Given the ongoing cleaning up process by the US government in order to make the way Wall Street conduct its business more ethical will, the international banking giant Barclays’ reputation at risk again?
By: Ringo Bones
The US government has been very busy inflicting punitive fines on major Wall Street financial firms who apparently had forgotten how to run their business in an ethical manner that eventually lead into the 2008 global financial crisis. But will the recent lawsuit by the New York Attorney General Eric Schneiderman of Barclays for not fully disclosing the extent of the risk of its financial instruments to its investors make Barclays wish that it had really good reputational risk insurance?
The lawsuit centers on what is called Dark Pool Trading where 40 percent of the trading is done away from the public. Far from being fair under existing financial trading laws, the Dark Pool trading scheme put those who are using superfast computers that enable them to perform high-frequency trading at an unfair advantage over their competition. Even though it is extremely profitable, it exposes investors to increased risk of losing all of their investment. Hedge fund managing schemes that use the pension funds of their trusted investors in the Dark Pool Trading scheme are more often than not aren’t warned of the risks involved.
Unfortunately at present, 40 percent of US shares are traded outside of the normal public trading channels – that is via Dark Pool Trading. And due to its much lower transactional overhead, this is the very characteristic that is used by Barclays as a “unique selling point” of Dark Pool Trading while not fully disclosing the full extent of the risks involved. Will a lawsuit on Barclays centered on the bank’s inability to warn and protect their clients from aggressive high frequency trading ever make the business at Wall Street more ethical again?