Barclays in Hot Water: Sued for 'Dark Pool' Misdeeds - Analyst Blog

Heightening the legal hassles faced by Barclays PLC BCS, the New York Attorney General Eric Schneiderman recently slapped a lawsuit against it. The company has been charged of malpractices related to its dark pool.

It is alleged that Barclays made false claims regarding its Equities Electronic Trading Division taking measures to protect investors from high-frequency traders in the dark pool. In fact, the division fraudulently propagated the trading platform by understating the degree of high-frequency traders in it.

High-frequency traders use sophisticated computers to access pending orders as well as special market impacting information before others. Moreover, the high speed systems enable them to book profit by moving in or out of a position within fraction of a second. Therefore, higher concentration of these high-frequency traders in the trading platform lowers the chances of profit for other traders from a particular development in the market.

It is further alleged that Barclays misled investors by presenting tampered information assuring them that their orders were spread across trading exchanges. However, the company had instead channeled maximum orders into the dark pool without informing the investors about it.

After Credit Suisse Group AG CS, Barclays has the highest holdings of dark pool in the country. In a determined effort to develop its dark pool as one of the largest in the U.S., Barclays compromised on investors' security and divulged sensitive information about their identity and trading activities to the high-frequency traders.

The Attorney General has proofs in form of emails and information from reliable insiders to support the aforementioned allegations. The lawsuit requires Barclays to discontinue its fraudulent activities and surrender the unscrupulous profits hence earned. Further, the company has to provide a complete accounting of its trading division activities and pay a certain amount as damage compensation.

Barclays has been embroiled in legal hassles for quite some time. Earlier this month, the company along with The Goldman Sachs Group, Inc. GS, and Merrill Lynch, Pierce, Fenner & Smith, Inc. of Bank of America Corp. BAC was fined $1 million each. The fine was levied by the Financial Industrial Regulatory Authority (FINRA) for submitting inaccurate and incomplete “blue sheet” data to various regulatory authorities.

Though the Barclays has undertaken special measures to combat the rise in expenses persistent litigation issues will be a headwind for the company in the forthcoming quarters. Moreover, the overall subdued economic scenario, low interest rate and stringent regulatory environment will continue to pressure the top-line.

Barclays currently carries a Zacks Rank #5 (Strong Sell).