While watching the World Cup yesterday I read through all 30 pages of legalese of the NY Attorney General’s charges against Barclays bank. What follows is a summary of what it contains and what you need to know to sound like you’ve actually read it and you can appear smarter than your finance friends at Friday night drinks at the pub.
Shall we get started?
What has really been happening at Barclays?
They’ve been naughty, very naughty indeed, that’s what has been happening at Barclays. Specifically their dark pool known as “LX” which is run by their Equities Electronic Trading division deserves a proper spanking.
So here’s what is alleged that Barclays has done: When you, a Barclays client, send an order to buy a stock, instead of routing it to the stock exchange they’d place it in their own dark pool (think of it like their own internal stock exchange). Nothing wrong with this so far, happens all the time and the idea is that you can get a better price.
Barclays needed more traders so they could match the trades in their dark pool. Why? When they matched trades in their dark pool they made money and also they wouldn’t have to pay exchange fees because this was their own little lemonade stand after all.
To get enough people to trade in their dark pool Barclays turned to high frequency trading (HFT) firms and invited them to their dark pool. The thing about high frequency traders is that they trade at a high frequency (clue’s in the name and all that). Thanks to these HFT firms throwing orders hither and yon Barclays had a working market, making them pots of money. Still nothing inherently wrong with this, but now we come to the real problems.
- To get these HFT firms to come and trade in their dark pool Barclays gave certain HFT firms information regarding their dark pool order flow.
- Barclays marketed their dark pool as being safe from “predatory” traders and “toxic” flow, both of which are often felt to be part and parcel of HFT.
As mentioned earlier, Barclays routed most of their trades into their own dark pool first. Information regarding these trades was then provided to certain HFT firms operating in the dark pool. Think about it like this: Certain firms operating in the world’s largest dark pool got information regarding most of the trade flow from one of the world’s largest banks. Even the deductive skills of Inspector Jacques Clouseau would tell you the value that can be gleamed from such information is priceless. Also it’s not really fair is it?
The duplicitous and possibly illegal activity that Barclays conducted is that they marketed aggressively the fact that they would keep investors safe from precisely the practices that it was subjecting its clients to.
I told you they’d been naughty, very naughty.
Was what Barclays did illegal?
Time will tell, but one thing is clear from the text of the summons. It’s not such an open and shut case as it first appears. It’s absolutely clear that Barclays shafted their clients. No doubt about it. Bringing them to justice on the other hand is a completely different kettle of fish, especially once Barclays’ lawyers have had a good go at it.
Here’s the problem from a legal perspective.
- Testimony based on former employees
- Marketing material
A significant part of the summons contains testimony and comments from former employees. In fact the most interesting part of the summons was how toxic (pardon the HFT pun) the working atmosphere at Barclays Electronic Trading must have been. North Korean politics probably has nothing on this particular department in Barclays when it comes to intrigue, back stabbing and seething resentment.
If I was one of these “former employees” I’d be right royally scared at this point. If one thing is a cert in American legal circles it is character assassination. Barclays’ lawyers will rip apart the lives of these former employees and paint them as gargoyles in human form and do anything they possibly can to discredit them, they’ll probably succeed as well.
Then we come to the point about marketing material. The summons shows many good points and quotes from Barclays marketing material, which really do look like a smoking gun. BUT!!! is it really? I haven’t seen the marketing material in question in detail myself, but I am wondering what the small print disclaimers said. No one can promise you the stars in the big print while delivering you manure in the small print like a bank’s marketing brochure.
As for the trial. I’m no American legal eagle but what if this goes to trial? The issues of trade routing, dark pools, HFT etc. are hugely complex. Most finance pros don’t understand them, how on earth will a jury of ‘normal’ non-finance people ever comprehend it all?
Therein is Barclays strength: A long protracted trial with the aim of sending each and every juror to sleep each and every day with the minutiae of trade execution.
So as you can see, the whole thing is not as straightforward as the NY Attorney General makes out… and Barclays knows it.
The über smart quotes
One more thing. It always makes you appear plenty smart if you can quote a few legal terms in a discussion. Since I'm your friend and want to help you look like the smartest person in the room below are the two laws Barclays is alleged to have violated.
- The Martin Act Securities Fraud “employed deception, misrepresentations, concealment, suppression, fraud, and false promises regarding the issuance, distribution, exchange, sale, negotiation, or purchase within or from this state of securities. “
- Persistent Fraud and Illegality – Executive Law § 63(12) “Barclays (a) engaged in repeated fraudulent or illegal acts or otherwise demonstrated persistent fraud and (b) repeatedly violated the Martin Act in the carrying on, conducting or transaction of business within the meaning and intent of Executive Law § 63(12).