A subsidiary of Swiss banking giant UBS has settled charges and agreed to pay a $12 million penalty, the Securities and Exchange Commission said Thursday in announcing largest prosecution yet of a so-called alternative trading system.
UBS Securities LLC settled for $14.4 million allegations of disclosure failures and other securities law violations regarding the operation and marketing of what is called a dark pool.
Dark pools are private networks, where large volumes of stocks or other financial assets are traded away from public view and not on a public exchange, where other market participants could push prices up or down. The rub on these alternative trading systems is a lack of transparency and the possibility that trading in a dark pool might provide an advantage when also trading in public exchanges.
The SEC said an examination of UBS activities revealed the bank’s subsidiary failed to disclose to all subscribers the existence of an order type that it conveniently pitched mostly to high-frequency traders and market makers. Market makers, generally Wall Street banks, stand ready to either buy or sell on a continuous basis, and high-frequency traders deploy powerful computers and software algorithms to buy or sell fractions of a second ahead of other traders,
“The UBS dark pool was not a level playing field for all customers and did not operate as advertised,” Andrew J. Ceresney, director of the SEC’s enforcement division, said in a statement announcing the settlement.
The SEC also said that UBS failed to preserve certain order data for the dark pool for periods in 2008, 2009 and 2010, and that it violated confidentiality requirements by giving access to confidential trading information to 103 employees who should not have had it.
The action by the SEC is important because it is the latest in a string of enforcement actions that began last year into both high-frequency trading and operation of dark pools. Both came under increased scrutiny after the release last year of the acclaimed book Flash Boys by author Michael Lewis that detailed how both enabled front-running financial markets and skimmed profits away from ordinary investors and their retirement savings plans.