The Securities and Exchange Commission said Wednesday that it charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers, and that it allowed an outside firm to use that data.
Dark pools do not display quotations to the public and they benefit participants by providing access to trading opportunities that aren't open to investors who use the public markets.
The SEC said that eBX - which operates the alternative trading system LeveL ATS - inaccurately informed its subscribers that their flow of orders to buy or sell securities would be kept confidential and not shared with anyone outside the venue. But an investigation found that the firm gave an outside technology company access to unexecuted orders from LeveL subscribers, the SEC said.
That technology firm had a leg up on the dark pool's users since its separate order routing business was able to use knowledge of orders sent by LeveL subscribers to make routing decisions for its own customers and also to boost its execution rate.
"Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information," said Robert Khuzami, the SEC's director of enforcement. "Many eBX subscribers didn't get the benefit of that bargain - they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit."
The SEC said eBX agreed to pay an $800,000 fine to settle the charges.
Matt Samelson, principal of capital markets research and consulting firm Woodbine Associates, compared this situation to last year's scandal involving Pipeline Trading Systems LLC. The now defunct darl pool operator was fined $1 million by the SEC for failing to disclose that most of the orders on its dark pool trading platform were actually being filled by an affiliate.
That case was the first of its kind taken up by the SEC against a dark pool.
"The fact that LeveL has apparently violated these rules and the promised conduct by which they operate is a grave misstep. Customers have to trust their brokers and ATS operators. Operators need to establish and maintain trust," Samelson wrote in an email. "We have well passed the time where full disclosure and third party validation is a necessity - which would help instill confidence in the client and help operators from any inadvertent conduct that ends up violating SEC rules."