SEC fines Citadel Securities $7 million over violating regulation against abusive short-selling practices

Rick Steves

“Compliance with the order marking requirements of Reg SHO is a key component of regulatory efforts to curtail abusive market practices, including ‘naked’ short selling,”

The Securities and Exchange Commission has announced that Citadel Securities LLC, a well-known broker-dealer based in Miami, has settled charges over violations of Regulation SHO.

This regulatory framework is designed to combat abusive short-selling practices and mandates broker-dealers to correctly mark sale orders as either long, short, or short exempt.

Such records play a pivotal role in monitoring and preventing prohibited short-selling activities. To resolve the SEC’s charges, Citadel Securities has agreed to pay a $7 million penalty.

Coding error within Citadel Securities’ automated trading system

According to the SEC’s order, Citadel Securities committed these violations over a five-year period. During this time, it is estimated that millions of orders were incorrectly marked, leading to certain short sales being inaccurately labeled as long sales and vice versa. The SEC’s investigation revealed that this erroneous marking was the result of a coding error within Citadel Securities’ automated trading system. Furthermore, the firm provided this incorrect data to regulators, including the SEC, throughout the duration of the violation.

“Compliance with the order marking requirements of Reg SHO is a key component of regulatory efforts to curtail abusive market practices, including ‘naked’ short selling,” said Mark Cave, Associate Director of the SEC’s Division of Enforcement. “This action against Citadel Securities demonstrates that a broker-dealer’s failure to comply with the requirements of Reg SHO can have negative downstream consequences on the accuracy of the firm’s electronic records, including its electronic blue sheet reporting, depriving the Commission of important information about the markets it regulates.”

This action against Citadel Securities serves as a clear demonstration that a broker-dealer’s failure to comply with Regulation SHO can have far-reaching consequences, affecting the accuracy of the firm’s electronic records, including electronic blue sheet reporting. Such inaccuracies deprive regulatory bodies, such as the SEC, of vital information required for overseeing the markets they regulate.

The SEC’s order charges Citadel Securities with violating Rule 200(g) of Regulation SHO. As part of the settlement, Citadel Securities has neither admitted nor denied the findings but has consented to a cease-and-desist order. This order imposes several penalties, including:

A censure.
Payment of a $7 million penalty.
Undertakings such as providing a written certification that the coding error has been rectified.
A review of the firm’s computer programming and coding logic related to processing relevant transactions.

Citadel Securities’ settlement with the SEC for $7 million underscores the severe consequences broker-dealers may face for violations of Regulation SHO.

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