[ by Melanie Gretchen ]

Dark pools should not see the light of day;  just ask eBX LLC.

The SEC charged the Boston-based dark pool operator with failing to protect the confidential trading information of its subscribers.  In addition, the Commission alleged that the eBX LLC failed to disclose to all subscribers that it allowed an outside firm to use their confidential trading information.

SEC Findings and Allegations. eBX operates the alternative trading system LeveL ATS, which it calls a “dark pool” trading program, according to the SEC’s order instituting a settled administrative proceeding.  What investors who subscribe get is access to quotations (and thus potential trade opportunities) that other investors using public markets do not.

What eBX told its subscribers was that their flow of orders to buy or sell securities would be kept confidential and not shared outside of LeveL.  Instead, eBX had insufficient safeguards and procedures to protect subscribers’ confidential trading information.  An outside technology firm's separate order routing business gained access and was able to use its knowledge of their orders to make routing decisions for its own customers’ orders and increase its execution rate.

SEC Sanctions. eBX has agreed to pay an $800,000 penalty to settle the charges.  Specifically, the SEC alleged eBX failed to disclose in required SEC filings that it allowed LeveL subscribers’ unexecuted order information to be shared outside of LeveL.  In addition to the penalty, eBX was censured and ordered to cease and desist from committing or causing further violations of certain provisions of the federal securities laws regulating alternative trading systems.

"Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information.  Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit." -- Robert Khuzami, Director of the SEC’s Division of Enforcement.