors, Kevin O'Hara resigned effective immediately. This is what he said:

Dear Maureen:

This letter serves to inform you that, effective immediately, I resign from the Board of Directors (“Board”) of Investment Technology Group, Inc. (“ITG”), and the attendant Board committees of which I am a member: Compensation, Technology, and Capital.

 

It has been my pleasure and an honor to serve the shareholders, clients, and employees of ITG, and to work alongside fellow directors over the last number of years. And, those years have witnessed ITG weather the slings and arrows of existential challenges: the 2008-09 financial crisis (and, subsequent, “Great Recession”), industry hyper-competition, and a highly dynamic regulatory environment.

 

However, as you know, over the last several months, continuous fundamental, strategic and vital differences of opinion and direction have transpired at the Board level and, in particular, between me and the Board’s leadership. Although I believe in the importance of the governance concept of “loyal opposition,” alas, to everything there is a season. I do hope that my service in such role has, at the very least, furthered and continues to further the breadth of substantive deliberation and the process of decision-making by the Board.

 

I wish the very best for ITG and its employees.

 

Best Regards,

 

Kevin J.P. O'Hara

So some board member quit the day his company was busted by the SEC for more market rigging and frontrunning its clients. Is that the punchline?

No. This is:

Mr. O’Hara worked in the Division of Enforcement of the U.S. Securities and Exchange Commission and as Special Assistant United States Attorney at the U.S. Department of Justice

 

And now proceed to laugh, or cry.

 

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Wed, 07/29/2015 - 20:43 | 6369454 Government need...
Government needs you to pay taxes's picture

Wink, slap on the wrist, back to business!

Wed, 07/29/2015 - 21:01 | 6369500 OC Sure
OC Sure's picture

I tire of this theme and admittedly did not read the article.

 

Wed, 07/29/2015 - 21:03 | 6369506 Squid-puppets a...
Squid-puppets a-go-go's picture

when ur running around in the dark, who can be said to be 'frontrunning' who ?

Wed, 07/29/2015 - 21:07 | 6369512 OC Sure
OC Sure's picture

I tire of this theme and admittedly did not read the article.

 

If the not-so-flash boys once upon a time used a chalk board to display quotes to a room of traders, then cards, then an electronic signal (ticker tape), then a faster electronic signal (computer), then a faster faster faster higher frequency signal, then doesn't the argument just boil down to the same fear of the luddites?

The faster signal is not responsible for the large bids and offers that "mysteriously" appear and vaporize. If you want them take them. If not, wait. 

Wed, 07/29/2015 - 21:15 | 6369531 insanelysane
insanelysane's picture

After the 2 year pilot they had enough information for some coders to write algos to do the frontrunning for them.  Machines don't talk.

Wed, 07/29/2015 - 20:46 | 6369459 JC-BI
JC-BI's picture

Such corruption is rampant in the financial system. If we could shut down the FED and arrest everyone, it will set an example to all the others because that's where it started>>

https://biblicisminstitute.wordpress.com/2014/08/24/the-corrupt-federal-...

Wed, 07/29/2015 - 20:50 | 6369471 Seek_Truth
Seek_Truth's picture

Spot on.

Keep up the good work.

Wed, 07/29/2015 - 20:56 | 6369477 undercover brother
undercover brother's picture

Woopty freaking doo.  The SEC awakens into semi-consciousness and bites a chunk of cash off the money tree for itself.   But wait, what about the "muppets" who were so blatantly ripped off, do they get their money back as well?  NO.  Michael Lewis laid it out plain as day for everyone to see, provided evidence that even the SEC couldn't ignore, yet for some strange reason HFT is still alive and well and frontrunning every bit of flow available to them.  10,000 quotes and 4000 trades per second....WHY is that neceesary?  Why is that SEC?  Why is it that computers are allowed to do all day and night for years at a time what an individual would be tossed in jail for? 

Wed, 07/29/2015 - 21:11 | 6369520 Lumberjack
Lumberjack's picture

Nanex has repeatly and diligently shown the evidence time and time again. I can only imagine the frustration.

Wed, 07/29/2015 - 21:59 | 6369664 buzzsaw99
buzzsaw99's picture

But wait, what about the "muppets" who were so blatantly ripped off, do they get their money back as well?

That's a good one!

