Poor Customer Disclosures at ITG Dark Pool Could Yield Record Fine

Investment Technology Group (ITG) announced a potential record $20.3 million penalty by the SEC for a dark pool run by its subsidiary, Alternet Securities, in 2010 and 2011. The investigation relates to proprietary trading in the dark pool without disclosing it to its broker clients who were executing orders there.

The investigation also relates to an employee that improperly accessed confidential information about the orders. Although unclear from the news reports, the employee may have used this information to the brokerage and technology firms benefit in its prop trading.

The SEC has been fining operators of these entities for both types of actions over the past few years. Liquidnet was fined $2 million for problems with its client secrecy last year. In 2011, Pipeline Trading was fined $1 million for trading against client orders secretly.

This potential fine comes at a time when dark pools are coming under increasing regulatory scrutiny, not least of which is because of there involvement with high frequency traders. UBS agreed to pay a then record $14.4 million fine back in January for inadequate disclosures to customers regarding some order types at its dark pool. At the time, SEC Enforcement Director Andrew Ceresney told reporters that the SEC would bring additional cases against operators of dark pools in the coming months.

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