LISTEN TO ARTICLE 4:02 SHARE THIS ARTICLE Share Tweet Post Email

Barclays Plc agreed to pay $150 million to New York’s banking regulator to resolve allegations of abusive practices on its electronic currency exchange platform, agreeing to terminate the unit’s head.

The London-based bank admitted unsafe and unsound conduct related to its electronic trading platform in a settlement with New York’s Department of Financial Services. At issue was Barclays’ use of a “last look” programming routine designed to defend the bank against opportunistic orders from sophisticated trading operations. Barclays employed the technology far more broadly, the New York regulator alleged, saying the bank used it to cancel its clients’ regular market-making trades when they would have resulted in losses to the bank.

"This case highlights the need for greater oversight and action to help prevent the misuse of automated, electronic trading platforms on Wall Street, which is a wider industry issue that requires serious additional scrutiny,” Anthony Albanese, acting superintendent of DFS, said in a statement Wednesday.

Person Terminated

The DFS didn’t identify the person designated for termination. Settlement documents referred only to the global head of electronic fixed income, currencies and commodities automated flow trading. That job has been held by David Fotheringhame, according to news reports, online documents and a person familiar with the matter.

The bank, in a statement, confirmed the settlement and said the civil penalty was “primarily for certain internal systems and controls failures.” It said it continues to cooperate with other ongoing investigations. It declined to comment on the employee’s identity. Fotheringhame couldn’t be reached for comment.

Professional traders armed with high-speed systems had the ability to exploit slight delays in Barclays’ electronic foreign exchange trading platform by placing orders before the bank’s systems caught up to the latest exchange rates, the regulator said. Such orders were known as "toxic order flow" or "toxic flow."

‘Toxic Flow’

To protect itself from such opportunistic trading, Barclays programmed its last-look delay to reject trades that appeared to be part of the toxic flow, according to the DFS. The bank sent its clients the message "NACK" -- or "not acknowledged" -- when it rejected a trade, the regulator said.

But from 2009 to 2014, the DFS said in the settlement, “a large number of the trades Barclays rejected were not truly examples of latency arbitrage or other toxic order flow.” Instead, it said, Barclays applied its last-look rejection protocol “almost entirely in reference to the profit or loss the trade would bring the bank.”

Customers complained about the rejections, according to the settlement document. “We have noticed that there were over 300 rejected orders with you today and the reason is ‘NACK,’ could you pls have a look at them and advise what’s causing it,” one client wrote on Dec. 15, 2010.

The client followed up to ask why orders that could have been filled by others were rejected “9 times out of 10.” There was no evidence Barclays responded to the questions, the settlement document said.

‘DO NOT Talk’

In launching the program in 2008, a Barclays employee warned colleagues not to tell clients the actual reason for the rejections. "If any client does call up about a rejected trade…it is important that you state in any communication ‘THE TRADE WAS REJECTED BECAUSE OF LATENCY.’…DO NOT talk about P&L on trades."

The resolution with DFS differs from the group settlement announced in May between the Justice Department and five global banks, including Barclays, over manipulation of foreign currency exchange rates on the spot market.

Barclays pleaded guilty in May to Justice Department charges related to the rigging of foreign exchange rates and paid a total of $2.4 billion to a variety of regulators, including New York’s DFS, which received $485 million of that sum but stipulated that its own investigation would continue.

Britain’s second largest bank is among global lenders hardest hit by a worldwide investigation from regulators into allegations of collusion in the $5.3 trillion-a-day currency market. The lender has reached settlements with most of the major authorities such as in the U.S. and U.K.

— With assistance by Richard Partington

(Adds details on dismissed unit head and bank statement from fourth paragraph.)