Dark pool operator Liquidnet has agreed to pay $2 million to settle SEC charges that it improperly used confidential trading data from its subscribers.
Liquidnet violated its regulatory obligations and its own promises to its ATS subscribers for three years by giving a unit outside the dark pool operation access to the data, an SEC investigation found.
The firm promised its dark pool subscribers that it would keep their trading information confidential and allow them to trade with maximum anonymity and minimum information leakage.
Yet staffers at Liquidnet's equity capital markets (ECM) desk were given data that they then used during marketing presentations and communications to other customers and in two ATS sales tools.
For example, ECM employees would provide issuers with descriptions - including geographic locations, assets under management, and investment styles - of ATS subscribers who had recently indicated interest in buying or selling shares of issuers' stock.
ECM employees also used dark pool subscribers' trading data to advise issuers about which institutional investors they should meet during investor conferences and when clients should execute transactions in the ATS given the liquidity in the dark pool.
Daniel Hawke, chief, market abuse unit, enforcement division, SEC, says: "Liquidnet's subscribers trusted and believed that the firm was safeguarding their confidential information. Instead, the firm breached its assurances of confidentiality and anonymity to them by allowing its ECM employees to improperly access subscriber trading data."
Last week SEC chair Mary Jo White laid out her plans to improve oversight of dark pools, which now account for around 35% of US trading volume. She wants to increase the amount of information the SEC gets from these venues and is even considering making that data public to help investors track what their brokers are doing.