Scandal engulfed the banking sector again yesterday as the Swiss bank UBS and Deutsche Bank admitted that they had been dragged alongside Barclays into an escalating inquiry into predatory high-frequency traders in so-called “dark pool” stock exchanges.
It comes just a day after Lloyds was savaged by watchdogs for attempting to fix interest rates in an attempt to duck fees due to the taxpayer for participating in the Bank of England’s “special liquidity scheme”. The scheme helped save Lloyds from collapse.
UBS, fined nearly £1bn for its central role in Libor interest rate-fixing, yesterday said it was “responding to inquiries” from US regulators as well as the New York Attorney General, Elliot Schneiderman, over the operation of its “dark pool”.
It also admitted to being named alongside “dozens” of others including high frequency traders, brokers and other “dark pool sponsors”, in a number of class action lawsuits filed by investors in the US.
Deutsche merely said it had received “a number of requests from regulatory authorities related to high-frequency trading” while also being named in lawsuits. It says it is co-operating.
Dark pools are supposed to allow big investors such as pension funds to trade big parcels of stock without other traders knowing what they are doing.
But there is controversy over the role played by high-frequency traders (HFTs) within them. HFTs trade rapidly in and out of shares, sometimes owning them for small fractions of a second, which critics say harms other investors.
Video: 'Dark pools are not new'
The dark pool scandal kicked off when the New York Attorney General claimed Barclays had misled investors using its dark pool into believing they would be protected from HFTs.
Barclays last week hit back, filing a motion to dismiss, but not before trading at its dark pool had dried up, with the bank falling from second to 12th in the market within days.
If the US authorities are able to prove wrongdoing they could demand another batch of mega-fines.
UBS, which reported a 15 per cent rise in second-quarter profit to Sfr792m (£516m), is already embroiled in a battle with the French authorities over alleged tax evasion. Last week a French court demanded it post €1.1bn (£900m) in bail after the bank was placed under formal examination over claims that it had helped launder the proceeds of tax evasion by French citizens. It is fighting the case and has pledged to appeal. But the bank warned that the extent of its involvement in various investigation could “substantially exceed” texisting provisions.
Deutsche also warned that litigation would have “a significant impact” on its future performance as it said net profit fell 29 per cent to €237m in the second three months of 2014.
Getting tough: BofE extends crackdown
The Bank of England could impose even tougher rules on bank bonuses today with new rules allowing bonuses to be clawed back seven years after they were awarded, according to reports. From January, firms supervised by the Prudential Regulation Authority will have to change staff contracts to impose the new regime. The Bank, which floated a six-year clawback in March, will also launch consultations on industry pay and strengthening management accountability among bankers.