Barclays was facing an exodus of big US clients last night after allegations it deceived them by allowing predatory high-frequency traders to use its "dark pool" share trading facility despite claiming it would keep them out.
Nearly £2.4bn was wiped from Barclays' stock market value, and shares in other banks with dark pools – which allow big investors to trade anonymously with each other – were also hit after the accusations of fraud in a lawsuit filed by the New York Attorney General. They include Credit Suisse, UBS and Deutsche Bank. But Barclays, whose shares fell, 14.16p to close at a 215.84p , was by far the biggest faller amid fears it could now take a "mega penalty" to settle the case.
Reports last night said broker-dealers including Deutsche, Royal Bank of Canada and ITG had all removed their connections to Barclays' dark pool, called Barclays LX.
US fines for European banks have recently undergone a step change, with France's BNP expected to pay up to $9bn (£5bn) to settle charges of sanctions busting.
Barclays LX shot from being a middle-of-the-pack player in 2011 to the number two in the market by last year.
The activities of high-frequency traders (HFTs) came to prominence earlier this year when they were the subject of Flash Boys, an exposé by Michael Lewis. They use sophisticated computer-based trading strategies – often holding shares for far less than a second – and exploit high-speed data feeds to gain access to information more quickly than ordinary investors.
According to filings by the Attorney General, Eric Schneiderman, Barclays relied on "false" and "misleading" marketing material promising that investors would be protected with the help of "built- in safeguards" against "toxic", "predatory" and "aggressive" HFTs.
But the pool's largest participant was an HFT and the bank, according to the complaint, admitted internally that it was "taking liberties" with the truth to "help ourselves", as it sought to increase the size of its dark pool. The bank, it is alleged, misled clients because it had identified a "growth opportunity" of up to $50m a year if it could move its "dark pool" towards the top of the pack.
Staff were allegedly given incentives to grow the pool "at all costs", in the words of one former senior director. A vice president responsible for selling the dark pool to clients allegedly told colleagues they had always "liked the idea that we were being transparent" but were "happy to take liberties" with the data and marketing materials "if we can all agree".
According to the complaint: "Barclays' head of product development said of a chart used to market the service that 'the accuracy is secondary to objective' of showing clients that Barclays was overseeing trading and 'so if you want to move/kill certain bubbles it doesn't really matter'. Barclays' head of equities sales responded: 'Yes! U smart'."
In another email the complaint details, the head of equities sales noted that some in the industry viewed Barclays' dark pool as "toxic landfill".
Barclays said: "We take these allegations very seriously. Barclays has been co-operating with the New York Attorney General... and the SEC and has been examining this matter internally. The integrity of the markets is a top priority."
Helen Roberts at the National Association of Pension Funds, said: "The allegation that investors have been misled is clearly not acceptable. Conflicts of interest need to be addressed and there should be a level playing field for all investors."
Barclays' US dark pool operates separately from its facilities here and the Financial Conduct Authority has not been involved in the investigation. But The Independent understands the results of the FCA's "thematic review" of dark pools in the UK could come as soon as next week.