New York Attorney General Eric Schneiderman’s complaint alleging Barclays Capital engaged in fraud “was more interesting reading than Flash Boys,” said one high frequency trading (HFT) critic while other bank brokerage analysts assess the impact on the Barclays PLC business model going forward.
Barclays PLC claims their trades were safe from HFT predators
The civil complaint alleges that while Barclays PLC (ADR) (NYSE:BCS) (LON:BARC) claimed to their brokerage clients their trades were safe from HFT predators, while in fact the opposite was true. Systems advertised as monitoring HFT activity were overridden to avoid detecting HFTs and predators were encouraged to operate in Barclay’s dark pool, formally titled LX but internally known as “the franchise,” according to Schneiderman’s complaint.
At one point, Barclays PLC is alleged to have falsified information to conceal their questionable activities. In documents submitted to brokerage clients Barclays claimed only 35 percent of trading activity was routed to its own dark pool. The actual number, Schneiderman says, was 75 percent. The Barclays employee originally creating the document was told to falsify the document yet refused to do so, the complaint says, and was fired and the document was changed from 75 percent to 35 percent, according Schneiderman.
Barclays PLC issued new talking points to its sales after dark pool activity discovery
Schneiderman says that when suspicious dark pool activity was discovered and mentioned publicly in the media and by Schneiderman, it was disregarded. Instead of changing their behavior, Barclays PLC issued new talking points to its sales people that continued to cover up was is alleged to be illegal activity. Barclays routinely provided special advantages to HFT traders yet hid this from clients, the complaint alleges.
“HFT isn’t about speed, it’s about special privileges provided HFT not available to most investors,” said Eric Hunsader, president of software firm Nanex and an ardent HFT critic. Hunsader notes the documentation shows special advantages given to HFT firms, bending over backwards to encourage them to trade on the exchange. From Barclays perspective laying claim to having one of the largest dark pool on Wall Street had high value. Wall Street analysts note total equity revenues at Barclays reached £2.3 billion pounds (just under $4 billion US) in 2013, with estimates of around 18 percent of that originating from the dark pool.
Credit Suisse’s concerns about Barclays
In assessing the situation, Credit Suisse was concerned about Barclays PLC going forward. “Litigation costs are a challenge to Barclays executing its strategic plan, as they put pressure on the capital base, which based on our estimates pro-forma for litigation, is the weakest of the peer group,” they said in a report on the issue. Credit Suisse Group AG (ADR) (NYSE:CS) has the largest dark pool, according to FINRA data, and Barclays had the second highest level of dark pool trading.
RBC Capital Markets, which was involved in helping expose the high frequency trading issue, noted the impact the growing list of litigation issues will have on the bottom line. “We see this latest development as highlighting ongoing litigation risk for Barclays PLC and the potential for this to continue to be a drag (on profits).”