Barclays Wants Dark Pool Complaint Against It Dismissed, Says "Nobody Was Harmed"; NY Attorney General Disagrees

File this one for the bizarro files.

After Barclays was caught lying to its "sophisticated" clients about how it handles their order following the lawsuit by NY AG Schneiderman, the bank, having suffered an epic 75% collapse of trading volume in its dark pool, has decided to fight back and earlier today filed a motion to dismiss the dark pool complaint against it. Its main argument, as reported by the WSJ, is that the attorney general's complaint "fails to identify any fraud, establishing no material misstatements, no identified victims and no actual harm." In other words, Barclays alleges the dark pool participants were smart enough to figure out Barclays was lying to them when it promised their order flow wouldn't be offered up to predatory algos.


In its response, Barclays says the attorney general's office took a number of details out of context and didn't provide a full account of documents cited in its complaint, according to a copy of the motion filed with New York's Supreme Court early Thursday.


The bank says its clients were sophisticated investors who were well aware that its dark pool, an off-exchange trading venue that doesn't post investors' buy and sell orders, included trading by high-speed firms.


Barclays also argues the Martin Act, the New York state securities law it is alleged to have violated, doesn't apply to the case. The bank argues the act, which doesn't require prosecutors to prove a firm intended to defraud investors, is limited to actions related to the purchase and sale of securities and doesn't apply to claims made regarding the operation of a dark pool.


The bank said the New York attorney general's office is overstepping its mandate by attempting to regulate dark pools, which it says is primarily the responsibility of the Securities and Exchange Commission. The SEC oversees dark pools, which account for abut 14% of U.S. trading volume, under Regulation ATS, short for "alternative trading system."


"Barclays works closely with its regulators in all jurisdictions and will continue to cooperate with the New York attorney general," Barclays spokesman Mark Lane said in a statement. "However, we do not believe that this suit is justified, and we have a duty to our shareholders, clients and staff to defend our position.

It will be interesting if a judge finds merit in this angle which is, stated simply: we may have lied but our clients should have known we are lying.... something that the rating agencies claimed repeatedly in the years following the Lehman collapse.

So far, Schneiderman isn't buying it as confirmed by the release he just put out moments ago:

The following statement was issued today by Damien LaVera, Communications Director for Attorney General Eric T. Schneiderman:

“The complaint filed last month by Attorney General Schneiderman clearly details the allegations that Barclays engaged in a persistent pattern of fraud and deceit, lying to its investors in order to grow its own dark pool. The Attorney General is committed to ensuring there is one set of rules for everyone in the markets, and will crack down on abuses wherever he sees them. We are confident that a judge will reject this motion and allow us to prove these disturbing allegations in Court.”

Attorney General Schneiderman’s complaint, filed last month, alleges that Barclays falsified marketing material purporting to show the extent and type of high frequency trading in its dark pool. For example, Barclays removed from a marketing document intended for institutional investors references to the dark pool’s then-largest participant – a high frequency trading firm Barclays knew engaged in predatory behavior in the dark pool.  In response, one employee stated: “I had always liked the idea that we were being transparent, but happy to take liberties if we can all agree.”

Barclays heavily promoted a service called Liquidity Profiling, which the bank claimed was a “surveillance” system that tracked every trade in Barclays’ dark pool in order to identify predatory traders, rate them based on objective characteristics of their trading behavior, and hold them accountable for engaging in predatory practices.

Contrary to those promises, the complaint alleges that:

  • Barclays has never prohibited any trader from participating in its dark pool, regardless of how predatory its activity was determined to be;
  • Barclays did not regularly update the ratings of high-frequency trading firms monitored by Liquidity Profiling;
  • Barclays “overrode” certain Liquidity Profiling ratings – including for some of its own internal trading desks that engaged in high-frequency trading – by assigning safe ratings to traders that were determined to be toxic.

The complaint further alleges that, contrary to Barclays’ representations that it protects clients from aggressive or predatory high-frequency trading in its dark pool, Barclays in fact operates its dark pool to favor high-frequency traders and has actively sought to attract them by giving them systemic advantages over others trading in the pool. As alleged in the complaint, this included:

  • Falsely underrepresenting the concentration of aggressive high-frequency trading in its dark pool;
  • Misrepresenting its Liquidity Profiling service – which Barclays claimed protected investors from predatory behavior – by failing to provide many of the benefits marketed with the service; and
  • Claiming that Barclays does not favor its own dark pool when routing client orders to trading venues, while in fact doing just that. As alleged in our Complaint, Barclays falsified an analysis of how it routed a major client’s orders.

* * *

Sadly for Barclays the damage at this point has been done as the bulk of its buyside clients have already migrated to other dark pool platforms. And since without buyside order flow to frontrun the HFTs have zero use for Barclays LX, whatever happens from this point on is merely window dressing. As for Barclays it may want to seek out markets it can allegedly rig.