Another financial bigwig Credit Suisse Group AG (CS) – one of the largest dark pool operators in the U.S. – came under the regulatory scanner. The company revealed that it is facing investigations regarding its private trading platform by several government and regulatory bodies. The bank did not divulge further details regarding the investigations.
Dark Pool Trading: Concerns on the Rise
Dark pools are private platforms wherein the secrecy of investors is guarded well in comparison to public exchanges. The crux of dark-pool trading is that there is less transparency in trading, minimizing the market impact. Further, price and volumes of trade are predetermined and are only revealed after the trade. Owing to this, such investors reap the advantage of manipulative price movement and lower transaction costs. Precisely, it allows a section of investors and traders to gain at the cost of a general investor.
Notably, many dark pools offer access to their trade data to outsiders including high frequency trading firms. With increasing competition in the dark pool industry, the technical faults and issues have heightened the associated risks and raised concerns over the relationship that the high frequency firms and the dark pools share.
The U.S Class Action Suit
Credit Suisse also stands among 30 defendants, including high-frequency trading firms, securities exchanges and broker-dealers, against class action filed on Apr 18, 2014 in the U.S. District Court for the Southern District of New York related to high frequency trading.
The class action has been brought on behalf of public investors who traded in the U.S stock market on a registered public stock exchange or on a U.S. based alternative trading platform since Apr 18, 2009. The defendants are alleged to have violated the federal securities laws related to market manipulation and insider trading.
Other Global Giants in Dark Pool Probe
Another Swiss banking giant UBS AG (UBS) revealed in its second- quarter 2014 release that its dark pool trading activities were under detailed scrutiny. Also, earlier this week, Germany’s Deutsche Bank AG (DB) said that it is co-operating with the regulators for similar investigations.
Among other holders of the dark pool, last month, a lawsuit has been filed against U.K. based Barclays PLC (BCS) by the New York Attorney General Eric Schneiderman, charging it for faulty practices related to its dark pool.
The Goldman Sachs Group, Inc. (GS) has recently been slammed with a fine of $800,000 by the Financial Industry Regulatory Authority (‘FINRA’). The company has been charged of malpractices related to its dark pool – SIGMA-X.
Bottom Line
Heightened investigations and lawsuits surrounding dark pool trading and high speed trading reflect efforts of the regulators and the government to bring transparency and stability in the trading industry and thereby safeguard investors’ interest.
On Credit Suisse’s part, undoubtedly, any negative outcome of the investigations might force the company to discontinue or limit such trading practices, which may result in lower trading revenues. In fact, it could significantly mar the total revenue. However, nothing can be certainly said until the extent of company’s involvement in the matter is known.
Credit Suisse currently carries a Zacks Rank #5 (Strong Sell).
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