Barclays to pay additional $150M ForEx penalty

NEW YORK British banking giant Barclays (BCS) will pay an additional $150 million penalty and fire a top official over misconduct related to foreign-exchange currency trading, a New York financial regulator said Wednesday.

The fine stems from evidence that Barclays in some cases used its electronic foreign-exchange trading system to automatically reject client orders that would prove unprofitable for the bank based on price swings during milliseconds-long hold periods, the New York State Department of Financial Services said.

Barclays didn't disclose why the trades had been rejected. Customers who inquired were told the rejections stemmed from technical issues or given vague responses, the state regulator said.

Combined with previous penalties, the London-based bank has now paid $635 million to the New York regulator for alleged manipulation and other misconduct involving the world's $5.3-trillion-a-day foreign-exchange market.

"This case highlights the need for greater oversight and action to help prevent the misuse of automated, electronic trading platforms on Wall Street which is a wider issue that requires serious additional scrutiny," said Anthony Albanese, acting superintendent of the regulator that oversees Barclays' U.S. operations.

Barclays said the civil fine will be reflected in its fourth-quarter financial results. The bank also said it continues to cooperate with other investigations and manage related litigation risks.

The latest penalty stems from the New York regulator's investigation of Barclays' electronic trading platform for the foreign-exchange market. Called BARX, the system allows traders to execute foreign-exchange transactions with the bank.

Powerful automated technology in some cases enables traders to spot and exploit tiny delays in the flow of foreign-exchange data by requesting trades based on information that Barclays and other banks might not yet have received. For instance, the trading systems might detect market movements milliseconds before the bank's own electronic platform picked up the information and adjusted prices to account for the changes.

Trading orders submitted in response to such changes are known as "toxic flow" or "toxic order flow."

In an effort to protect the bank against losing trades, Barclays designed a "last look"  program that imposed a short delay between the time a customer's trading order was received and the time the transaction was executed. The delay enabled Barclays's trading system to compare the price of the customer's order at the start and end of the hold time.

The system rejected trades that would be unprofitable for the bank, investigators found.

Moreover, Barclays ultimately used the automated last look delay to reject all foreign-exchange trades expected to favor customers over the bank, not just toxic flow transactions, the regulator said.

Evidence showed that a Barclays employee warned in October 2008 that if any trading clients questioned rejected foreign-exchange trades "it is important that you state in any communication 'The trade was rejected because of latency.' ... Do not talk about P&L on trades."

A Barclays sales employee emailed a BARX support system colleague in September 2014 asking about the built-in delay in the last look system. The BARX support system employee responded that the delay was designed to "ensure profitability of a trade for Barclays," but stressed that "our team generally does not share this info with the client, and just say it was a business reject."

Along with paying the financial penalty, Barclays is terminating the bank's global head of Electronic Fixed Income, Currencies and Commodities, the regulator said.

The new fines come six months after Barclays and four other major banks  agreed to plead guilty to criminal charges and pay more than $5.5 billion in cumulative penalties to settle allegations their traders routinely manipulated the world's foreign-exchange market for their own profit.

That case, investigated by the Department of Justice, the Federal Reserve, the New York regulator and other U.S. and European authorities and regulators, involved misconduct findings related to non-automated foreign-exchange trading.