Barclays seeks to defend itself in “dark pool” case

Maria Nikolova

Barclays affirms that it had expressly disclosed that there were, in fact, “aggressive” traders in LX, but it also claims to have offered a “Liquidity Profiling” tool to protect against such traders.

Bank account for FX firm

Barclays Capital Inc and Barclays PLC (LON:BARC) have sought to defend themselves in a civil action brought by investment banking and securities firm Great Pacific Securities. In court filings, dated October 11, 2017, Barclays aims to dismiss the appeal filed by Great Pacific Securities, a large and sophisticated client of Barclays.

The Plaintiff alleges that Barclays PLC and Barclays Capital Inc. (together, “Barclays” or “Defendants”) violated California’s laws of concealment, false advertising, and unfair competition by misrepresenting certain information concerning the operation of Barclays’ LX – an Alternative Trading System (ATS), also known as “dark pool”.

As FinanceFeeds has previously reported, Great Pacific Securities claims that Barclays has 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.

In its response filed with the Court earlier this week, Barclays says it expressly disclosed that there were, in fact, “aggressive” traders in LX. The bank adds that the Plaintiff never chose to use the optional Liquidity Profiling tool, thereby undermining Plaintiff’s claim that it supposedly wanted to avoid transactions with “aggressive” HFTs.

The “Liquidity Profiling” service was launched by Barclays in January 2012. Rather than blocking by counterparty type, this optional product allowed blocking based on whether Barclays rated a counterparty’s trading “aggressive,” “neutral,” or “passive.” Clients could, for example, “disable their orders from interacting with [ELP] traders” with “aggressive” flow and allow “neutral” or “passive” ELP flow to execute against their orders.

Regarding the allegations by the Plaintiff that it would have acted differently, had it known about Barclays’ alleged interaction with HFT firms, Barclays says that the Plaintiff fails to explain with any plausibility how it would have done that. Indeed, Barclays notes, Plaintiff’s admission that it continued to trade in LX and use Barclays’ algorithms after learning of Barclays’ alleged misconduct belies entirely any claim of reliance.

Barclays requests that Ninth Circuit U.S. Court of Appeals should affirm the District Court’s decision that Plaintiff failed to plead damages, as Great Pacific Securities provides no factual support for the allegation that it was harmed when HFTs in LX were allegedly able to “skim” information about Plaintiff’s trades to its detriment, or that its clients did not receive “best execution” when trading in LX or using Barclays’ algorithms or router.

Regarding the claims that Barclays violated the advertising laws, the bank demands that this Court affirms the District Court’s dismissal of these claims as the alleged misrepresentations were not transmitted to the public at large, and thus do not constitute “advertising”.

Great Pacific Securities also referred to 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. In its latest filings with the Court, Barclays notes that Great Pacific Securities acknowledges that it continued to submit trades to LX after the NYAG’s allegations became public and therefore cannot plausibly allege that it would not have used these products had it known of the information.

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

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