New York prosecutors sued British bank Barclays for fraud Wednesday, saying it ran a "dark pool" securities trading operation to the benefit of "predatory" high-frequency traders.
Attorney General Eric Schneiderman said Barclays promised clients that it would protect them from aggressive high-speed trading firms in the dark pools but at the same time took steps that benefited these firms.
"The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit," said Schneiderman.
"Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays' dark pool was full of predators -– there at Barclays' invitation."
A Barclays spokesman said the British banking giant was cooperating with Schneiderman, the top prosecutor for New York state.
"We take these allegations very seriously," he added. "Barclays has been cooperating with the New York attorney general and the SEC and has been examining this matter internally."
The spokesman stressed that "the integrity of the markets is a top priority of Barclays."
The suit comes amid criticism that high-frequency traders skim profits from clients who order a stock at one price, only to end up paying more than the quoted amount after the high-frequency firm pushes up the price through a series of lightening-quick transactions.
Such aggressive maneuvers are often characterized as predator" behavior.
Schneiderman said Barclays heavily promoted to its clients a "liquidity profiling" surveillance service it said would identify and hold accountable traders who engaged in predatory practices.
But Barclays has not prohibited any traders from participating in its dark pool, regardless of how predatory they were.
Schneiderman said Barclays gave high-frequency traders "systematic advantages" over others in the pool and falsely underreported the number of aggressive high-frequency traders in the dark pool.
Transactions on "dark pools" take place on a private stock trading platform where there is little pre-trade pricing transparency.
Mary Jo White, who chairs the US Securities and Exchange Commission, signaled in an early June speech plans to stiffen scrutiny on both high-frequency traders and dark pools.
White acknowledged concerns that high-frequency traders have attained an unfair advantage over rank-and-file investors, saying she was worried "dark pool" trading volumes have become large enough to threaten the viability of "lit" venues like the New York Stock Exchange.
Concerns about high-speed trading rose on the public agenda after author Michael Lewis in March argued in a best-selling book that markets were "rigged" in favor of high-speed traders..