By Clayton Browne. Originally published at ValueWalk.
AQR Capital Management’s head of trading, Hitesh Mittal, is taking a temporary paid leave of absence amid an ongoing SEC investigation of his former employer, Investment Technology Group Inc.
During Mittal’s absence, AQR principal Brian Hurst will assume the management of the firm’s trading operations.
ITG under SEC radar
ITG announced late Wednesday that the U.S. Securities and Exchange Commission was investigating the lack of disclosure by the firm to its clients that a subsidiary of the agency broker was trading against client orders within ITG’s private stock trading venue or “dark pool”.
ITG disclosed that a market-making unit run by the subsidiary in 2010 and 2011 traded using information not available to other customers of its dark pool. ITG indicated that it had set aside $20.3 million for a probable settlement with regulators related to how it ran its dark pool.
Incidentally, the $20.3 million penalty would be a record fine for a private stock-trading platform in the U.S. The penalty amount would surpass the $14.4 million that UBS AG (NYSE:UBS) Group AG agreed to pay in January.
As outlined by ValueWalk, an SEC investigation of UBS’ dark pool operations revealed that the firm didn’t properly disclose to all subscribers an order type that it offered almost exclusively to market makers and high-frequency trading firms.
The SEC investigation also revealed that UBS failed to disclose to all subscribers a “natural-only crossing restriction” developed to make sure specific orders would not execute against orders placed by market makers and high-frequency trading firms.
Earlier, New York attorney general, Schneiderman complained that Barclays PLC (NYSE:BCS) (LON:BARC) heavily promoted a service called Liquidity Profiling, with the goal to identify predatory traders. The complaint alleged that Barclays engaged in a persistent pattern of fraud and deceit, lying to its investors in order to grow its own dark pool.
Thus, the latest investigation over ITG signifies the steps the authorities are taking against alternative trading systems such as dark pools.
ITG was one of the first dark pools, established in 1987, aimed at helping asset managers complete large trades with each other.
ITG cites problematic behaviour by a senior employee
ITG Chief Executive Officer Bob Gasser made several references Thursday to a former employee he didn’t identify who was purportedly involved in the case. Without identifying the former worker, Gasser said the problematic behavior was led by a senior employee who operated in a manner that violated ITG policy.
The ITG CEO disclosed that for several months in 2010, the employee improperly accessed information regarding orders flowing into ITG’s trading algorithms and improperly accessed information about executions by all customers in markets away from its dark pool that was not otherwise available to ITG clients.
A spokesman for AQR said: “This investigation relates to alleged misconduct that occurred in 2010 and 2011 while Mr. Mittal was employed at his former employer, ITG”. He added: “Mr. Mittal subsequently joined AQR in 2012 and we had no knowledge of the issues in question. Mr. Mittal is taking a temporary paid leave from AQR while the firm diligently reviews the issues.”
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