Barclays Plc is seeking to rebut New York Attorney General Eric Schneiderman's lawsuit accusing it of misleading customers about who they were sparring with in the bank's dark pool. Financial Darwinism, rather than judges and courts, should be allowed to settle the issue.
If Schneiderman is correct in his assertion that clients who were trading stocks on the Barclays LX platform were misled by the bank about the presence of predatory high-frequency traders, presumably those clients will depart of their own free will, never to return, and the platform will die a natural death.
If Barclays is correct that the platform users are "highly sophisticated traders and asset managers" who "don't rely on glossy marketing brochures" to decide where to do their business, then the liquidity advantages of the LX platform should reassert themselves, and clients will return in droves.
Customers have certainly been shunning the Barclays pool, which was the second-biggest before the lawsuit. Credit Suisse Group AG's Crossfinder is the largest. The number of shares traded on LX dropped to 66 million in the week of June 30, down 66 percent from 197 million the previous week, and from 312 million the week before that. As things stand, it's impossible to tell if the 78 percent cumulative three-week drop in business was because of the lawsuit or what it purports to have uncovered.
So for Darwinism to take effect, the lawsuit has to go away. My colleague Matt Levine has parsed the to-and-fro between Barclays and Schneiderman, and points out that customers may be fleeing just because they don't like lawsuits, and not because they're offended or scared of what the attorney general says he has discovered about those rapacious HFT traders lurking in the pool.
Dark pools evolved as a way of allowing big investors to do large trades in secret, reducing the risk of speed traders front-running the transactions. Whatever the merits or otherwise of Schneiderman's lawsuit, let's hope Barclays persuades the state court in Manhattan to throw it out, just so we can see what happens next to its dark pool. In other words, let there be light.
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