August 21, 2015

SEC Enforcement Spotlight – ITG Pays Over $20 Million To Settle Charges Related To Its “Dark Pool”

By Molly Knobler

Brokerage company ITG, Inc. and its affiliate AlterNet Securities will pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.  See SEC Press Release.

In 1987, ITG created POSIT, an alternative trading system or “dark pool,” for subscribers such as asset managers, broker-dealers, and institutional investors to anonymously and confidentially place trades on behalf of various types of investors, including pension funds and individuals with retail brokerage accounts.  As of March 31, 2015, POSIT was the ninth largest alternative trading system (“ATS”) as measured by dollar volume of executions, with over $109 billion in executions in the first quarter of 2015.

According to the SEC’s order instituting administrative proceedings, ITG has historically operated and marketed itself as an “agency-only” brokerage firm, meaning that it did not engage in proprietary trading for its own account.  However, according to SEC allegations, between April 2010 and July 2011, ITG improperly operated an undisclosed proprietary trading desk known as “Project Omega.”  In addition, despite claiming to protect the confidentiality of dark pool subscribers’ information, for eight months during 2010, “Project Omega” accessed live feeds of the order and execution information of ITG’s subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in POSIT.  Therefore, while Project Omega was engaging in proprietary trading, including with ITG’s own customers, and using their information to maximize its trading profits, ITG promoted itself as protecting the confidentiality of its customers’ trade information and acting without conflicts of interests with its customers.

As a result of these actions, the SEC alleged that ITG violated § 17(a) of the Securities Act of 1933 by engaging in a course of business that operated as a fraud, and violated Rule 301(b) of Regulation ATS by failing to amend its Form ATS filings and establish adequate safeguards.  ITG has agreed to admit wrongdoing and to pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega), prejudgment interest of $256,532, and a penalty of $18 million.  This is the largest penalty the SEC has imposed on an alternative trading system.

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