by Howard Haykin

ITG and its affiliated broker-dealer, AlterNet Securities, agreed to pay a $12 million fine to settle SEC charges arising from ITG’s misstatements and omissions about the operation of the firm’s dark pool, POSIT, and ITG’s failure to establish adequate safeguards and procedures to protect POSIT subscribers’ confidential trading information.

These charges are in addition to charges filed in August 2015 against ITG and AlterNet for operating an undisclosed proprietary trading desk that used confidential customer trading information to trade in the POSIT dark pool.

POSIT was one of the first dark pools to allow for anonymous and confidential matching of subscriber orders. POSIT subscribers include asset managers and institutional investors, generally referred to as “buy-side” subscribers, and broker-dealers, generally referred to as “sell-side” subscribers.

SEC FINDINGS.  

(1)  Despite assuring subscribers that it would maintain the confidentiality of their trading information … ITG improperly disclosed the confidential dark pool trading information of firm clients.

From 2010 until 2017, ITG improperly disclosed confidential trading information of POSIT subscribers in a variety of ways, including by sending 3 daily written reports containing POSIT trading information outside the firm.

For example, from 2010 to 2015, ITG sent daily reports to several high frequency trading (“HFT”) firms - entitled Top 100 Reports for the prior day’s trading activity, that identified the top 100 stocks for which certain orders were submitted to POSIT and the top 100 stocks for which certain orders were executed.  ITG informed the recipients that they could use these Top 100 Reports to identify “potential unsatisfied liquidity needs” in the dark pool, despite assuring subscribers that ITG would not signal their trading intentions.

(2)  ITG also failed to disclose certain important structural features … of the dark pool. 

From 2010 to mid-2014, ITG split the dark pool into 2 separate pools, which prevented certain orders in the 2 pools from interacting with one another. ITG failed to disclose the separate pools, which had different performance and fill rates, despite specific questions from subscribers about whether ITG “tiered” or segmented the dark pool in any way. 

From mid-2014 to late 2016, ITG failed to disclose that the firm applied a “speedbump” to slow down interactions involving orders from certain HFT firms.

ITG’S REMEDIAL ACTION.    By 2017 and early 2018, ITG was under new management; among other changes, ITG had a new CEO, new CCO, and new POSIT management. Under their guidance, ITG implemented a series of changes related to POSIT, including enhancing the firm’s internal policies and procedures related to POSIT operations and access to POSIT data, and overhauling its training and oversight of employees.

[For further details, click on ... SEC Order.]