Dark Pool Is Found Not Dark Enough in SEC Enforcement Complaint

Jun 06, 2014 11:27 am ET

June 6 (Bloomberg) -- Liquidnet Holdings Inc., one of the biggest independent dark pool operators, agreed to pay a $2 million fine for failing to live up to client secrecy standards on its private trading platform.

The New York-based brokerage agreed to the settlement after the Securities and Exchange Commission found it didn’t maintain a firewall keeping employees of one business from accessing client information in another. Liquidnet neither admitted nor denied guilt in the infractions, which occurred from 2009 to 2011. Bloomberg News previously reported the probe.

“This was a lack of oversight that we’ve now put tremendous measures in place,” to prevent a recurrence, Seth Merrin, chief executive officer of Liquidnet, said in a phone interview. No harm was suffered by clients, he said.

One of the key features of dark pools is that they don’t identify the firms that buy and sell on their systems and give out no information about their block orders. The platforms are designed to eliminate the market impact of trading requests by keeping them out of public view until the moment a transaction is completed.

The SEC said in a statement today that its investigation found that Liquidnet broke rules from 2009 to late 2011 when it allowed another unit at the firm to have access to confidential trading data. Staff in that unit used the confidential information in marketing presentations and other customer communications, the SEC said.

Improper Access

“Liquidnet’s subscribers trusted and believed that the firm was safeguarding their confidential information,” Daniel Hawke, chief of the SEC’s market abuse unit, said in the statement. “Instead, the firm breached its assurances of confidentiality and anonymity to them by allowing its ECM employees to improperly access subscriber trading data.”

The amount of the settlement with the regulator reflects the “massive escalation in the overall size of penalties” as well the size of Liquidnet’s business, Merrin said.

“Two million dollars I’m not happy about paying, but relative to our business it’s de minimis,” he said.

In a speech yesterday, SEC Chair Mary Jo White proposed rules for monitoring dark pools, including forcing dark pool operators to provide more information about their clients and how they process buy and sell orders.

“Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues,” White said at the Sandler O’Neill & Partners Global Exchange and Brokerage Conference in New York.