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Two Penn’orth Finance
Barclays and Goldman Sachs
Two stories have hit the press in the past few days. Each is a scandal when viewed in isolation. But intriguing when viewed side-
Barclays is being sued by the New York Attorney General for alleged fraud in relation to the operation of a ‘dark pool’. According to Mr Schneiderman, Barclays misrepresented the safety of its alternative trading system to investors. His allegation is that Barclays grew its dark pool by telling investors they were diving into safe waters when in fact the dark pool was full of predators there at Barclays invitation. News of the suit wiped 10% off the market capitalisation of Barclays.
Goldman Sachs, meanwhile, has agreed to pay an $800,000 fine in relation to charges that it executed nearly 400,000 trades in its dark pool at inferior prices -
So what is supposed to happen? And what has gone wrong in these cases?
In Europe, the regulators have a rule known as the best execution rule. This is a little more complicated than you might expect, but generally it requires brokers to get the best deal for their clients. You’d like to think that goes without saying, but there’s a rule to support it anyway.
Goldmans is charged with breaking the US equivalent of this rule which requires that firms don’t execute trades at prices worse than the National Best Bid and Offer (NBBO). For a number of days, due to some systems breakdown, it was executing at worse prices. And it failed to detect this. Its customers, however, did notice. And they started calling up to complain.
The Barclays case is maybe a little more complex. Barclays is accused of
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