The response from Barclays (LSE: BARC) (NYSE: BCS.US) to New York Attorney General Eric Schneiderman’s allegations of ‘fraud and deceptive practices’ in its dark pool share trading venue, LX Liquidity Cross, was short and sweet:
“Barclays will update the market, if appropriate, in due course.”
Barclays has 20 days (from 25 June) to respond to the lawsuit, and it’s clear that considerably more than a market update will be required.
In my view, Barclays CEO Antony Jenkins now has the opportunity to free the bank of its increasingly toxic investment banking legacy. The question for shareholders is whether he is willing to grasp this particular nettle.
Could BNP happen to Barclays?
Barclays shares remain down by 6.5% on last Wednesday’s closing price, and now trade at just 75% of their tangible net asset value. Although I maintain my value buy rating on the shares, due to their discount to book value, the risks are rising.
One risk is that Barclays could face a multi-billion dollar fine of the kind accepted by French bank BNP Paribas on Monday. BNP will pay $8.9bn in penalties to US authorities for executing currency trades which breached US sanctions.
I don’t think this is likely for Barclays, but the potential financial cost of the dark pool allegations is hard to predict: analysts estimate that trading revenues from Barclays’ dark pool business last year might have been as little as $100m-$200m — yet the potential litigation costs could be huge.
Personally, I’m more worried about the increasingly tarnished reputation of Barclays’ investment banking business.
Not such a bargain
Dark pools were originally intended to allow investors to trade large blocks of shares without moving the market. Barclays’ US ‘dark pool’ business, LX Liquidity Cross, was one of the assets it acquired from Lehman Brothers, when the US bank went into administration.
At the time, Barclays was seen as having got the Lehman assets on the cheap, but I’m not sure that the bank would want to repeat this deal today.
Dark pools have come under increasing regulatory scrutiny since Michael Lewis’ bestselling book Flash Boys was published, alleging that high-frequency traders use dark pools to conceal their activities.
In my view, Barclays should jump the gun and shut down its dark pool operations, so that it can focus on its three attractive, profitable growth businesses: UK retail banking, African retail banking, and Barclaycard.
Prompt action now could help deliver improve returns to Barclays’ shareholders, rather than to its costly lawyers.
