Goldman Sachs will pay an $US800,000 fine and return money to investors in order to settle charges that it failed to protect clients from harmful trading in its dark pool, Sigma-X, announced the Financial Regulatory Authority.
This comes after New York Attorney General Eric Schneiderman filed civil charges against Barclays bank last week, alleging that it misrepresented the safety of its dark pool exchange. Some investors pulled their money from the bank and Barclays’ stock tumbled on the news.
Goldman, for its part, has been outspoken about the dangers of high frequency trading and the dark pools where those traders can live. Earlier this year COO Gary Cohn, a former trader himself, wrote an op-ed in the Wall Street Journal outlining how Wall Street’s race for speed can make exchanges vulnerable technologically.
He also pointed out that the lack of transparency in this kind of trading created unfairness in the market.
Public market data should be disseminated to all market participants simultaneously. Exchanges currently disseminate prices and transaction data to the SEC-sanctioned distributor for all investors, but exchanges may also send this information directly to private subscribers. While the data leave the exchange simultaneously, the public data are delayed because they go through the intermediary’s processing infrastructure. The public aggregator should release information to all market participants at the same time.
Removing the possibility of differentiated channels for market data also reduces incentives that favour investment in the speed of one channel over the stability and resiliency of another. Instability creates and compounds market disruptions. Stable and accurate market data is one of the most important elements of market safety; it is the backbone of the market that must weather the most extreme periods.
That said, it’s important to note that Goldman didn’t have the baddest dark pool on the Street. In fact, the word was the bank would be happy to give it up if it meant more transparency. Investors were starting to get worried about high frequency trading, and Goldman’s stock trading business in general has been losing market share.
As for this $US800,000 fine, Goldman will neither admit nor deny guilt upon payment.
Expect to see a lot of that as authorities crack down on what’s going on in dark pools and try to catch regulation up with technology. This isn’t even close to over.