US Financial Industry Regulatory Authority (FINRA) today reached a settlement with Citadel Securities. The company has agreed to pay a fine of $700,000.
Citadel Securities fined
The firm allegedly violated FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders) and FINRA Rule 6460 (Display of Customer Limit Orders). The rules help in maintaining market transparency, protect orders of the consumers, and also increase quote competition.
The allegations are related to an over-the-counter (OTC) equity trading desk that was established in 2011. The desk would take orders from the broker-dealer clients on behalf of their customers. The desk was to be programmed to comply with the Trading Ahead and Limit Order Display Rules. It provided customer orders automated order protection, execution, and quote display as well.
Issues occurred between 2012 and 2014
Between September 2012 and September 2014, the firm used several pre-trade controls, processes, and settings that omitted thousands of customer orders on the OTC desk from the logic. The new settings were designed for multiple purposes but they were mostly designed for making larger OTC customer orders reach manual review or handling. The orders that were omitted from the logic were considered inactive until the manual trader review was completed.
When the OTC customer orders were inactive, the firm traded for its own account on the same side of the market. Citadel Securities completed its own orders at the same price that the customers’ orders could be fulfilled. It failed to immediately execute the customer orders at the same or better price than what it received for its own account.
FINRA reviewed the firm’s handling of OTC customer orders while they were inactive in the month of February 2014. It said that the firm traded ahead of 415 inactive OTC customer orders in 559 instances. The firm also failed to create a supervisory system that includes written supervisory procedures (WSPs) that were reasonably designed to achieve compliance with the Rules related to OTC customer orders.
It failed to create WSP specifically related to FINRA Rules 5320 and 5460. There were not supervisory tools or reports that could report whether OTC customer orders were handled while complying with the above-mentioned rules between October 2014 and June 2015. The reports in June 2015 were also not designed reasonably to achieve compliance with FINRA Rule 6460.
This made it violate NASD Rule 3010(a) and (b) (for conduct before December 1, 2014); FINRA Rule 3110(a) and (b) (for conduct on and after December 1, 2014); FINRA Rule 5320(a) and (b); FINRA Rule 6460; and FINRA Rule 2010.2.
The firm has agreed to a censure and a fine. It will provide restitution to each client as well.
English
Arabic
Dutch
French
German
Italian
Polish
Portuguese
Spanish