Citadel Securities Fined $22.6m by SEC for Misleading Trade Pricing

Citadel made misleading statements over its retail wholesaling business where it acts as agents for trades from retail brokers.

Citadel Securities, one of the largest market makers in US stocks and options, has agreed to pay $22.6 million to settle charges that it deceived its broker clients by wrongfully claiming that its retail customer orders were being executed at best prices.

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The Securities and Exchange Commission (SEC) said that Citadel Securities, which was set up in 2002, made misleading statements regarding its retail wholesaling business where it acts as agent for trades from retail brokerages.

Citadel Securities is a unit of Citadel LLC, which also runs one of the world’s largest hedge funds and is led by billionaire investor Ken Griffin.

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The firm agreed to pay the fine without admitting or denying violations, according to the notice. The breakdown statement includes paying $5.2 million disgorgement of ill-gotten gains, in addition to interest of $1.4 million and a $16 million penalty.

More specifically, Citadel Securities told its broker-dealer clients for years that its model for executing the retail orders of their customers would periodically take the other side of the trade and provide the best price observed on market data feeds or obtain that price in the marketplace. In reality, the firm used two algorithms that did not ‘internalize’ retail orders. These algorithms did not take the other side of the retail orders, called internalization, at the best price observed nor did it seek the best price in the marketplace.

According to the SEC’s statement: “One strategy, known as FastFill, immediately internalized an order at a price that was not the best price for the order that Citadel Securities observed. The other strategy, known as SmartProvide, routed an order to the market that was not priced to obtain immediately the best price that Citadel Securities observed.”

Zia Ahmed, spokesperson for Citadel Securities, said: “Today, Citadel Securities resolved an issue related to the adequacy of certain disclosures from late 2007 to January 2010. We take very seriously our obligations to comply fully with all laws and regulations. As the market leader we are committed to providing superior service and execution quality to our clients each and every day.”

“These two algorithms represented a small part of Citadel Securities’ internalization business, but they nevertheless affected millions of orders placed by retail investors because of Citadel Securities’ large role in that market. We are focused on the execution of retail orders and encourage investors to ask brokers, and brokers to ask internalizers, how they are determining best prices for retail orders,” said Robert Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit.

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