Citadel Securities fined $275k for reporting violations after $700k fine in 2020

Rick Steves

While claiming Citadel Securities had no relevant disciplinary history prior to this $275,000 settlement, FINRA did fine Citadel $700,000 for trading ahead of inactive OTC customer orders in a settlement last year. 

Chicago

Citadel Securities LLC has been fined $275,000 by FINRA amid reporting violations. The firm has been a FINRA member since 2005 and had no relevant disciplinary history prior to this, the authority said.

The Chicago-based firm engages in market making and provides execution services in U.S. equities, options, government securities, and foreign exchange products.

FINRA found that, from July 2017 through October 2019, Citadel Securities had multiple issues with correctly reporting Treasury transactions to the Trade Reporting and Compliance Engine (TRACE) causing violations of FINRA Rules 6730 and 2010.

This has resulted in incorrectly reporting internal transfers as Treasury transactions, when they were not reportable, as well as failing to append the “No Remuneration” indicator to TRACE reports for certain Treasury transactions between affiliates. Citadel also failed to include the correct contra-party type in its TRACE reports for certain affiliate transactions.

Citadel’s supervisory system, including written supervisory procedures (WSPs) was found to be “not reasonably designed to achieve compliance with TRACE reporting rules because it could only detect violations that would generate automatic alerts. In all cases, the incorrect TRACE reports involved internal position transfers or transactions with affiliates and did not involve transactions with clients”, according to the letter of acceptance, waiver, and consent.

While claiming Citadel Securities had no relevant disciplinary history prior to this $275,000 settlement, FINRA did fine Citadel $700,000 for trading ahead of inactive OTC customer orders in a settlement last year.

Citadel Securities agreed to pay the fine for alleged violations concerning FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders) and FINRA Rule 6460 (Display of Customer Limit Orders).

Citadel Securities established an Over-the-Counter equity trading desk in late 2011. It received orders from the firm’s broker-dealer clients on behalf of its customers.

The firm sought to program the OTC Desk trading systems to comply with the Trading Ahead and Limit Order Display Rules by providing customer orders automated order protection, quote display, and execution.

However, from September 2012 through mid-September 2014, Citadel Securities employed pre-trade controls, settings and processes that removed hundreds of thousands of OTC customer orders from that logic. While those controls, settings and processes had multiple purposes, they shared a principal purpose of directing mostly larger OTC customer orders for manual review and/or handling. Impacted orders were rendered inactive until the completion of a manual trader review.

While OTC customer orders were inactive, Citadel Securities, in many instances, as part of its market-making activities, traded for its own account on the same side of the market at prices that would have satisfied the orders, without immediately thereafter executing them up to the size and at the same or better price as it traded for its own account.

To assess the potential trading ahead impact, FINRA reviewed Citadel Securities’ handling of OTC customer orders in an inactive state awaiting manual trader review during the sample month of February 2014. Based on this review, in 559 instances, Citadel Securities traded ahead of 415 inactive OTC customer orders.

Citadel Securities also failed to establish a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with Trading Ahead and Limit Order Display Rules for OTC customer orders.

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