Dark pools charges reveal trust issues


The SEC has once again charged a dark pool operator with illegally sharing information that should have been kept in the dark.

The latest charges involve eBX, which operates the LeveL ATS. The SEC accused the Boston-based company of misrepresenting to customers that their order flow details would be kept confidential and not shared with outsiders. However, eBX apparently "allowed an outside technology firm to use information about LeveL subscribers' unexecuted orders for its own business purposes. The outside firm's separate order routing business therefore received an information advantage over other LeveL subscribers because it was able to use its knowledge of their orders to make routing decisions for its own customers' orders and increase its execution rate. eBX had insufficient safeguards and procedures to protect subscribers' confidential trading information," according to the SEC.

The charges are similar to the charges previously filed against Pipeline Trading Systems, which settled for $1 million in October of 2011. In that case, the information was shared with a proprietary trading affiliate, Milstream, which traded on that information for its own account. In this case, Lava, the third-party technology firm, was definitely not trading on the information. Rather, it was using the confidential information to enhance its order router algorithms. Recall also that the SEC has taken a look at LiquidNet for its now-ceased practice of providing "descriptive characteristics" about members firms to clients.

Does all this add up to a credibility problem for dark pool operators at a very sensitive time? It's fair to say that customers will be more sensitive to possible leakages of sensitive information. More trading outfits will likely demand assurances. All dark pools need to be able to prove that they have no inappropriate data-sharing agreements in place. -Jim