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Deutsche Bank admits misleading clients in dark pool trades
[NEW YORK] Deutsche Bank AG agreed to pay US$37 million and admit to misleading customers about its dark pool stock-trading platforms to settle a joint state and federal probe, bringing the bank a step closer to resolving several potentially costly legal challenges in the US
The bank will admit to violating state and federal securities laws over a two-year period by failing to address known technical problems with its proprietary dark-pool ranking model, the US Securities and Exchange Commission and New York Attorney General Eric Schneiderman said Friday.
"Misleading and self-serving statements that defraud investors will not be tolerated," Mr Schneiderman said. "Electronic order routing systems that route investor orders to various markets, including dark pools, are a part of modern equities trading, and companies that promote their routing capabilities must do so truthfully."
Despite Deutsche Bank chief executive officer John Cryan's push in February to "speedily" resolve legal and regulatory matters, the Frankfurt-based lender continues to grapple with concerns that many of its global rivals have put behind them - including US probes into its mortgage-backed securities business and into whether its traders colluded to manipulate currency rates.
Deutsche Bank said in September that the US Justice Department had opened negotiations by seeking as much as US$14 billion to settle a probe tied to mortgage securities. That would be on top of the more than US$9 billion in fines and settlements it has paid since the start of 2008, according to data compiled by Bloomberg.
The bank is also being investigated by US and UK authorities over whether its internal controls failed to catch some US$10 billion in transactions that may have moved money out of Russia, people familiar with the matter have said.
Friday's civil agreement extends a string of settlements in probes of whether banks properly disclosed how trades were executed or who was on the other side of them with the private platforms. In January, Barclays Plc agreed to pay US$70 million and Credit Suisse Group AG US$84.3 million to settle allegations by the SEC and Mr Schneiderman of wrongdoing in their dark pools. The settlements hinged on whether the banks adequately disclosed how their venue worked to their customers.
"Deutsche Bank is pleased to have resolved these matters," the company said in a statement Friday. "We believe that all concerns described in the settlements, which do not allege intentional wrongdoing or misconduct, have been remediated." Deutsche Bank shares rose 0.5 per cent to US$19.03, and touched the highest level since April.
The bank told clients for years that its ranking model for dark pools, an industry term for private stock trading platforms that compete with public exchanges, would periodically re-rank the pools based on their execution quality and available liquidity, according to the statement. In reality, the bank used stale rankings from 2012 to 2013, and failed to fully fix the problem during an attempted update to the system without telling clients, the attorney general said.
Deutsche Bank's clients and potential clients were led to believe that its model was being regularly updated with "objective" data in order to reflect the current state of trading in the venues to which Deutsche Bank routed orders, so as to direct client orders to the most optimal venue.
From January 2012 to February 2014, technical problems at Deutsche Bank prevented the execution quality rankings from being performed, Mr Schneiderman said in a statement. "Despite knowing about the problem for over a year, Deutsche Bank did not address the issue," he said.
Deutsche Bank also manually overrode its dark-pool-ranking model to prioritise trading on its own venue after a coding error placed its platform in the lowest tier of the lineup. That move wasn't disclosed to clients. The same coding error also gave two other venues inflated rankings in its system. As a result, they received millions orders that wouldn't have been routed their way if the bank's model worked as advertised.
The Financial Industry Regulatory Authority fined Deutsche Bank an additional US$3.25 million on Friday for failing to provide accurate information in regulatory filings on the operation of its private trading venue. Finra said in a statement that the bank failed to provide the same information to all clients of its alternative trading systems about certain services and features. As a result, some customers including high-frequency trading firms received services that others may not have known were available.
US regulators have increased scrutiny of dark pools in recent years. The private trading platforms emerged in the 1980s as a way for institutional investors to trade large blocks of stock without tipping their hand to the rest of the market.
Other multimillion-dollar SEC settlements have included a US$20.3 million accord with Investment Technology Group Inc, which was alleged to have run a proprietary trading desk that used knowledge of customers' requests to trade for its own benefit.
In January 2015, UBS Group AG was fined US$14.4 million by the SEC for failing to provide adequate information about how its dark pool operated.