Justice Shirley Werner Kornreich of the State Supreme Court in Manhattan said it was premature to dismiss Schneiderman's claim under the state's Martin Act, a powerful anti-fraud law.
"Traders are entitled to rely on material representations banks make about their dark pools," the judge wrote. "If such representations are untrue, the integrity of dark pools will be compromised and investor confidence in them will be shaken."
But the judge said Schneiderman still must show enough specifics about Barclays' dark pool to demonstrate the bank lied to clients and investors.
Quoting from Schneiderman's complaint, Kornreich also said she would not transform the case into a battle over the legality of high-speed trading.
"Investors in the dark pool are highly sophisticated and, hence, no liability will be found simply on the basis of meaningless words, such as 'aggressive', 'predatory', and 'toxic'," she wrote. "This court is not influenced, nor is it moved, by the NYAG's public policy arguments."
Kornreich said she will rule later on whether Schneiderman raised a valid Martin Act claim, and that Barclays' arguments that the law should not apply were "not entirely unreasonable."
The judge also dismissed a claim that Schneiderman brought under a separate state law.
Barclays had no immediate comment.
Liz DeBold, a spokeswoman for Schneiderman, said: "We are pleased the court affirmed our ability to pursue a claim against Barclays."
Dark pools were designed to let people quietly trade shares before investors in the broader market could learn about and bet against their trades.
But in his lawsuit, Schneiderman said Barclays falsely told clients from 2012 to 2014 that its algorithms gave no advantage to particular trading venues or client orders, despite having reprogrammed those algorithms to favour its dark pool.
He also said Barclays falsely downplayed the percentage of dark pool trading that was "aggressive," and that electronic trading chief William White and head of product development David Johnsen directly oversaw this activity.
Schneiderman's lawsuit is among the highest-profile cases as regulators probe high-speed trading, which came under scrutiny in Michael Lewis' bestseller "Flash Boys: A Wall Street Revolt."
The case is Schneiderman v. Barclays Capital Inc et al, New York State Supreme Court, New York County, No. 451391/2014.
(Reporting by Jonathan Stempel in New York; Editing by Meredith Mazzilli and Chris Reese)
By Jonathan Stempel