Dark pool fraud: what is Barclays accused of?

Barclays has been accused of "dark pool fraud" by the US authorities, prompting a sharp fall in the company's share price.

New York's attorney general alleges that the British bank falsified documents and displayed a "disturbing disregard" for its investors by misrepresenting the safety of its US-based alternative trading system.

What are dark pools?

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A dark pool is a private trading platform where all activity is concealed from the public. Dark pools allow investors to trade large blocks of shares with complete anonymity, and only post their prices after the deals are done. "They were created as a way for institutional investors to place large orders without disadvantaging themselves by signalling to the wider market any market-moving trades," the Financial Times says.

Why do they exist?

Proponents argue that dark pools allow institutional investors, such as money managers, insurance companies and investment banks, to buy and sell huge quantities of stock without altering the price, or having other traders shift the price in anticipation. Otherwise, for example, a large sale would lower the price while the transaction was in progress, and news of an intention to buy would result in a price rise. But dark pools have come under fire recently due to their lack of transparency, Forbes notes, and some people believe that the secretive systems may actually cause price inefficiencies.

What is dark pool fraud?

New York attorney general Eric Schneiderman says that contrary to its explicit assurances, Barclays had been using its dark pool system to favour high-frequency traders – those firms that use computer systems to buy and sell stock instantaneously based on minor fluctuations in share prices.

"The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit," Schneiderman said. "Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays' dark pool was full of predators – there at Barclays' invitation."

The lawsuit claims that Barclays never intervened to eject a single trader.

High-frequency trading has itself come under scrutiny recently, The Guardian notes, following the publication in March of best-selling author Michael Lewis' book, Flash Boys: A Wall Street Revolt, which argues that high-frequency traders have effectively "rigged the stock market" by using systems that are not available to others.

How has Barclays responded to the allegations?

The bank says that it was monitoring trade within its dark pool and "predatory" traders would be held to account.

"We take these allegations very seriously," the bank said. "Barclays has been co-operating with the New York attorney general and the SEC and has been examining this matter internally."

Schneiderman said that the lawsuit was compiled with the help of former senior Barclays traders. It seeks an unstated amount of damages and restitution.