The Securities and Exchange Commission last month announced that Barclays Capital and Credit Suisse Securities have agreed to settle separate cases for violating federal securities laws while operating alternative trading systems known as dark pools and Credit Suisse’s Light Pool. Both firms collectively will pay more than $150 million to settle the cases.

The New York Attorney General’s office announced parallel actions against the two firms. Barclays agreed to settle the charges by admitting wrongdoing and paying $35 million penalties to the SEC and the NY Attorney General’s office for a total of $70 million. 

Credit Suisse agreed to settle the charges by paying a $30 million penalty to the SEC, a $30 million penalty to the NY Attorney General’s office, and $24.3 million in disgorgement and prejudgment interest to the SEC for a total of $84.3 million. 

“These cases are the most recent in a series of strong SEC enforcement actions involving dark pools and other alternative trading systems,” SEC Chair Mary Jo White said in a statement, announcing the settlements. “The SEC will continue to shed light on dark pools to better protect investors.”

“Dark pools have a significant role in today’s equity marketplace, and the firms that run these venues must ensure that they do not make misstatements to subscribers about their material operations,” said Andrew Ceresney, director of the SEC’s Enforcement Division.  “These largest-ever penalties imposed in SEC cases involving two of the largest ATSs show that firms pay a steep price when they mislead subscribers.” 

According to the SEC’s order against Barclays, Barclays said that a feature called Liquidity Profiling would “continuously police” order flow in its LX dark pool and that the firm would run “surveillance reports every week” for toxic order flow. In fact, Barclays did not continuously police LX for predatory trading using the tools it said it would, and it also did not run weekly surveillance reports.

Barclays did not adequately disclose that it sometimes overrode Liquidity Profiling by moving some subscribers from the most aggressive categories to the least aggressive, according to the SEC order. As a result, subscribers that elected to block trading against aggressive subscribers nonetheless continued to interact with them. 

Barclays at times misrepresented the type and number of market data feeds that it used to calculate the National Best Bid and Offer in LX.  For example, Barclays represented that it “utilize[d] direct feeds from exchanges to deter latency arbitrage” when in fact Barclays used a combination of direct data feeds and other, slower feeds in the dark pool.

Credit Suisse Settlement

According to the SEC’s order against Credit Suisse, Credit Suisse misrepresented that its Crossfinder dark pool used a feature called Alpha Scoring to characterize subscriber order flow monthly in an objective and transparent manner.  In fact, Alpha Scoring included significant subjective elements, was not transparent, and did not categorize all subscribers on a monthly basis. 

Credit Suisse misrepresented that it would use Alpha Scoring to identify “opportunistic” traders and kick them out of its electronic communications network, Light Pool. In fact, Alpha scoring was not used for the first year that Light Pool was operational. Also, a subscriber who scored “opportunistic” could continue to trade using other system IDs, and direct subscribers were given the opportunity to resume trading.

The SEC order further stated that:

Credit Suisse accepted, ranked, and executed over 117 million illegal sub-penny orders in Crossfinder.

Credit Suisse failed to treat subscriber order information confidentially and failed to disclose to all Crossfinder subscribers that their confidential order information was being transmitted out of the dark pool to other Credit Suisse systems.

Credit Suisse failed to inform subscribers that the Credit Suisse order router systematically prioritized Crossfinder over other venues in certain stages of its dark-only routing process.

“Two Credit Suisse ATSs failed to operate as advertised, and failed to comply with numerous regulatory requirements over a multi-year period,” said Joseph Sansone, co-chief of the Market Abuse Unit. The action “sends a strong message that the agency will continue to scrutinize ATSs for compliance with the securities laws.”