New York-based fund management company ITG Inc. has agreed to pay $12 million to settle SEC charges that the firm made misstatements and omissions about the operation of its dark pool and failed to establish adequate safeguards to protect confidential trading information.
A dark pool is a type of trading center that does not display information regarding the orders placed into the pool, or the identities of subscribers who have submitted orders into the pool. Dark pools are often used by market participants who seek to minimize the price impact of their orders and executions.
According to the SEC’s cease and desist order, ITG omitted important information on structural features of the dark pool, such as the fact that it was divided into two separate pools, which prevented certain orders in the two pools from interacting with one another. This was despite specific questions from subscribers about whether ITG tiered or segmented the dark pool in any way. The SEC also said the firm applied a “speedbump” to slow down interactions involving orders from certain high-frequency trading firms.
“Contrary to assurances it made to dark pool subscribers, ITG failed to ensure that trading information was protected, and in some instances used this information to attempt to grow its business,” said Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit. “Our agency continues to scrutinize dark pools to ensure they protect client trading information and operate in compliance with the securities laws.”
The order said that ITG improperly disclosed confidential trading information of POSIT subscribers “in a variety of ways,” such as by sending three daily written reports containing POSIT trading information outside the firm. ITG allegedly sent two of these reports immediately before the market opened every trading day to approximately seven subscribers and three firms that were not subscribers, all of which engaged in high-frequency trading. The SEC said ITG informed some high-frequency trading firms that they could use the reports to identify “potential unsatisfied liquidity needs” in POSIT.
Without admitting or denying the findings, ITG and its affiliated broker-dealer AlterNet consented to the SEC’s order finding that they violated the antifraud provisions of the securities laws, as well as the rules governing the requirements for dark pools. In addition to the $12 million in fines, the order directs ITG and AlterNet to cease and desist from committing or causing any future violations of those provisions, and censured the two companies.
This is not ITG and AlterNet’s first run-in with the SEC over their dark pool operations. In 2015, both firms agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused confidential trading information of dark pool subscribers.