US regulator fines Citadel Securities over trading breach

The US financial industry regulator has fined Citadel Securities $700,000 for trading ahead of customer orders, dealing a blow to the market-making firm that has benefited from a big rise in retail trading this year.

Chicago-based Citadel Securities delayed certain equity orders from clients to buy or sell shares while continuing to trade the same stocks in its own account, as part of its market-making activities, Finra said. The claims relate to “over the counter” equity trades, which are carried out away from public stock exchanges and then reported to regulators.

Over a two-year period until September 2014, the market-maker removed hundreds of thousands of large OTC orders from its automated trading processes, according to Finra. That rendered the orders “inactive” and so they had to be handled manually by human traders.

Citadel Securities then “traded for its own account on the same side of the market at prices that would have satisfied the orders,” without immediately filling the inactive orders at the same or better prices as required by Finra rules, the regulator said.

In February 2014, a sample month reviewed by Finra, the market-maker traded ahead in nearly three-quarters of the inactive orders. “Based on this review, in 559 instances, Citadel Securities traded ahead of 415 inactive OTC customer orders,” the regulator said.

Citadel Securities will pay a fine of $700,000 under the terms of a settlement with the regulator without admitting or denying the claims. The company is also required to make whole any customers affected.

In a statement to the FT, Citadel Securities said: “We have addressed all of Finra’s concerns and take very seriously our obligations to comply fully with its rules. The issue relates to a limited number of manually handled orders, most of which occurred in 2012-2014.” 

Citadel Securities is majority-owned by Ken Griffin, the billionaire investor, and is the sister firm to Citadel, the hedge fund he runs. The company is the biggest US retail market-maker with a 40 per cent share and has emerged as one of the big winners from the boom in retail investing through the pandemic.

The company makes money from the difference between orders to buy and sell a stock, known as the spread, and buys up orders from the big retail trading platforms including Charles Schwab and Robinhood that have attracted record numbers of new customers this year. 

Finra also said Citadel Securities fell short of supervisory requirements and failed to display certain OTC customers’ limit orders: instructions to buy or sell at a specific price, or better.

Nearly half of the 467 limit orders reviewed by the regulator in the six years until September 2018 were found to violate Finra’s requirements to display orders. The bulk of the violations were for failing to execute trades against existing quotations in a timely manner, Finra said.

The regulator also highlighted the ability for traders on Citadel Securities’ OTC desk to “disable” the system component that automatically sent certain messages to trade OTC stocks.