Credit Suisse in Hot Water: To Settle Dark Pool Probe?

Rumour mills are in overdrive, claiming that Credit Suisse Group AG CS, which is one of the largest dark pool operators in the U.S., has agreed to shell out around $85 million to regulators in order to resolve claims concerning Crossfinder, the company's dark pool trading platform.

According to a person familiar with the matter, Credit Suisse will compensate roughly $30 million in fines to the New York Attorney General and about $55 million to the Securities and Exchange Commission ("SEC") for the alleged faulty practices on its platform in July 2014.

Notably, negotiations for the settlement are still ongoing and final announcement for the same is expected to be made by the end of September.

Flashback

Reportedly, Credit Suisse has been accused of offering undue advantages to a few traders and has also been found to violate rules that prohibit pricing of stocks. Moreover, the company failed to inform investors comprehensively about the workings of Crossfinder.

Additionally, Credit Suisse stands among 30 defendants, including high-frequency trading firms, securities exchanges and broker dealers, against the class action lawsuit related to high frequency trading filed on Apr 18, 2014, in the U.S. District Court for the Southern District of New York.

Dark pools are private platforms wherein the secrecy of investors is guarded well in comparison to public exchanges. The crux of dark-pool trading is that there is less transparency in trading, minimizing the market impact. Further, price and volumes of trade are predetermined and are only revealed after the trade. Owing to this, such investors reap the advantage of manipulative price movement and lower transaction costs. Precisely, it allows a section of investors and traders to gain at the cost of a general investor.

Other Dark Pool Settlements

U.K.-based Barclays PLC BCS is undergoing similar negotiations with the U.S. regulators, and will likely face a heavy fine for misleading clients about the extent of high-speed trading on its dark pool platform.

In July 2015, Investment Technology Group Inc. ITG revealed that it has set aside $20.3 million for a probable settlement with the SEC, which is investigating trading activities on POSIT, the company's dark pool platform.

In January 2014, the SEC had slammed UBS Group AG UBS with a record $14.4-million fine for failing to comply with rules that ensure fair trading on its dark pool platform.

Bottom Line

Heightened investigations and lawsuits surrounding dark pool trading and high-speed trading reflect efforts on part of the regulators as well as the government to bring transparency and stability in the trading industry. This, in turn, will help safeguard investors' interest.

Nevertheless, any negative outcome of the investigations might force Credit Suisse to discontinue or limit such trading practices, which may result in lower trading revenues. In fact, it could significantly hurt the company's total revenue. However, nothing certain can be concluded until the settlement is announced.

Credit Suisse currently holds a Zacks Rank #4 (Sell).

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