Barclays misled large institutional investors and other clients by falsely telling them it was taking measures to protect them from predatory high-frequency traders, New York's attorney general said.
The allegations against the British banking and financial services firm were contained in a securities fraud lawsuit that Eric Schneiderman announced at a Manhattan news conference.
The complaint, filed in state Supreme Court, portrays "a flagrant pattern of fraud, deception and dishonesty with Barclays clients and the investing public," the attorney general said.
Barclays spokesman Mark Lane said the bank was co-operating with the attorney general.
"We take these allegations very seriously...The integrity of the the market is a top priority at Barclays," he said.
The lawsuit alleges Barclays, which has headquarters in London, deceived investors about its dark pool, an electronic trading operation intended to shield them from the high-frequency traders who use sophisticated computer programmes to get early access to pending orders and other market-moving information.
The bank promoted a service it claimed was a "surveillance" system that would identify and hold accountable "toxic," ''predatory" and "aggressive" traders, the lawsuit says.
Instead, the service "was essentially a sham," Mr Schneiderman said.
"Barclays has never prohibited any trader from participating in its dark pool, regardless of how predatory or aggressive its behaviour was determined to be."
Information from former high-level insiders at Barclays and email evidence show that Barclays was determined to raise profits by making its dark pool, referred to internally as The Franchise, the largest on Wall Street, New York authorities said.
To help reach that goal, the firm "disclosed detailed, sensitive information to major high frequency trading firms in order to encourage those firms to increase their activity in Barclays dark pool," the complaint says.
The lawsuit also accuses the bank of misleading investors by telling them that it would spread orders around to various trading exchanges based on performance.
In reality, it says, the bank was routing the vast majority of trades, 75%, to its dark pool.
The complaint says a Barclays executive was instructed to doctor a presentation to an institutional investor by lowering the figure to 35%. The change was made over the executive's protests, and he later resigned, it says.
The lawsuit asks the court to order Barclays to halt the behaviour and pay unspecified damages.