Disclaimer: CMC Markets is an execution-only service provider. 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. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
Barclays falls into a dark pool
00:00, 26 June 2014
We wake up this morning to yet another probe into investment bank behaviour, and once again Barclays is in the firing line, begging the inevitable question as to when will all the bad news end? Not content with probes and fines into Libor, electricity trading, as well as an ongoing FX probe, we now have a probe into "dark pools" in yet another blow to the banks and the industry's credibility.New CEO Antony Jenkins must dread getting out of bed in the morning; as yet more prospective cockroaches emerge from the ether. Barclays is being sued by New York's top security regulator 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. In normal exchange traded markets we have something called market price depth ladders which show the number of orders at various price points either side of the bid and offer price. This has the advantage of giving an indication of the amount of liquidity in the market. In these sorts of markets any large order can trigger sharp price movements as other institutions or high frequency traders jump on the back of a market price move and thus sharply move the price, in a way that can mean the seller or buyer doesn't get the best price. Even though dark pools sound sinister, used properly they shouldn't be, and should be a vehicle for institutional investors to conduct business at the best available price. Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges' public limit order books, but without showing their actions to others. Dark liquidity pools avoid this risk because neither the price nor the identity of the trading company is displayed. Dark pools allow funds to line up and move large blocks of equities without giving too much indications as to what they are up to. This is especially useful if a pension fund for example, wants to rotate a large amount of shares out of one sector into another in the most efficient way possible, and at the best possible price. These liquidity pools are normally closed to HFT programs. According to the lawsuit filed in New York on Wednesday, 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. Barclays, it is also claimed changed statistics in a client presentation that showed 75 per cent of all orders were routed to its dark pool despite being required to get the best price for the trade. The version shown to an investor was changed to 35 per cent. Coming as this does on the back of the furore over the recent multibillion dollar fine on Banque Paribas, the fear must be that given recent evidence of fine inflation that we've been seeing from regulators, that Barclays could be hit very hard if these charges are proven. Investors aren't waiting to find out the outcome of this investigation, with the shares hitting their lowest levels since November 2012. This is yet another problem for the bank given its investment banking arm is still a key revenue earner, even though it is being scaled back in the latest part of the most recent restructuring plan. It certainly increases uncertainty in the broader sector as inevitably we could well find further examples of this amongst other banks that operate their own dark pools. We consistently 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, it is hard to feel any sympathy whatsoever. This looks like yet another reason to steer away from the banking sector as increased scrutiny and regulation, as well as more fines, is likely to be the result of yet another PR disaster 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.