Barclays obscured the involvement on the dark pool of Tradebot Systems Inc., which had an “established history of trading activity that was known to Barclays as ‘toxic,’” according to the complaint. Tradebot is a high-frequency trading firm founded by its chairman, Dave Cummings, who declined to comment on the complaint.
Schneiderman accuses Barclays of violating New York’s Martin Act with counts of securities fraud and persistent fraud and illegality. The state seeks unspecified damages, disgorgement and restitution.
Dark pools were created as a haven for institutional investors seeking to trade large blocks of shares in secret, hoping to minimize their impact on prices so they can get a better deal on their trades. In practice, the average size of trades on private venues such as dark pools amounts to only 232 shares, according to SEC data released in October.
High-frequency traders have filled a void left by the exit of human market makers from the stock market and other securities. With trading profits so thin, few people can transact shares in the volume necessary to keep exchanges supplied with offers to buy and sell.
On May 2, Bloomberg News reported that Schneiderman was planning to subpoena exchanges and has already requested information from dark pools in a probe related to high-frequency trading, a person familiar with the matter said at the time.
Michael Lewis’s “Flash Boys,” released in March, said bank-owned dark pools serve as a key intersection between high- frequency traders and brokers’ investor clients. The banks, Lewis wrote, charge high-frequency traders for the right to trade against orders placed by their brokerage customers.
“Why would anyone pay for access to the customers’ orders inside a Wall Street bank’s dark pool?” Lewis wrote. “The straight answer was that a customer’s stock market order, inside a dark pool, was fat and juicy prey.”
For dark pools generally, “even if the result isn’t that there is new regulation, the result is the others are going to be sufficiently freaked out” by the complaint, said Kevin McPartland, head of market structure and research at Greenwich Associates in Stamford, Connecticut.
After news broke that Schneiderman was going after Barclays, the bank postponed an offering of notes, according to a person familiar with the matter, who asked to not be identified because of a lack of authorization to speak publicly.