Credit Suisse Group AG and Barclays PLC, two of the biggest
operators of "dark pools," have entered settlement negotiations
with the New York attorney general and the Securities and Exchange
Commission over allegations of wrongdoing in the private trading
venues, said people familiar with the matter.
Credit Suisse is in talks to pay a fine in the high tens of
millions, which would be the largest fine ever levied against an
operator of a private trading venue, and the Barclays discussions
also suggest a large fine, the people said.
Deals with the banks could come as soon as the next several
weeks, though talks could still fall apart, they said.
Representatives of Credit Suisse and Barclays declined to
comment.
Dark pools, which allow buyers and sellers to swap shares with
greater anonymity than they can on the stock market, have come
under scrutiny from regulators in the past several years, and
enforcement activity has been heating up lately.
Analysts say that while the pending settlements could lead to
tighter regulation of off-exchange trading, they are unlikely
reduce the amount of dark-pool trading.
Dark pools, along with so-called internalizers who execute
trades on behalf of retail brokers, account for nearly 40% of all
stock trading, according to the market-research firm Tabb Group
LLC.
"This may serve to finally sterilize dark pools," said Larry
Tabb, chief executive of Tabb Group, referring to the likelihood
that operators disclose more information about trading activity and
stay in compliance.
The size of fines against dark-pool operators is on the
rise.
Investment Technology Group Inc., a New York brokerage, said
last month it had set aside $20.3 million to settle allegations of
wrongdoing related to its dark pool, Posit, with the SEC.
The largest case before that was against UBS Group AG, which in
January agreed to pay $14 million to settle allegations with the
SEC it created an uneven playing field inside its dark pool.
Credit Suisse operates the largest dark pool in the U.S. Called
CrossFinder, it matched more than 430 million shares during the
week beginning July 20, according to data from the Financial
Industry Regulatory Authority.
The case against Credit Suisse includes allegations that it
provided unfair advantages to some traders, violated rules against
pricing of stocks and didn't adequately disclose to investors how
CrossFinder works, according to the people familiar with the
matter.
Regulators also are scrutinizing Credit Suisse's system of
auctioning the right to trade against retail stock-market orders to
trading firms in the dark pool.
The setup resembled a waterfall, said people familiar with the
matter, in that the first firm to trade against the flow would pay
one price and subsequent auctions to other traders would go down in
price.
Barclays was accused by the New York attorney general in July
2014 of lying to clients about the extent of high-speed trading in
its dark pool.
In one example in the lawsuit, a Barclays executive allegedly
instructed two employees to mislead a large institutional investor
about how much of its trading was done in the dark pool and how
often those trades were with high-frequency firms.
When one of the employees provided the accurate information to
the investor anyway, the employee was fired, according to the
suit.
Barclays has denied it defrauded customers and fought to have
the case dismissed. The civil case, filed in New York State Supreme
Court, is ongoing.
Institutions, including hedge funds and large mutual funds, use
dark pools to buy and sell stock without having a large impact on
the price. If a firm is trying to make a purchase of 100,000
shares, it is preferable to try to find another large institution
looking to sell rather than take it directly to the stock
market.
"Investors believe there is value to trading in the dark," said
Alex Green, president of the consultancy FuturePoint Advisors LLC
and a former head trader at hedge funds. "The regulators are
exposing some of the things that have gone on, but there will still
be a demand to trade in dark pools."
Most orders on stock exchanges, for instance, are publicly
displayed to all other investors in the form of a bid or an offer.
The institution's name isn't given, but their buying or selling
intent is broadcast to others.
In a dark pool, a firm's bid or offer also is anonymous and is
only executed if another firm puts in a matching order.
However, over the years dark pools have become more complicated
and included facilities for a broader swath of traders to access
the venues. Regulators have been probing a range of firms on
whether they adequately disclosed the rules of trading to
participants and whether any traders—including high-frequency
traders—were given advantages over others.
Deutsche Bank AG, Morgan Stanley and Goldman Sachs Group Inc.
also have been investigated by the New York attorney general. The
banks declined to comment.
Jean Eaglesham contributed to this article.
Write to Bradley Hope at bradley.hope@wsj.com, Emily Glazer at
emily.glazer@wsj.com and Jean Eaglesham at
jean.eaglesham@wsj.com
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