The U.S. Securities and Exchange Commission (SEC) has levied its largest-ever penalty against an alternative trading system to resolve allegations that New York-based ITG Inc. operated a secret proprietary trading desk that used the confidential information of its dark pool clients to inform its own high frequency trading strategies.
ITG, and its affiliate AlterNet Securities, will pay US$20.3 million to settle charges that, despite telling the public that it was an “agency only” broker, the firm actually operated a secret trading desk in 2010 and 2011 that traded on the confidential information of its dark pool subscribers, the SEC announced on Wednesday.
The proprietary trading desk, which was known as “Project Omega”, accessed live feeds of order and execution information of its dark pool subscribers over an eight-month period, which it used to implement high-frequency trading strategies, “including one in which it traded against subscribers in ITG’s dark pool called POSIT,” the SEC says.
ITG agreed to admit wrongdoing and pay a penalty of US$18 million, and disgorgement of US$2.08 million, which amounts to the total revenues generated by Project Omega, plus prejudgment interest of US$256,532.
“ITG has a distinguished heritage of integrity that has certainly been tested. By reaching this final settlement with theSEC, we now have the opportunity and the responsibility to restore the bond of trust with our clients and make it stronger than ever before,” saysJarrett Lilien, interim chief executive officer of ITG, in a statement “We look forward to restoring the confidence of our customers and our shareholders through the actions we take in the coming weeks and months.”
The SEC’s order found that Project Omega violated securities law “by engaging in a course of business that operated as a fraud and by failing to make disclosures about Project Omega and its proprietary trading activities.” ITG also violated SEC rules by failing to establish adequate safeguards, and failing to implement adequate oversight procedures to protect the confidential trading information of POSIT subscribers, the SEC order says.
“ITG created a secret trading desk and misused highly confidential customer order and trading information for its own benefit,” says Andrew Ceresney, director of the SEC’s division of enforcement. “In doing so, ITG abused the trust of its customers and engaged in conduct justifying the significant sanctions imposed in this case.”