ITG (NYSE:ITG), an independent execution broker and financial technology provider, was ordered to pay $12 million by U.S. regulators for misleading users of a “dark pool” operated by one of its affiliates, AlterNet Securities Inc.
The alleged violations occurred over various periods, the longest ranging from 2009 to late 2016, SEC said. As part of the settlement, the broker-dealer will neither admit nor deny the allegations.
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In one case, SEC’s investigation focused on allowing high-speed traders to interact with investor orders in the dark pool. In another, it looked at how confidential client-trading information was shared internally and with algorithmic trading clients.
Specifically, the Securities and Exchange Commission found that ITG misled users with assurances that its will not reveal their anonymized data on its dark pool platform POSIT to high-frequency traders.
The regulator also found that ITG did not disclose that over a period of more than four years, the dark pool was split into two separate pools which did not offer the same premium features as the company promised. This also prevented certain orders in the two pools from interacting with one another.
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The New York-based company also sent trade confirmation messages to certain users that indicated the top 100 stocks for which certain orders were submitted and executed on ITG’s own platforms.
“ITG informed some high frequency trading firms that they could use these Top 100 Reports to identify “potential unsatisfied liquidity needs” in the dark pool, despite assuring subscribers that ITG would not signal their trading intentions,” the SEC said.
The settlement is ITG’s second with the U.S. regulators in the last three years, following a $20.3 million charge in August 2015. Under the first deal, ITG admitted to having run a secret trading desk that profited off of confidential customer information within its U.S. dark pool.
Increasing scrutiny on dark pools
“Contrary to assurances it made to dark pool subscribers, ITG failed to ensure that trading information was protected, and in some instances used this information to attempt to grow its business,” said Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Our agency continues to scrutinize dark pools to ensure they protect client trading information and operate in compliance with the securities laws.”
Dark pools are private electronic trading sites allow institutional investors to anonymously trade large blocks of shares without being visible to other traders until they are executed. The anonymity of price tags is designed to help investors trade large blocks of shares without the market moving against them.
In recent years, dark pools have attracted increasing scrutiny amid warnings by exchanges and lobby groups about the lack of pre-trade transparency, perceived unfairness, and the potential exploitation of some dark pool users.
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