Dark Pools Brought Further into the Light

In recent years, more and more securities have been traded away from the public eye, exposing markets to new kinds of possible securities fraud. As Bloomberg reported in 2012, only 68 percent of all trades occurred on public markets, like the NASDAQ or New York Stock Exchange. This number, down from 74 percent as recently as 2008, owes itself largely to the increasing popularity of trading venues known colloquially as “dark pools.” Since 2008, trading in dark pools has nearly tripled.

These non-public exchanges are attractive to investors and brokers alike. Dark pools, defined broadly, are simply securities exchanges that are not accessible to the general public. Traders on these markets can then avoid many of the consequences of public trading, like market fluctuations based on the desirability (or lack thereof) of a particular security.

Drawbacks of Dark Pools

Large amounts of capital exchanging hands in the dark, however, can have negative consequences. On June 25, 2014, for example, the New York Attorney General filed a lawsuit against Barclays alleging fraud and deceit in connection with its dark pool. The complaint asserts that the bank made false statements to clients in efforts to attract and benefit “high frequency” traders, at the expense of others.

“We are talking about pension fund money,” the attorney general said on CNBC. “The average citizen who wants to be in the market is trading through large institutional investors, and we found specifically that there was fraud committed against large institutional investors.”

In the wake of the filing of this lawsuit, trading in Barclays’ dark pool plummeted. Deutsche Bank, Credit Suisse, and Royal Bank of Canada—among others—ceased directing orders to the dark pool.

These startling allegations were followed shortly by a separate settlement against Goldman Sachs by FINRA, in which the investment bank was made to pay $800,000 for allegations that its dark pool executed hundreds of thousands of trades in 2011 at prices that violated investor protection rules. This was in addition to the $1.67 million already returned to those clients harmed by the behavior.

FINRA Requires Dark Pool Information be Made Public

With the rising popularity of non-public trading, regulatory entities have been attempting to mitigate the possibility of fraud. On June 2, for example, FINRA announced that it would begin collecting and publishing data on all securities exchanged in dark pools. Prior to this change, this information was only available to certain investing professionals—and even then, it was limited to particular dark pools and only released on a monthly basis.

Now, members of the public have free access to a database showing the total number of shares of a stock traded in dark pools each week. Separated out by stock and dark pool, this information is supplied weekly by the operators of dark pools (although FINRA delays the publication of some of this data). As FINRA has stated, it hopes that supplying this data “will increase market transparency and thereby enhance investor confidence.”

If you have been the victim of securities fraud or financial exploitation, please contact attorney Gregory Tendrich, P.A. to discuss your legal options today.