Wed, 07/29/2015 - 20:59 | 6369491 WillyGroper
WillyGroper's picture

The pot is about to boil over.

There's some incredibly strong language being used in alt that really concerns me.

Concerns me for their safety.

Wed, 07/29/2015 - 21:15 | 6369532 Implied Violins
Implied Violins's picture

And that's exactly what the PTB are hoping for, so they will have a reason to trot out the police state on every block.

They are literally pulling shit like this IN OUR FACES, and laughing, because they can get away with anything.

I'm just waiting for those first paychecks to bounce...when people no longer have anything left to lose, they not only will 'lose it', they will lose their fear - and there will be a LOT of whistleblowers coming out, on a lot of issues. That is a tide they will NOT be able to stem...

Wed, 07/29/2015 - 21:15 | 6369538 Madcow
Madcow's picture

anyone "trading" or "investing" in the "markets" gets what they deserve - 

 

Wed, 07/29/2015 - 21:20 | 6369548 WTFUD
WTFUD's picture

FREE Corzine & Geithner

Wed, 07/29/2015 - 23:19 | 6369853 El Hosel
El Hosel's picture

... I say Freeze them, until such time as they are needed.

Wed, 07/29/2015 - 21:40 | 6369604 Montani Semper ...
Montani Semper Liberi's picture

What about the clients that they front run? Did they not lose money in this crime and deserved to be made whole, or does the SEC get to keep these millions to fund their enforcement division?

Wed, 07/29/2015 - 21:47 | 6369625 jcdenton
jcdenton's picture

I'm done crying, all there is left to do is laugh. Of course, there still is pitchforks, torches, and the Julian Gallows. I'm sure there is a large crop of enterprising carpenters to whip up a few of those in short order. Especially when there is a fund of ~100 billion to do such ..

https://www.facebook.com/klaatu.aquinas/posts/865274413511570

Wed, 07/29/2015 - 21:48 | 6369628 pndr4495
pndr4495's picture

Buttercup: You mock my pain. Man in Black: Life is pain, Highness. Anyone who says differently is selling something.

Wed, 07/29/2015 - 23:17 | 6369846 El Hosel
El Hosel's picture

.... Whatever, wake me up when the Fed has to stop front running all of it.

Thu, 07/30/2015 - 02:49 | 6370118 JailBanksters
JailBanksters's picture

So, Pay the parking fine and move on to the next fraud When will the fun every stop ? Well, Never.

Thu, 07/30/2015 - 06:22 | 6370231 Spodeejr
Spodeejr's picture

OMG that is the funniest delivery of the funniest joke I've ever hear a thousand time. But it was funniest the first time. And not as funny as last time.

Thu, 07/30/2015 - 07:18 | 6370310 Dr.Engineer
Dr.Engineer's picture

The rule of law is voluntary.  There are two sides to that. If one side stops, the other side will when they realize they've been duped. The SEC is playing with fire.

Thu, 07/30/2015 - 10:27 | 6370875 Grinder74
Grinder74's picture

Sigh, yet another slap on the wrist.  Meanwhile, I'm still paying off the SEC's extortion of over 70% of my "annual revenue".  Just think, if the SEC actually practiced the 14th Amendment, ITG would be paying a ~$400 MILLION fine (70% of their annual revenue).  Conversely, the SEC could have only extorted me for 4% of my "annual revenue" like they just did to ITG.

Fri, 07/31/2015 - 10:37 | 6375332 Maestro Maestro
Maestro Maestro's picture

INDICTMENT

Americans are criminals because Americans violate the Constitution of the United States of America.

The U.S. President Obama, the entire U.S. Congress, the CIA, the FBI, the U.S. Military, and the entire Police Force of these United States SWORE to protect, serve and uphold the U.S. Constitution.

The U.S. Constitution forbids usage of debt as money (referred to as 'notes') and stipulates that only gold and silver can be used as money.

Yet,

Americans commit or support and condone the murder and torture human beings throughout planet earth in the name of democracy and freedom, all for the sake of acquiring Constitutionally fraudulent and illegal Federal Reserve Notes a.k.a (counterfeit) U.S. Dollars.

Since the United States is a democracy and Americans only elect Democrats and Republicans who perpetuate this unlawfulness,

Americans are indicted criminals according to the United States Constitution.

Spread the word.

Do NOT follow this link or you will be banned from the site!