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Barclays earnings set to be hit by “dark pool” concerns
00:00, 29 July 2014
It’s been over a month since the announcement from US regulators that they are suing Barclays US investment bank for alleging that the bank favoured HFT traders using its "dark pool" trading venue, and in the process potentially disadvantaging its big pension fund and institutional clients. New CEO Antony Jenkins must feel like a punch bag; as he strives to navigate more land mines, given his pledge to clean up the bank, when he took over in 2012. Nicknamed St Antony when he took over with his “Project Transform” policy to clean up the bank, it would appear that no-one appears to be listening in the US investment banking arm. Having just digested the recent news that it would have to create a bad bank for some significantly underperforming investment banking assets in Fixed Income and commodities (FICC), and its European retail operations, the allegations from the US regulator that Barclays is vigorously contesting are the last thing Antony Jenkins needs right now. These allegations appear to be somewhat of an own goal on the part of its US arm which has been the beneficiary of some backtracking by its new CEO on the subject of bonuses cuts amidst threats of mass defections. Given the severity of these allegations and the subsequent drop in trading revenues as a result, tomorrow’s trading update could well see a significant hit to revenues in the investment banking unit, which would then raise the question as to why keep it open, given that the unit is already undergoing significant restructuring changes with the loss of 7,000 jobs over three years. The pay and practices of investment banking continue to come under scrutiny not only in the UK, but across the globe as well, and the prospect of further inquiries on top of recent litigation could well suggest that the banks investment banking unit needs shrinking further given that fixed income business at other major institutions is also on the decline. This will be an important component of this week’s update with close scrutiny on the investment banks trading revenues which are certain to have taken another hit, in the wake of these allegations as well as the lower volatility seen this year. According to the lawsuit filed in New York last month, Barclays allegedly falsified marketing materials to institutional investors concerning its so called monitoring system called “Liquidity Profiling”, which it told investors enabled it to identify predatory trading and ban malicious trading practices or HFT traders. It is also alleged the bank falsely claimed it did not favour its own dark pool when routing client orders to trading venues. The bank looks set to vigorously contest these charges suggesting that it feels it is on fairly solid ground. Coming as this does on the back of the furore over the recent multi-billion dollar fine on Banque Paribas, the fear must be that given recent evidence of fine inflation, which we’ve been seeing from regulators, that Barclays could be hit very hard if these charges are proven. The share price has come under pressure since the announcement of the SEC investigation, with the shares hitting their lowest levels since November 2012, earlier this month, though we have seen a modest rebound since then, largely as a result of last week’s surprise improvement in Royal Bank of Scotland’s latest numbers, which has raised hopes that Barclays could well surprise on the upside. This seems a rather optimistic assessment given RBS’s profits improvement was down to improved valuations in its bad bank’s assets, which got deep-sixed at the end of last year, when the bank announced another hefty loss. What this inquiry in the US does do is increase the uncertainty in the broader sector as inevitably we could well find further examples of this amongst other banks that operate their own dark pools, with reports that Swiss bank UBS is also under investigation. We constantly hear banks complain about overzealous regulation, and there is certainly a risk of a knee jerk response in a lot of these cases, but when stories about malpractice, alleged or otherwise consistently hit the headlines, as in the case of Lloyds this week, it is hard to feel any sympathy whatsoever. If you behave like a misbehaving child then you should expect to be treated like one. This looks like yet another reason to be cautious about the banking sector as increased scrutiny and regulation, as well as more fines, is likely to be the result of another PR pot-hole for the banking industry. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.