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New York state's Attorney General Eric Schneiderman speaks during a news conference to announce his office is filing a securities fraud lawsuit against the banking and financial services firm Barclays, Wednesday, June 25, 2014, in New York. The suit alleges that Barclays told investors that it had set up safeguards to protect them from predatory high-frequency traders. But it says Barclays actually catered to those traders.John Minchillo/The Associated Press

It appears that instead of running a dark pool, Barclays PLC was operating a shark tank.

That's the main thrust of the allegations revealed yesterday in a civil fraud suit against the British bank by Eric Schneiderman, the attorney-general of New York State.

The accusations shed further light on the potentially harmful activities of certain high-frequency traders and the way they allegedly exploit the fractured nature of U.S. equity markets.

There are two salient items to be gleaned from the complaint. First, if prosecutors are correct, then investors' deepest anxieties about dark pools are justified. Unlike public exchanges, such internal trading venues shield client orders from prying eyes. But what actually goes on in the shadows?

Nothing good, says Mr. Schneiderman. He alleges that Barclays said it would protect clients from predatory traders in its dark pool but utterly failed to do so. The bank also claimed to route client orders to wherever it could get the best execution for their transactions, the complaint says, then sent the vast majority of them to its own dark pool – where high-frequency traders were waiting to take advantage of such traffic.

"These are serious charges which allege a grave failure to live up to our values," said Barclays CEO Anthony Jenkins in a memo sent to the bank's staff on Thursday. "We are working urgently to understand the situation. We are undertaking a full internal investigation into these allegations."

The second important aspect of the Barclays case is the prominent role played by whistleblowers. Such internal sources of information are often critical in cases of financial malfeasance but not always forthcoming. In this instance, several former Barclays employees were ready to sing like canaries.

They pointed investigators to the tool Barclays said it employed to protect investors from predatory trading in its dark pool. In marketing materials, the program came with its own name and motto: "Liquidity Profiling – Protecting You in the Dark."

The program was "a scam," in the words of one former employee, according to the complaint. Barclays never actually prevented predatory or toxic high-frequency traders from accessing the dark pool and fudged numbers to make it look like such traders played a smaller role than they actually did, the complaint says.

Meanwhile, an internal analysis showed that Barclays funnelled 75 per cent of client orders directed to private venues to its own dark pool, according to the court papers. One employee was ordered to change the figure to 35 per cent before presenting the analysis to an institutional investor client; the employee later resigned, the complaint says. Another employee was fired after sharing the unaltered results of the analysis with a client, prosecutors say.

One of the ex-employees who spoke with prosecutors had a deft touch with metaphors. Summing up the bank's behaviour in its private trading venue, the former senior director said: "It's almost like they are building a car and saying it has an airbag, and there is no airbag or brakes."

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