News that Deutsche Bank AG (NYSE:DBF) may agree this week to a penalty with the U.S. Department of Justice over the sale of toxic mortgage debt, raised the issue of private trading venues called “dark pools” something the average investor knows very little about.
The penalty, the result of a 2012 initiative launched by President Barack Obama that was designed to penalize banks for allegedly selling subprime debt while misleading investors about the risks. The debt was sold through so-called “dark pools,” venues not subject to normal scrutiny.
Dark Pools Explained
A dark pool is a privately run stock-g venue that allows buyers and sellers to swap shares anonymously and in larger quantities than on traditional exchanges.
Financial organizations, like Deutsche Bank, can benefit from dark pools that keep more buy and sell orders “in-house,” which reduces fees to stock exchanges. Customers like being able to minimize fees while executing trades that move so swiftly they don’t affect prices in the market.
DB And Dark Pools
According to regulators, Deutsche Bank told investors it prioritized dark pools based on transaction costs and other factors. In fact, regulators say, the bank’s technology didn’t work properly and ranking did not occur as advertised.
In its settlement agreement, Deutsche Bank admitted that between January 2012 and February 2014 it did mislead traders about how it ranked trading venues including its SuperX dark pool. The bank also said it was deceptive in how it determined which dark pool it would send an order to. Some of the problems were attributed to coding errors by regulators.
It was reported in September that U.S. authorities told Deutsche Bank it wanted the lender to pay a penalty of up to $14 billion for its role in the mortgage crisis. Deutsche Bank rejected the $14 billion settlement offer from the government and has gone back and forth with the Obama administration in an attempt to settle on a final figure.
Deutsche Bank, one of the highest profile European banks involved in the financial crisis, had a 6.4% share of the retail mortgage backed securities market according to Moody’s. That’s less than The Goldman Sachs Group Inc. GS, which paid a fine of $5 billion.
Settlements have been reached with U.S. banks such as Bank of America Corp. (NYSE:BACC) and now the government’s focus has turned to European banks. In addition to Deutsche Bank, others include The Royal Bank of Scotland Group (NYSE:RBSD), Credit Suisse Group AG (NYSE:CSD), Barclays (NYSE:BCSB), UBS Group AG (:UBSN/A) and HSBC Holdings (NYSE:HSBCF).
A final deal for Deutsche Bank could come before the end of the Obama administration. It is not known if others will be settled by then or not.