Investment Technology Group Inc.’s stock plunged after the company said its dark pool faces a record $20.3 million penalty for running afoul of U.S. regulations.
ITG dropped 24 percent to $18.36 as of 4 p.m. New York time Thursday, the largest slump on record.
A market-making unit run by a subsidiary in 2010 and 2011 traded using information not available to other customers of ITG’s private stock-trading system, the company said Wednesday. ITG also said it’s in talks with the regulator to settle the case. Judy Burns, an SEC spokeswoman, declined to comment.
A fine at the level ITG mentioned would be a record for a private Wall Street trading platform, surpassing the $14.4 million that UBS Group AG agreed to pay in January. After years of operating with seemingly little scrutiny, the latest case, as well as the New York attorney general’s lawsuit against Barclays Plc, shows the steps authorities are taking against alternative trading systems such as dark pools.
“That would be a lot of money for an action against a dark pool,” said Thomas Sporkin, a former SEC enforcement lawyer now in private practice at BuckleySandler LLP. In cases where some participants have unfair advantages over others, “the SEC is going to come down hard,” he said.
These aren’t the first dark-pool disclosure violations that the SEC has gone after. Last year, the regulator fined Liquidnet Holdings Inc. $2 million for not living up to client secrecy standards. In 2011, Pipeline Trading Systems LLC agreed to pay $1 million, in part because it had a proprietary trading unit that was secretly trading against client orders.
ITG Chief Executive Officer Bob Gasser said the firm shut the market-making operation, which the company referred to as a “pilot,” or experiment.
“In hindsight, I recognize that our client disclosures about the pilot were insufficient,” Gasser said in a conference call on Thursday morning. “I deeply regret our lack of disclosure.”
The matter is focused on customer disclosures, regulatory filings for the dark pool and customer information controls, ITG said. The problematic behavior was led by a senior employee who operated in a manner that violated ITG policy, Gasser said, without identifying the former worker.
For several months in 2010, the employee improperly accessed information regarding orders flowing into ITG’s trading algorithms and improperly accessed information about executions by all customers in markets away from its dark pool that was not otherwise available to ITG clients, Gasser said.
“When these policy breaches were discovered, our compliance team shut down the pilot in December 2010 and took steps to cure the identified problems before authorizing it to restart,” Gasser said.
The employee was “ultimately severed from the company” according to Gasser.
The ITG’s Posit dark pool, started in 1987, is one of the oldest venues for matching stock orders away from an exchange. The market-making unit’s trading accounted for less than 1 percent of total volume on Posit during its existence, according to Gasser.
ITG also said Wednesday that Kevin J.P. O’Hara resigned from its board on July 23.
“Over the last several months, continuous fundamental, strategic and vital differences of opinion and direction have transpired at the Board level and, in particular, between me and the Board’s leadership,” O’Hara said in his resignation letter, according to a filing.
After filing the UBS case in January, SEC Enforcement Director Andrew Ceresney told reporters the regulator would bring more cases in the coming months against dark pools.