ITG record fine further dents trust in US equity market structure – Financial Times

For the US equity market, it appears that August is the cruellest month.

In recent years it has had to deal with wildly volatile swings, the implosion of Knight Capital and a three-hour outage on Nasdaq. To that one may now add the drama at Investment Technology Group (ITG).

An impending record fine from the Securities and Exchange Commission for violations at a proprietary trading pilot in its dark pool is bad enough, coming on top of other infractions committed in the past byPipeline, Liquidnet and UBS. The New York attorney-general’s case against Barclays — which the bank denies — continues.

The ITG case is shocking as it has spent 30 years building its reputation. Agency brokers are judged to a higher standard than platforms run by banks, where investors are half-expecting some minor sleight of hand with their orders. Agency brokers simply don’t cross against clients’ orders.

The company’s efforts to underline that it happened five years ago and accounted for only a fraction of its daily operations have gone unheeded. As it admitted in its earnings call yesterday, volume in its dark pool has dropped by a quarter in three days and Bob Gasser, chief executive, paid for it with his immediate departure, as did the general counsel.

Its immediate future looks less clear. While the US business accounts for 55 per cent of its revenues, the stock price has dropped 30 per cent in the last week. The final settlement with the SEC may yet be another blow if it contains an admission to the charges rather than the usual “neither admits nor denies” settlement clause.

Analysts argued that some broker-dealers shut off their flow to ITG until the SEC settlement has been finalised. “We expect the flow here to be switched back on once the fine is settled,” wrote analysts at Credit Suisse. “[In] European dark pool volumes (the biggest profit centre for ITG), share appears to be largely intact.”

Credit Suisse expects ITG to weather the storm but it seems unlikely the brokerage will remain in its current guise. While ITG has started the search for a new permanent chief executive, it was striking that interim head Jarrett Lilien has the green light to evaluate all options.

Interested parties are already circling. In the past there have been rumours about ITG buying Convergex, another agency broker, for $200m. The latter is certainly interested in a deal, people familiar with the company’s thinking say. The industrial logic behind putting the two together is undeniable and Convergex’s owners BNY Mellon and private equity group GTCR have tried to offload the business several times, without success. One could imagine a scenario similar to what happened at Knight, where the white knight bidder (Getco) effectively backed into the listed company.

The thorny issue of chief executive would also be resolved, with Convergex chief Eric Noll, the former Nasdaq executive and a highly respected senior figure with US equity market circles, as a potential candidate, as CS noted.

Even so, Convergex is also rebuilding its reputation after its own Department of Justice and SEC punishments for overcharging clients through hidden fees, although the events took place long before Mr Noll arrived.

But little about this case does look good. For example Maureen O’Hara, chair of ITG’s board since 2007, is a notable academic and economist but also sits on the SEC’s Equity Market Structure Advisory Committee. That latter role may come into question.

Furthermore, any uneasy peace that has been built up between sellside banks and buyside asset managers has almost certainly been set back again.

“The level of distrust is higher than I’ve ever felt before,” says the head of one alternative trading platform. It’s hardly surprising that many asset managers are turning to new ventures like Luminex.