The US Securities and Exchange Commission has fined Credit Suisse and Barclays for misleading customers over dark pools

Barclays and Credit Suisse have been fined a collective total of $154m (€133m) by US regulators. The two European banks will pay the fine split between the state of New York and the US Securities and Exchange Commission, for misleading investors with their ‘dark pool’ private market service.

Dark pools are private stock trading venues, closed to access from the public, and so are inherently non-transparent. These secret trading forums, which cost a premium to use, are supposed to allow institutional investors to carry out large block trades without impacting the market price. When large trades are carried out on the open market, they are broken up into smaller amounts. This can often alert other market participants as to the intention of an investor. However, with no order book visible to the public in the dark pool, the intention of participants within the pool remains a secret until after the trade has been executed.

While dark pools have existed for many years, with the growing ruse of high frequency trading (HFT), institutional investors making large orders have increasingly turned to them. HFT, through the use of algorithms and high-powered computers, works at breakneck speeds, recognising patterns and executing trades. Therefore, the systems are better at recognising the large block trades being carried out by investors, allowing them to front-run the trades, pushing up the prices of trades before they have been fully executed.

While dark pools have existed for many years, with the growing ruse of high frequency trading (HFT), institutional investors making large orders have increasingly turned to them

By keeping trading intentions in the dark, the opaque dark pools were marketed by banks such as Barclays and Credit Suisse to investors as a trading venue to carry out block trades away from the supposedly predatory practices of HFT users. The two European banks in question, however, have been accused of misleading investors about these dark pools.

Barclays has admitted that it misled investors concerning how it monitored its venue for high speed, predatory trading. Credit Suisse has denied any wrongdoing, but has been accused of prioritising its own dark pool, Crossfinder, over others, regardless of the quality of trades executed. Both banks, according to the New York attorney general, made “false statements and omissions in connection with the marketing of their respective dark pools and other high-speed electronic equities trading services.”