ITG agrees to record $20M trading settlement
Independent execution and research broker Investment Technology Group (ITG) agreed to a record $20.3 million settlement Wednesday over allegations it operated a secret trading desk and traded against the financial interests of customers who used its dark pool trading venue.
The Securities and Exchange Commission said ITG told the public it was a so-called agency-only broker whose financial interests didn't conflict with those of its customers. But the company operated an undisclosed proprietary trading desk dubbed "Project Omega" for more than a year, the SEC said.
According to the regulator, the New York-based company claimed to protect the confidentiality of customers who used its dark pool — an alternative trading venue used by asset managers and others to trade large blocks of shares without negatively affecting their buying and selling prices.
But Project Omega accessed live feeds of order and execution information of ITG subscribers and used the data to execute high-frequency algorithmic trading strategies, the SEC said. Those strategies included trading against company subscribers in ITG's dark pool, known as POSIT.
"ITG created a secret trading desk and misused highly confidential customer order and trading information for its own benefit," said Andrew Ceresney, director of the SEC Enforcement Division. "They abused the trust of their customers."
The company and its affiliate AlterNet Securities admitted wrongdoing and agreed to pay disgorgement of more than $2 million, representing the total proprietary revenues generated by Project Omega. The companies also agreed to pay $256,532 in prejudgement interest, plus an $18 million penalty, the largest SEC sanction to date involving securities law violations by an alternative trading system.
"With today's settlement, we have put this regrettable legacy matter behind us and are working to rebuild our clients' trust in ITG," Maureen O'Hara, chair of ITG's board of directors, said in a statement issued after the agreement. "We have moved to position the company for future success."
According to the SEC settlement order, the securities law violations occurred between April 2010 and July 2011.
Project Omega used an algorithmic "facilitation strategy" that executed trades based on a live feed of information about orders its sell-side customers sent to ITG's algorithms for handling, the SEC said. The operation had a real-time view of customer orders being placed.
Project Omega also had access to the identities of subscribers to the company's POSIT dark pool, and used the information to trade with them there as part of the facilitation strategy, the SEC said.
The operation took steps to ensure that the sell-side customers were configured to trade "aggressively" in the dark pool, thereby ensuring that the customers would "cross the spread" to trade with Project Omega, the SEC said.
Although the settlement closed the case against ITG, the SEC probe is continuing. "We're not charging individuals today, but our investigation is not over," said Ceresney.