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| CARL COURT, AFP/Getty Images |
The settlements, announced by the Securities and Exchange Commission and the New York Attorney General's office, mark the largest penalties in U.S. history against dark pools. The venues have been the subject of complaints that they favor high-frequency traders over trading counterparts for pension funds, mutual funds and other financial institutions.
Unlike regular stock exchanges, dark pools do not display best trading bids and offers to the public. Institutional traders typically use dark pools because they offer the possibility of buying and selling large blocks of stock without disclosing the transactions and prompting disadvantageous price shifts.
But Barclays and Credit Suisse, operators of two of the largest U.S. dark pools, misled customers about trading conditions and participants in their dark pools, according to the SEC and New York Attorney General.
London-based Barclays falsely told customers it would "continuously police" trading order flow in its LX dark pool, investigators found.
The bank also did not adequately disclose that it sometimes moved subscribers from the most aggressive to the least aggressive trading categories. As a result, customers that opted to block trading with more aggressive subscribers, such as high-frequency traders, unwittingly interacted with them, according to the settlements.
Similarly, Credit Suisse falsely told customers its Crossfinder dark pool characterized trader order flow in an objective and transparent manner, the settlements said.
The Swiss banking giant separately said it would identify "opportunistic" traders and oust them from Credit Suisse's Light Pool, an electronic communications network that does display best trading bids and offers. But investigators found that both types of subscribers were able to continue Light Pool trading.
Barclays and Credit Suisse told customers they would route trades to the dark pool, alternative trading venue or regular stock exchange with the best price and execution available, said New York Attorney General Eric Schneiderman. Instead, the banks sent a disproportionate number of trades to their own dark pools, while hiding that information from customers, he said.
"These cases mark the first major victory in the fight to combat fraud in dark pool trading and bring meaningful reforms to protect investors from predatory, high-frequency traders," said Schneiderman, whose office sued Barclays in a June 2014 lawsuit that accused the bank of "fraud and deceit."
"Today, we've brought some light to the darkest places in the market," and helped level the financial playing field for all traders, he added.
SEC Chair Mary Jo White and other officials said the settlements follow six recent enforcement actions by the regulator involving dark pools and other alternative trading systems. The SEC in November proposed new rules aimed at increasing oversight and transparency of the trading systems.
"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.
Barclays and Credit Suisse said they were pleased with the settlements.
According to the agreements, Barclays admitted wrongdoing and agreed to pay a combined $70 million to the SEC and New York Attorney General's office.
Credit Suisse agreed to pay $30 million each to the SEC and New York Attorney General's office, plus $24.3 million in disgorgement and prejudgment interest to the SEC.
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