Barclays (LSE: BARC) (NYSE: BCS.US) came under pressure yesterday, its share price slumping as much as 9% at one point, after it was revealed that the New York Attorney General had filed a lawsuit against the bank.
According to Eric Schneiderman, the state Attorney General, the lawsuit concerned Barclays’ “dark pool” trading venue. It has been claimed that the dark pool was favouring high-speed traders, which profit off other users transactions.
For Barclays, this revelation is a huge blow to its reputation, as the bank had been telling institutional investors, which regularly used the dark pool, that they were “diving into safe waters”.
Not easy to understand
For many investors, all this talk about dark pools will be confusing.
Simply put, a dark pool is designed to allow institutional investors to buy and sell large amounts of shares, without revealing their hand to the market. The problem is that these dark pools are essentially black holes, leaving them open to manipulation.
Luckily, due to the black hole nature of dark pools, regulators have historically had difficulty accessing and assessing dark pool data, which could work to Barclays’ advantage.
Indeed, for this reason, it is unlikely that investigators will be unable to uncover the whole truth about the manipulation.
Further, looking at the fines both Barclays and others have had to pay in the past with regards to high frequency trading and dark pool manipulation, it’s unlikely that the financial penalties as a result of the lawsuit will be crippling.
However, with regulators cracking down on high frequency trading and dark pools, there is a chance that Barclays could be made an example of.
Poor reputation
Still, while Barclays is likely to get off lightly when it comes to financial penalties, the bank’s reputation now lies in tatters. As part of the investigation, it was revealed that the bank’s traders knew what was going on in these dark pools, ignoring the best interests of customers.
The current lawsuit quotes one former Barclays director as saying:
“... there was a lot going on in the dark pool that was not in the best interests of clients…“
What’s more, Barclays knew that some people in the industry viewed the bank’s dark pool as a;
“toxic landfill”
and traders believed that;
“… [i]f we can help ourselves we should[;] it’s in our control…“
Based on these statements, according to City sources, broker-dealers including Deutsche Bank were yesterday severing ties with Barclays’ dark pool trading venues, in an attempt to distance themselves from the disgraced bank.
One dealer, Pragma Securities, told reporters that it had received numerous complaints from clients demanding that the firm cut its connections with Barclays.
Comes at a good time
Luckily for Barclays this bad news could has come at a convenient time. The bank is currently in the process of winding down its investment division and these revelations could speed things along.
So, to some extent, investors could view this news in a positive light. With Barclays’ investment banking customers turning their backs on the bank, management can refocus their efforts on UK retail banking, Barclaycard and Barclays Africa — three highly profitable and stable businesses.
For this reason I feel that Barclays’ long term outlook is still robust and investors shouldn’t shy away from the shares just yet. Barclays is still making progress across the board.
