FINRA fines Citadel Securities for trading ahead of inactive OTC customer orders

Maria Nikolova

Citadel Securities agrees to pay $700,000 as a part of a settlement with FINRA.

Citadel Securities LLC has agreed to pay a fine of $700,000 as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA).

The alleged violations concern FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders) and FINRA Rule 6460 (Display of Customer Limit Orders). These rules are designed to, among other things, protect customer orders, promote market transparency, and increase quote competition.

In November 2011, Citadel Securities established an Over-the-Counter equity trading desk that received orders from the firm’s broker-dealer clients on behalf of their customers. Citadel Securities 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.

By virtue of the foregoing, Citadel Securities violated FINRA Rules 5320(a) and 2010.

Furthermore, Citadel Securities 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. Among other things, Citadel Securities did not establish WSPs requiring supervisory reviews of OTC customer orders for compliance with FINRA Rules 5320 and 6460, nor did the Firm establish any supervisory reports or other tools to allow supervisors to monitor whether OTC customer orders were handled in compliance with those rules, until October 2014 and June 2015, respectively. Furthermore, the reports the Firm implemented with respect to the display of OTC customer limit orders in June 2015 were not reasonably designed to achieve compliance with FINRA Rule 6460.

By virtue of this conduct, Citadel Securities violated 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

On top of the fine, the firm agrees to a censure. Citadel Securities will also provide restitution to each corresponding firm client for the customer orders that it executed at prices worse than it traded for its own account as a result of the FINRA Rule 5320(a) violations.

Read this next

Digital Assets

Crypto.com secures preliminary approval to operate in Canada

Crypto.com, one of the longest-established crypto platforms, has become the first digital asset platform to sign a Pre-‘Registration Undertaking’ with the Ontario Securities Commission (OSC) in Canada.

Retail FX

CySEC hits IC Markets One with regulatory warning

The Cyprus Securities and Exchange Commission has once again stepped up its fight against unauthorized brokers.

Uncategorized

XTAGE now offers bitcoin and ether trading to 3.6M Brazilian investors

Brazilian financial services giant XP has officially launched its crypto trading platform XTAGE, which was built on major American stock exchange Nasdaq’s trading technology.

Institutional FX

FX volume drops 7pct at CLS Group in July 2022

FX settlement specialist CLS Group today reported that the executed volumes of currency trading on its platforms were notably down in July.

Digital Assets

Web3 startup PIP integrates with Binance ecosystem

Web3 payment provider PIP has announced integration with the Binance ecosystem, which allows the firm to vastly develop and propose needed products and improvements that are worthy of competing with others chains.

Industry News

Celsius $750m insurance claims are fraud, says lawyer seeking EU crypto superfund

“It is an intentional deception in aid of a billion-dollar securities offering.”

Institutional FX

DGCX brokers authorized to provide derivatives trading and clearing services

The DFM is looking to provide multiple asset classes such as; equities, ETFs, equities’ futures, crude oil futures, etc. to meet the growing demand from its diversified base of local and international investors.

Digital Assets

EQONEX leaves “crowded crypto exchange space” amid crypto winter

“The recent extreme market volatility and declining trading volumes have added to the headwinds being felt by exchange operators. We take a realistic view that our exchange will not move the needle for us financially over the near-to-medium term.”

Digital Assets

FTX and Paradigm partner for spreads trading: lower risk, lower fees

“This structured spread trading product is the first that will enable crypto investors to utilize cash and carry trades through FTX and Paradigm.”

<