Trading firms raised early concerns about Barclays' dark pool-WSJ

July 20 (Reuters) - Trading firms and employees raisedconcerns about high-speed traders at Barclays Plc's "dark pool" months before the United States accused the bank offavoring its high-frequency trading clients, the Wall StreetJournal reported, citing people familiar with the firms.

New York Attorney General Eric Schneiderman filed a lawsuitlast month, accusing the Barclays dark pool of givinghigh-frequency traders an unfair advantage, even though the bankhad promised investors they would be protected from "predatory"and "toxic" traders.

The lawsuit alleges that Barclays executed nearly all ofits customers' stock orders on its LX Liquidity Cross dark poolalternative trading system instead of on exchanges or othervenues that might have offered better prices.

Some big trading firms noticed that their orders weren'tgetting the best treatment on the dark pool and began to growconcerned that the poor results were due to high-frequencytrading, the Journal said. (http://on.wsj.com/1tocIWT)

Dark pools let institutional investors trade large blocks ofshares anonymously and only make trading data availableafterwards so that investors with large orders are not at adisadvantage.

A number of Barclays employees also privately expressedconcerns to top stock-trading executives that the London-basedbank was giving high-frequency traders too much access to itsdark pool without fully informing clients, the newspaper said.

Barclays is expected to respond to the attorney general'scivil complaint this week, the report said, adding that the bankis expected to argue that certain emails and other documentscited in New York's complaint were taken out of context.

Reuters reported last month that Barclays had hired externallawyers to help it investigate the allegations, includingMatthew Martens, formerly the chief litigator at the U.S.Securities and Exchange Commission.

Representatives from Barclays could not be immediatelyreached for comment outside regular business hours. (Reporting by Supriya Kurane in Bangalore; Editing by GopakumarWarrier)