A lawsuit filed by New York state against Barclays PLC was the latest hit to the image of dark-pool trading, providing yet another prod to increase trading venues' transparency while also potentially opening up dark-pool operators to broader legal action from governmental agencies.
“Nobody needed this,” Kevin McPartland, principal and head of market structure research, Greenwich Associates, Stamford, Conn., said of the lawsuit filed June 25 by Eric Schneiderman, New York state attorney general.
The suit, combined with SEC Chairwoman Mary Jo White's announcement last month that the Securities and Exchange Commission would review rules on dark-pool transparency, should show the need to make dark-pool operations more open, Mr. McPartland said.
In addition, the SEC might be spurred into filing civil charges against dark-pool operators. Some experts see parallels between the Barclays lawsuit filed by Mr. Schneiderman and legal action brought in 2003 against Putnam Investments LLC, Boston, claiming the money manager did not disclose improper market timing by its portfolio managers.
A year later, Putnam agreed to pay a total of $110 million to settle accusations by the SEC and Massachusetts regulators.
“If the past is any guide to the future, I think this raises the potential that the SEC will feel some motivation to move ahead with a civil case (against Barclays),” said Todd Cipperman, founder and managing partner of Cipperman Compliance Services LLC, Wayne, Pa. “I wouldn't be surprised first if Massachusetts followed suit with its own case against Barclays. But I would be surprised if the SEC didn't do the same.”
One source who asked not to be identified said: “Back then (with market timing), shareholders were harmed; now it's both shareholders and investment clients. ... Traditional mutual funds had no reason to do market timing other than to game the system. It's the same with dark-pool manipulation; it's not best execution, it's gaming the system for individual gain.”