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Brokers reportedly ditching Barclays over ‘dark pool’ lawsuit

A day after being sued for securities fraud by New York’s attorney general, Barclays is facing defections by brokers from its “dark pool” private trading exchange.

Large broker-dealers like Deutsche Bank, Royal Bank of Canada and ITG have cut ties with the Barclays dark pool – an alternative trading venue where bidders and sellers can execute trades that are not viewed by the public – and are no longer routing trades through the private exchange, according to Wall Street Journal report that cites anonymous sources.

(RBC was featured prominently in the recent Michael Lewis book “Flash Boys,” which follows former RBC stock trader Brad Katsuyama in his quest to bring dark pools and high-frequency trading to the public’s attention.)

On Wednesday afternoon, New York State Attorney General Eric Schneiderman announced a lawsuit against Barclays (BCS) that alleges the bank deceived and defrauded investors by making false statements about how it runs its private exchange. The bank’s stock price fell 6.5% in London on Thursday following news of the suit, which seeks unspecified monetary damages and injunctive relief.

Some of the brokers pulled out of the Barclays dark pool, known as Barclays LX, as a precautionary measure in the wake of Schneiderman’s suit, while others were responding to requests from some of their largest investors, according to WSJ’s sources. A Barclays spokesman declined to comment on the WSJ report.

In a memo sent to Barclays staff Thursday afternoon, CEO Antony Jenkins said the bank is working with “substantial external resources” to conduct an internal investigation related to Schneiderman’s charges and that Barclays will cooperate fully with the Attorney General’s office.

“I have also always made it clear that cultural change will take time, but it is precisely incidents such as this which drive home the urgent necessity of the programme we have embarked on to transform the values and conduct of this business,” Jenkins said in the memo. “I will not tolerate any circumstances in which our clients are lied to or misled and any instances I discover will be dealt with severely. The success of our business depends crucially on our clients being able to rely absolutely on our honesty and integrity.”