(Bloomberg) — Investment Technology Group Inc. is in talks to settle allegations its equity dark pool ran afoul of U.S. regulations, with the possibility of paying a record $20.3 million penalty.
ITG disclosed the discussions and potential fine in a statement Wednesday, saying the situation concerned an experimental market-making unit that a subsidiary ran in 2010 and 2011. The division traded using information not available to other customers of ITGs private stock-trading system, which is against Securities and Exchange Commission rules.
A fine at the level mentioned by ITG would be a record for a private Wall Street trading platform, surpassing the $14.4 million that UBS Group AG agreed to pay in January. After years of operating with seemingly little scrutiny, the latest case, as well as the New York attorney generals lawsuit against Barclays Plc, shows the steps authorities are taking against alternative trading systems such as dark pools.
ITG Chief Executive Officer Bob Gasser said the firm shut the trading experiment and hasnt run a similar one since.
As CEO of ITG, I apologize to our clients, our investors, and our employees. I take full responsibility for these historical mistakes, Gasser said in a note to clients. We have learned from this unfortunate experience and continue to apply those lessons to our business every day.
Proprietary Trading
The matter is focused on customer disclosures, regulatory filings for the dark pool and customer information controls, ITG said.
These violations principally involved information breaches for a period of several months in 2010 regarding sell- side parent orders flowing into ITGs algorithms and executions by all customers in non-Posit markets that were not otherwise available to ITG clients, according to ITGs statement.
The Posit platform, started in 1987, is one of the oldest venues for matching stock orders away from an exchange. The market-making units trading accounted for less than 1 percent of total volume on Posit during its existence, Gasser said in his note.
That would be a lot of money for an action against a dark pool, said Thomas Sporkin, a former SEC enforcement lawyer now in private practice at BuckleySandler LLP. In cases where some participants have unfair advantages over others, the SEC is going to come down hard, he said.
In the same press release, ITG said Kevin J.P. OHara resigned from its board on July 23.
Board Disagreements
Over the last several months, continuous fundamental, strategic and vital differences of opinion and direction have transpired at the Board level and, in particular, between me and the Boards leadership, OHara said in his resignation letter, according to a filing.
Judy Burns, an SEC spokeswoman, declined to comment on ITGs disclosure.
In the UBS case, the SEC flagged a series of violations from 2008 to 2012, among them that the Swiss bank let customers submit orders at prices denominated in increments smaller than a penny and that the ability to trade in such increments wasnt widely disclosed to customers. Instead, said the agency, UBS secretly pitched it to market makers including high-frequency traders.
At the time the UBS settlement was announced, SEC Enforcement Director Andrew Ceresney told reporters the regulator would bring more cases in the coming months against dark pools.
Liquidnet Fine
Last year, the agency fined Liquidnet Holdings Inc. $2 million for not living up to client secrecy standards. In 2011, Pipeline Trading Systems LLC agreed to pay $1 million, in part because it had a proprietary trading unit that was secretly trading against client orders.
New York Attorney General Eric Schneidermans case against Barclays alleged that the British bank bilked its own customers to expand its dark pool. Schneiderman says Barclays falsely claimed that it closely monitored and shut off certain types of traders. The bank has denied the charges and is fighting the suit.
