Level ATS Sees Sign of Rebound in Volume

Level ATS said Thursday that the number of shares traded on its dark pool gained 20 percent in December.

That is the first monthly signal that its activity is rebounding since the announcement at the outset of September that it would pay $800,000 to settle charges it failed to protect the confidentiality of its customers properly.

The Boston firm pegged its average daily volume at 40.7 million shares in December. That was a gain of 20 percent, it said, in a report to customers, over November, without specifying that month’s daily volume.

“As people have begun to understand the specifics of the settlement, clients have returned to the pool,’’ Stephen R. Miele Jr. senior vice president and head of sales told Traders Magazine. “And that’s why we’ve seen an uptick” at the end of last year and the start of 2013.

Thirty-five of what Level considered its top 40 clients before the settlement are now routing orders to its dark pool. And, on January 2, the company said it recorded a three-month high of 61.7 million shares across 3,726 symbols.

But that remains far below its pre-settlement level of activity.

On the day before announcing the settlement with the Securities and Exchange Commission over charges that it failed to properly protect information on customers’ trading practices, the Level alternative trading system executed 79.9 million shares across 3,912 symbols.

That was on October 2. The previous five days Level reported 89.5 million, 76.2 million, 81.2 million, 92.1 million and 91.2 million shares executed on its trading system. Then, it stopped reporting its activity, after announcing the settlement.

Rosenblatt Securities, which tracks dark pool activity, reported that volume at the Level ATS dropped by more than half, from September to October.

In its monthly “Let There Be Light” report on activity in dark pools, Rosenblatt said volume at the Level ATS was 19 million single-counted shares in October, down from 41 million in September. That’s a drop of 53.7 percent.

Those numbers are in accord with Level’s, which reports both sides of a transaction in its count. Such “double counting” produces numbers that appear twice as big.

In its report to customers Thursday, Level indicated that its October volume was below 40 million double-counted shares, daily. That would be below 20 million single-counted shares.

November volume was below 35 million double-counted shares.

On October 3, Level’s parent, eBX LLC, agreed to pay the SEC a fine of $800,000 after the regulator said the pool, which is based on anonymous trading, did not “protect the confidential trading information of its subscribers,” allowing an outside technology firm to use information about LeveL subscribers’ unexecuted orders, for its own “business purposes.”

Following the SEC’s announcement of the settlement, several customers stopped sending their orders into the LeveL dark pool. In October, LeveL chief executive Whit Conary told Traders Magazine that a quarter of its customers had stopped sending their flow to the dark pool.

The smart order involved has a retained memory function that, according to LeveL, is a “commonplace” feature of such machines.

That “memory feature,” the SEC said, enabled the Lava trading unit of Citigroup to retain a record of any order submitted to various market centers, and to use that information to make automated routing decisions. The feature retains the symbol, side, source, quantity, and received time for these orders; and can be turned on or off.

In a letter to customers, Conary said Lava confirmed in April 2011 that it no longer was using the feature when it involved LeveL subscribers.

The SEC also noted “there is no evidence that information about LeveL’s unexecuted orders was displayed, or otherwise communicated to, clients of the Order Routing Business or other third parties.” The SEC also said actual execution prices were not affected by the use of the memory feature.

Nonetheless, eBX had “insufficient safeguards and procedures to protect subscribers’ confidential trading information,” the SEC said.