ITG, an electronic brokerage that trades more than 4 billion U.S. shares a month, has admitted to running a secret trading desk that took advantage of its clients.
The firm runs what’s known as a dark pool — a place for funds to place massive orders to buy or sell shares without making them known to the market until after the fact.
Secrecy is the whole point. If other traders know there’s a big buyer of shares out there, they will push up the price before the fund can close its order.
The SEC complaint filed today said ITG set up an in-house team – dubbed Project Omega – that saw those “secret” orders and took advantage of that information for a profit.
“ITG created a secret trading desk and misused highly confidential customer order and trading information for its own benefit,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.
The team was set up in 2010 as ITG looked to diversify its revenues, and according to the SEC it continued have access to client information after ITG discovered that the team was improperly accessing it.
Project Omega generated around $US2.1 million in gross revenues before the head of the team at the time – Hitesh Mittal – was terminated in July 2011. The firm agreed to admit wrongdoing and will pay back the proprietary trading revenues, interest and a $US18 million civil penalty for running the team.
The settlement follows the departure of former chief executive Robert Gasser, who led the firm at the time of the offenses in question.
“With today’s settlement, we have put this regrettable legacy matter behind us and are working to rebuild our clients’ trust in ITG,” said Maureen O’Hara, chair of ITG’s Board of Directors.
Here are the key facts from the SEC complaint:
- ITG owns and operates POSIT, the alternative trading system known as a dark pool. The dark pool was the ninth largest in the US as of March 31, with over $US109 billion in trading activity in the first quarter.
- In late 2009 the company looked at diversifying its revenues, and set up Project Omega under the leadership of an executive who also had responsibility for POSIT.
- From April to December 2010, the prop trading desk accessed live feeds of ITG customer and POSIT subscriber and trading information and traded based on that information.
- Omega identified and traded with investment bank subscribers in POSIT, and took steps to ensure that those subscribers traded in such a way in POSIT that Omega was able to take the full ‘bid-offer’ spread on the other side of the trade.
- ITG’s senior management discovered that Omega was improperly accessing subscriber order information in December 2010 and trading was halted.
- On December 20, the then-CEO of ITG reprimanded the executive running Omega. Omega then made changes to its trading strategies and was allowed to restart trading under the leadership of the same executive.
- Omega continued to have improper access to information identifying POSIT subscribers, and still ensured investment bank subscribers were set up to trade in a way that benefited Omega.
- Project Omega’s existence and activities were not disclosed to ITG customers, and even within the company Omega was only discussed on a “need-to-know” basis.
- ITG promoted itself as an independent agency-only broker that protected the confidentiality of its customers trade information throughout the period that Omega was trading.