What, You Expected Deutsche Bank's Dark Pool To Work As Advertised?

Deutsche Bank's $40 million fine a blow to those who want dark pools synonymous with honesty and fair dealing.
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Some on Wall Street bemoan the fact that alternative trading systems used by institutional traders and others came to be known as “dark pools.” It sounds vaguely sinister, calling to mind shadowy machinations and obscure dealings, a benighted place where savvy operators swindle each other away from the glare of regulators.

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Deutsche Bank isn't doing much to dispel that notion.

On Friday New York Attorney General Eric Schneiderman and the SEC leveled a $37 million penalty against Deutsche Bank for “fraudulent” practices that misled investors using its dark pool platform SuperX+. Finra got an extra $3.25 million out of the bank.

In broad strokes, Deutsche Bank said its system did a thing, but it didn't do that thing, and it kept not doing that thing, undisclosed, for more than two years.

The big selling point for SuperX+, now the fourth-largest alternative trading system, was that Deutsche Bank wouldn't just run trading orders through its own dark pool – conveniently named SuperX – but regularly measure a host of different venues based on their costs and execution times, then route client orders accordingly. The bank advertised that its system “ranks liquidity on a real-time and historical basis to determine the optimal sources according to the order characteristics and urgency.”

When it launched in April, 2010, SuperX+ worked fine. But in December, 2011, there was a glitch in the back-end and Deutsche Bank stopped measuring the rankings – for 14 months. For more than a year SuperX+ failed to execute on one of its central selling points.

If that wasn't bad enough, Deutsche Bank added new trading venues to the list during this time without actually running its highly touted proprietary software to measure them. In one case, the settlement says, employees just copy-and-pasted stats from a different, larger dark pool into a newly added one.

Things got even worse when they did renew the rankings in February, 2013. The new measurements put SuperX, Deutsche Bank's in-house dark pool, in the bottom tier. That meant less volume. So they just decided to hell with the algorithm, and put SuperX back on top of the pecking order manually, where it stayed for more than a year. It wasn't until July 2014 that they finally learned where the glitch came from, the settlement says.

“We believe that all concerns described in the settlements, which do not allege intentional wrongdoing or misconduct, have been remediated,” the bank said in a statement.

Here's the timeline of what occurred:

  • April 2010: SuperX+ launches.
  • December 2011: Glitch; SuperX+ stops ranking venues.
  • February 2013: Deutsche Bank re-ranks, but subjectively moves own dark pool from bottom tier to top.
  • July 2014: Glitch discovered, manual override overridden.

All in all, that's two and a half years of Deutsche Bank's dark pool confirming all the worst Michael-Lewis-inspired fears implicit in the term dark pool. Credit Suisse, Barclays, Goldman Sachs – come get your boy.

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