ITG Inc. and its affiliate AlterNet Securities (collectively, ITG) agreed to pay US $20.3 million in sanctions to resolve allegations by the Securities and Exchange Commission that ITG impermissibly used confidential trading information in connection with the operation of its dark pool – POSIT. According to the SEC, on multiple occasions between April 2010 and July 2011, ITG routed sell-side customer trades without their knowledge to POSIT against which ITG’s proprietary trading desk (known as “Project Omega”) traded. Typically, Project Omega’s trading algorithm would detect that a client wanted to buy or sell a stock and then would first buy or sell the same stock for ITG at the prevailing best bid or offer price. The algorithm would then immediately place the client’s order for the same stock into POSIT such that ITG would sell to the customer at the best offer price when the client wanted to buy, or buy from the customer at the best bid price when the customer wanted to sell. This would guarantee that ITG would obtain the spread between the best bid and best offer on all such transactions. However, during the relevant time, ITG promoted itself and POSIT as an “independent ‘agency only’ broker that did not have conflicts of interests with its customers and that protected the confidentiality of its customers’ trade information.” As a result of its trading activity against sell-side customers and other proprietary trading activities, ITG realized gross revenues in excess of US $2 million during the relevant time. The SEC charged that ITG committed fraud by not disclosing to its customers that it engaged in proprietary trading operations at the same time it claimed it was only operating an agency business; that it was using confidential client order information; and that it was trading opposite customers in a way that was detrimental to them. The SEC also charged that ITG failed to amend required filings with it prior to implementing Project Omega. To resolve this matter, ITG admitted to the facts charged by the SEC, in addition to agreeing to pay a penalty of US $18 million, disgorgement to customers of US $2,081,204 and prejudgment interest. (Click here for additional information on ITG’s conduct in the article “Dark Pool Operator International Trading Group Announces US $20 Million Reserve for SEC Enforcement Action Settlement” in the August 3 - 7 and 10, 2015 edition of Bridging the Week.)