Barclays faces another appeal in dark pool case

Investment banking and securities firm Great Pacific Securities is appealing an order by the United States District Court for the Central District of California in a case against Barclays over harm done by the way the bank operated and marketed its “Liquidity Cross” dark pool (“LX”). Back in the fall of 2016, the District Court dismissed the Complaint by the plaintiffs, accusing Barclays Capital, Inc. and Barclays PLC (LON:BARC) of concealment, false advertising, and violations of California’s Unfair Competition Law.

The Appellant, Great Pacific Securities, has now taken the case to the Ninth Circuit U.S. Court of Appeals. Earlier this week, the Plaintiff-Appellant filed its Opening Brief, which FinanceFeeds has seen. In the document, Great Pacific Securities seeks reversal of the District Court’s order of dismissal.

Plaintiff Great Pacific Securities was a customer of Barclays and submitted trades for execution in Barclays’ LX dark pool, which Barclays marketed as a safe haven for investors seeking to avoid price manipulation caused by predatory high frequency traders (HFTs). Barclays, however, is alleged to have concealed the true extent of aggressive HFT trading in LX, the significant limitations of its safeguards, and manipulations to its trading algorithms to favor LX.

At the heart of Barclays’ scheme was its attempt to convince investors that trading in LX was safe. The Plaintiff-Appellants refer to marketing materials disseminated to Plaintiff and the Class, which contained a number of “misrepresentations, omissions, and half-truths” regarding the extent of “aggressive” trading by HFT clients in LX. For instance, in marketing materials released in early 2013 and 2014, Barclays claimed that trading in LX was only “9% aggressive” and “6% aggressive,” respectively. However, these representations are dubbed as misleading because they concealed the fact that trading by “aggressive” HFTs constituted a significantly larger percentage of all trading in LX, higher than 30%.

Notably, Plaintiff insists that it is not challenging the existence of HFT activity in LX. Accordingly, Plaintiff does not contend it was unaware of any HFT activity in LX, but rather the extent of trading by aggressive HFTs.

Another example of concealment is that, beginning in October 2012, Barclays disseminated pitchbooks that omitted from the bubble chart the bubble representing Barclays’ largest aggressive trader (Tradebot). Regardless of this omission, the charts retained the February 2012 footnote, stating: “This chart represents the top 100 participants in LX (~86% of total order flow). The analysis spans more than 11.3 million trades.”

Also, Barclays is alleged to have actually encouraged aggressive HFTs to continue using its pool by “repeatedly disclosing information” to them to encourage them to increase their activity in LX, “including data that helped those firms maximize their aggressive trading strategies, such as the routing logic of Barclays’ order router, the percentage of Barclays’ internal order flow that was first directed into its own dark pool, and a breakdown of trades executed in the dark pool by participant type and ‘toxicity’ level.”

Barclays’ concealment “was harmful to Plaintiff [because] the predatory traders in LX obtained information from the requested trades that Barclays swept across LX and then traded ahead” of Plaintiff’s trades, harming Plaintiff. Plaintiff says it was harmed in its business because its customers “based the amount of trades given to Plaintiff on Plaintiff’s performance in executing such trades.” As the execution in LX was not as advertised by Barclays, Plaintiff was harmed because it received fewer trade orders from its customers.

Major points in the Appellant’s argumentation are the settlements that Barclays reached with the New York Attorney General (NYAG) and the US Securities and Exchange Commission (SEC) in January 2016 over the operations of LX. In these settlements, Barclays admitted that, from December 2011 through June 2014, it misled its clients and violated securities laws. Barclays paid $70 million to settle the lawsuit filed by the NYAG and the investigation led by the SEC.

The Plaintiff notes that it had managed to sufficiently demonstrate how Barclays’ claims and marketing materials were misleading and how Barclays caused harm to the plaintiffs. The Appellant’s Brief concludes with a request for the the Court to reverse and remand the District Court’s order granting Barclays’ motion to dismiss.

The case is captioned Great Pacific Securities v. Barclays Capital Inc., et al (0:16-cv-56804).