Karen Freifeld and John McCrank New York

NEW York’s state attorney-general has filed a securities fraud lawsuit against Barclays, accusing the UK bank of giving an unfair edge in the US to high-frequency trading clients even as it claimed to be protecting other customers from such traders.

The lawsuit, which relates to Barclays’s LX Liquidity Cross “dark pool” trading system, alleges that the bank promised to get the best possible prices for customers trading shares but instead took steps that maximised the bank’s profits and executed nearly all stock orders on LX instead of on sites that may have offered better prices.

The New York attorney-general’s action is the highest profile case yet to emerge in the US authorities’ efforts to ensure that dealers are not ripping off investors in increasingly automated stock markets.

Dark pools were originally created to allow investors to execute big trades without tipping off the market. But ever-larger volumes of trades have been shunted into dark pools and their critics say the opacity of the markets may be resulting in more and more investors being ripped off.

Barclays’s London-listed shares were down 7.2 percent at £2.136 (R38.50) by mid-afternoon yesterday, their lowest level in more than 18 months.

The lawsuit delivers another blow to chief executive Antony Jenkins’s efforts to restore the bank’s reputation after a series of scandals.

He has said that its culture, which has been criticised as high-risk, high-reward, had to change and that systems and controls were improving, but his efforts are being hampered by the emergence of past sins.

New York attorney-general Eric Schneiderman said Barclays told customers who chose to trade in its dark pool that they would be protected from “predatory traders”, which use their speed advantage to deprive other investors of small profits on every trade. But in fact customers were not protected at all, and the bank in fact courted predatory high-frequency traders in part by charging them virtually nothing, Schneiderman alleged.

“We take these allegations very seriously,” Barclays said in a statement. It added that it was co-operating with the authorities while looking at the matter internally, and that the integrity of markets was a top priority for the bank.

Banks have admitted to bad behaviour in other markets, after probes showed collusion in currency trading and short-term interest rate products.

Jenkins took over as chief executive in August 2012 after Barclays was fined for alleged manipulation of London interbank offered rates. – Reuters