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