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By John McCrank and Lisa Lambert
Aug 12 (Reuters) - Brokerage firm Investment Technology Group agreed to pay $20.3 million to settle charges it ran a secret trading desk that profited off of confidential customer information within its “dark pool,” the U.S. Securities and Exchange Commission said on Wednesday.
ITG has always billed itself as an agency broker, meaning it only trades on behalf of its clients, including matching buy and sell orders within POSIT, the company’s private stock trading venue, or “dark pool.”
But in 2010 it opened a secret trading desk called Project Omega that traded for ITG’s own account and used automated trading strategies to mine live customer trading data to get an advantage over some of its own clients within POSIT and on other trading platforms for more than a year, the SEC said.
“The conduct here was egregious,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said on a call with reporters.
Project Omega traded around 1.3 billion shares in total, including 262 million shares with unsuspecting POSIT clients, the SEC said.
ITG admitted to wrongdoing and will pay a penalty of $18 million, the largest levied by the SEC against a dark pool to date. It also will pay disgorgement of around $2 million and prejudgment interest.
Shares of the company were down 7.3 percent at $16.21 around midday on Wednesday, and down 32.4 percent since ITG disclosed on July 29 it was in talks over a settlement.
Dark pools are anonymous and do not display pre-trade information. The anonymity was meant to help institutional investors trade large blocks of shares without the market moving against them.
POSIT was one of the first dark pools, opening in 1987.
There are now around 40 of the broker-run trading venues competing for much of the same business as more heavily regulated public stock exchanges.
Regulators have increased their scrutiny of the venues, with the SEC fining UBS Group AG $14.4 million in January for violations in its dark pool. In June 2014, New York’s attorney general brought a lawsuit against Barclays for alleged fraud within its dark pool.
Last week ITG fired its chief executive officer, Bob Gasser, over the matter, replacing him in the interim with board member and former E*Trade executive, Jarrett Lilien.
“We won’t mince words - this was not ITG’s finest hour. With this settlement we’ve brought those legacy issues to a close,” ITG said in a note to clients. (Reporting by John McCrank in New York and Lisa Lambert in Washington DC; Editing by Bill Trott and Alan Crosby)