Credit Suisse dark pool accused of nefarious activity
Credit Suisse is facing allegations that its dark pool Crossfinder ripped off investors by providing unfair advantages for some participants while misleading others. The incident follows a long history of nefarious activity reported in various dark pools in recent years – and exposed the bank to charges of hypocrisy from market observers.
According to reports that emerged earlier today, the bank is trying to negotiate a settlement with the New York Attorney General and regulator the SEC over the allegations. Although no terms have yet been revealed, the consequences could be serious. In July, agency broker ITG spent $20 million to resolve allegations of nefarious activity in its dark pool, while in January, UBS paid $14 million over accusations of unequal trading conditions in its dark pool.
The history of suspicious activity in dark pools goes back further still. In 2011, Pipeline Trading Systems was the subject of legal action by regulator the SEC, over allegations that it misled investors. In particular, the company failed to disclose that orders in its dark pool were being filled by Millstream, a high-frequency trading firm owned by the company. Pipeline later ceased operations, its reputation irretrievably tarnished by the incident.
In the light of this dubious history, some observers have seized on the allegations against Credit Suisse as evidence that many bank-owned dark pools have become little more than a sham in which long-term investors are conned by aggressive, predatory high-frequency traders.
“What is grotesque about this story is not that yet another dark pool has been found to cater solely to HFTs i.e., the best paying clients who will always get priority treatment by banks such as Credit Suisse and Barclays simply because that’s all they do: pay to frontrun others because in a market which is rigged to the core, HFT and dark pool manipulation is now the rule,” wrote Tyler Durden at activist investment blog Zero Hedge. “What is grotesque, is that back in December 2012, it was none other than Credit Suisse which conveniently explained and laid out all those forms of HFT manipulation which we accused virtually every HFT firm of employing since 2009… and which Credit Suisse itself is now accused of engaging in!”
This is a reference to a report published by Credit Suisse in 2012 which analysed various aspects of HFT as well as various forms of market manipulation. It is also a reference to author Michael Lewis’ book Flash Boys, which tells the story of an investigation into the mechanics of HFT carried out by one senior executive at RBC. The book alleges that securities markets are rigged in favour of HFT firms – an allegation that is also often made by representatives of the buy-side such as Adrian Fitzpatrick, head of equity trading at Kames Capital, who has referred to HFTs in the past as “predatory vultures”.
Credit Suisse declined to comment.