Barclays enlists outside help in dark pools investigation

Friday 27 June 2014 15.47
CEO Antony Jenkins is trying to restore Barclays' reputation but the emergence of past sins are hampering his efforts
CEO Antony Jenkins is trying to restore Barclays' reputation but the emergence of past sins are hampering his efforts

Barclays said it is bringing in outside help to speed up an investigation into alleged misconduct in its "dark pool" operations.

The latest probe has rekindled concerns that the cost of past problems at its investment bank will rise. Over £2 billion was wiped off Barclays' market value yesterday.

The fall came after New York's attorney general filed a lawsuit against the British bank, accusing it of trying to grab extra profits from its alternative trading system while promising to get the best possible prices for customers. 

The shares stabilised today after tumbling 6.5% to a 19-month low yesterday. 

Dark pools allow institutional investors to trade large blocks of shares anonymously. Prices are posted only after deals are done, and the pools were created so that investors do not suffer a disadvantage by signalling their big orders. 

But ever-larger volumes of trades have been shunted into them and critics say the opacity of the markets may be resulting in more investors getting ripped off. 

Barclays' dark pool business, called LX, originally belonged to Lehman Brothers, the investment bank that collapsed in 2008. Barclays subsequently bought Lehman's US business.

The business under scrutiny generates relatively modest revenues for the bank. The 31-page summons issued by New York's Attorney General said internal Barclays documents valued the growth opportunity from pushing more orders into its dark pool at between $37-$50m a year. 

Total revenues for the dark pools business may be $100-200m, industry sources and analysts estimated, out of $4.6 billion in equities revenues last year. 

Analysts said the hit to its shares reflects broader concern that customers may leave Barclays, that chief executive Antony Jenkins will struggle to turn around the bank's culture as quickly as he needs to, and the threat of higher-than-expected litigation costs on a range of issues. 

Barclays has been hit by series of scandals in recent years, including its role in the rigging of the Libor interest rate which cost chief executive Bob Diamond his job in 2012, leading to huge fines and legal bills. 

Analysts have raised estimates of possible litigation costs for Barclays to £7.5 billion over the next three years, from £2.4 billion. 

Barclays, which has 20 days to respond to the lawsuit, said today it was still assessing the complaint. It could suffer a litigation cost of $163m from the dark pool activities, analysts at Credit Suisse estimated. 

Jenkins told staff in a memo issued he had started an internal investigation into the allegations. "To assist us in that we have brought in substantial external resource to ensure that the investigation can proceed at pace and is properly objective," the memo said. 

The bank declined to comment who that would involve. It typically uses law firms Clifford Chance in Britain and Sullivan & Cromwell in the US. 

Jenkins is trying to restore Barclays' reputation but the emergence of past sins are hampering his efforts. Last month it was fined £26m for past failures in internal controls that allowed a trader to manipulate the setting of gold prices. 

Rival banks have pulled business out of Barclays' dark pool, the Financial Times reported. Deutsche Bank, Credit Suisse and Royal Bank of Canada as well as asset manager Alliance Bernstein had all withdrawn from the dark pool, it said.