What Is A Dark Pool And What Does Barclays' Misuse Of It Mean For Bank Shares?

News of the law suit from New York Attorney General Eric Schneiderman against Barclays over the bank's dark pool market raises a number of questions. Probably the most commonly cited one outside of the financial services industry was: what's a dark pool?

The idea of a dark pool is that it allows investors to be anonymous when they trade big blocks of shares. Think of it like this: you are a big institutional investor who wants to make a significant trade, but you know that doing so in public markets is going to create such waves that you lose out from the market movements that follow. A dark pool lets you do your business quietly, behind the scenes, and the price isn't announced until after it's happened.

You don't have to look too hard to see the obvious problem here: lack of transparency. So there is a school of thought that says that any institutional investor who chooses to take this route, rather than through public markets with their rafts of investor protection measures, has only themselves to blame if they found something unpleasant lurking in the darkness. But nevertheless, any law suit from a foe as powerful and influential as the New York Attorney General is bad news for a bank, particularly when it explicitly complains about the bank misleading investors: he used the words "fraud and deceit."

This is particularly unwelcome news for Barclays, which has had an absolute gut full of problems and fines and misdemeanours since the global financial crisis. Its CEO, Antony Jenkins, rose to the top by being seen as a man who won't tolerate this bad-old-days stuff and wishes to bring Barclays somewhat back towards its mainstream roots and away from the murkier corners of investment banking. He can get away with this: the law suit refers to behaviour that began in 2011, before his tenure.

But the market reaction was clear. Barclays' share price lost 6% yesterday. The Financial Times calculates that more than $13 billion was wiped off the market value of the 10 biggest dark pool owners (others include Credit Suisse, UBS and Deutsche Bank). The FT also claims that big banks have started to pull business out of Barclays' dark pool – this is the subject of today's front page – and one doesn't have to have the most photographic memory of the financial crisis to recall what happens when funds start being pulled out when confidence fails in an institution.

Clearly, loss of liquidity in a dark pool is not the same as a loss of liquidity in Barclays itself. There's no threat to the bank, just to part of its business and to its share price. But the news presents yet another challenge to investors trying to work out just what their attitude should be to bank stocks. The time to buy in earnest must surely be when investors are convinced that all of the sins of recent years have been fined, resolved, paid and consigned to the past. But six years on from the financial crisis, that day simply never seems to get any closer. Weekly, there is news of yet more markets or rates being fixed, of misbehaviour in opaque markets, of everything from currencies to precious metals to interest rate benchmarks to international sanctions being drawn into the mix of errant practices.

Clearly, then, investors should still be cautious about investment banks, because you still don't quite know what's around the corner and what fines and other penalties might be in the mail. There will be a time when all of this is digested, but it doesn't feel like it's going to be any time soon.