The US SEC fines Citadel Execution Services with $22.6 million to settle charges. The company is accused of misleading customers by various strategies.
16 January, AtoZForex – US Securities and Exchange Commission announced that market making company Citadel Securities LLC has agreed to pay a fine to settle charges. These charges included the firm’s business unit handling retail customer orders from other brokerage companies making misleading statements. Also, the company is accused of making misleading statements about the way it priced trades. Additionally, SEC fines Citadel Execution Services with $22.6 million to settle the aforementioned charges.
SEC fines Citadel Execution Services
The SEC’s order reveals that Citadel Execution Services mislead its broker-dealer clients. It did so by suggesting possible two options upon receiving retail orders they forwarded from their customers.
The firm proposed that either retail orders take the other side of the trade and provide the best price it observed on different market data feeds or sought to obtain that price in the market. Hence, the process of taking the other side of the trade of retail orders is called “internalization”.
However, the watchdog reveals that two algorithms that Citadel Securities used didn't internalize retail orders at the best price observed. Also, these algorithms did not seek to obtain the best price in the market. Additionally, the company triggered these strategies when it identified the differences in the best prices on market feeds. Specifically comparing SIP feeds to the direct feeds from exchanges.
Also, the regulator’s order finds that Citadel Securities violated section 17(a)(2) of the Securities Act starting late 2007 until January 2010. The company did not admit nor deny the watchdog’s findings and agreed to pay $5.2 million in disgorgement of illegal gains. Moreover, Citadel Securities agreed to pay interest of over $1.4 million and a penalty of $16 million.
Citadel Securities misleading strategies
Citadel Securities used one strategy known as FastFill. This technique instantly internalized an order at a price that wasn't the best price for the order which the firm observed. The other strategy is SmartProvide, where an order is routed to the market that was not priced to obtain immediately the best price the company observed.
Moreover, the SEC’s Enforcement Division Acting Director Stephanie Avakian stated that Citadel Securities made misleading statements. These statements promise to provide or try to obtain the best prices it saw for retail orders routed by other broker-dealers. She added:
“Internalizers can’t suggest they are doing one thing yet do another when it comes to pricing trades.”
Moreover, as a wholesale market maker or an internalizer, the company specialize in handling retail orders from investors. These investors are other broker-dealers customers. According to the SEC’s order, Citadel Securities executes about 35 percent of the average daily volume of retail equity sales in US markets.