MANHATTAN (CN) - Barclays will pay $150 million to resolve allegations it manipulated foreign exchange trades by exploiting a tiny lag between an order and its execution to the detriment of the trading client, New York's top financial watchdog announced Wednesday.
Under the terms of the settlement, the New York Department of Financial Services is also requiring the bank to fire the executive who oversaw it electronic trading system.
For more than a decade, sophisticated computer algorithms increasingly replaced human traders in beating out the competition on Wall Street. The phenomenon began with the growth of so-called high-frequency trading, or HFT.
It has since moved on to the world of foreign-exchange trading, where major banks compete in a market that has been said to net more than $5 trillion a day.
The New York State Department of Financial Services estimates that some 80 percent of the FX trading volume at Barclays now takes place on its electronic trading platform known as BARX.
"The ever-increasing power of sophisticated automated electronic trading systems and technologies creates opportunities for investment entities, which might be able to exploit latencies in the flow of information by requesting trades at prices informed by information that Barclays and other market makers might not yet have," the department explained in a 14-page consent order.
"Orders of this kind, which seek to outflank and exploit a market maker's less nimble trading systems, are known as 'toxic order flow' or 'toxic flow,'" it continues.
This can occur when an electronic trading business detects market movements a thousandth of a second faster than Barclays system.
To offset this risk, Barclays created a "Last Look" system that enforced a hold period between the receipt and execution of a customer's order.
But instead of guarding strictly against "toxic flow," the system filtered out trades that were too unprofitable for Barclays, the department said.
"From 2009 to 2014, a large number of the trades Barclays rejected were not truly examples of latency arbitrage or other toxic order flow," the consent order states.
The order provides many examples of Barclays customers complaining about rejected orders.
One Barclays managing director instructed in an email four years ago that support staff should "avoid mentioning the existence of the whole BATS Last Look functionality."
"If you get enquiries just obfuscate and stonewall," the email said, according to the order.
A Barclays support employee apparently took this advice to heart two years later by emphasizing that customers should be told: "[BARX Support] cannot confirm or deny the existence of last look," according to the order.
A Barclays managing director and Global Head of Electronic Fixed Income, Currencies, and Commodities (eFICC) Automated Flow Trading has been suspended.
Barclays' similarly-titled executive from the Global Head of eFICC Trading was terminated.
The bank did not immediately respond to an email request for comment.
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