Citigroup has agreed to pay more than $12 million to settle allegations that its Citi Order Routing and Execution (CORE) unit misrepresented its private trading venues, known as dark pools.
As part of the settlement, Citigroup will neither admit nor deny the allegations.
At the heart of the case against Citigroup are allegations that CORE misled investors in the dark pools, saying they would be protected from high-frequency traders.
According to the bank’s marketing materials, customers were supposed to have assurances that high-frequency traders were not allowed to trade in Citi Match, CORE’s premium-priced dark pool.
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Instead, CORE’s system enabled two traders rated as high-speed firms to tap the pool for executing more than $9 billion of orders. It also did not block other HFT traders or keep track of participants in its dark pool, as it said it would.
As a result, traditional traders who thought they were trading only against other traditional traders were, in many cases, facing aggressive high-speed traders.
In addition, Citigroup secretly forwarded and executed nearly half of Citi Match’s orders in other trading venues, including other dark pools and exchanges. The system was supposed to reveal that those orders were executed on an outside venue, but it didn’t and instead sent trade confirmation messages as if the trades were settled in-house.
Dark pools are private electronic trading sites where buyers and sellers are supposed to be able to make trades without being visible to other traders until they are executed. The anonymity of price tags is designed to help institutional investors trade large blocks of shares without the market moving against them.
In recent years, dark pools have attracted increasing scrutiny amid warnings by exchanges and lobby groups about the lack of pre-trade transparency, perceived unfairness, and the potential exploitation of some dark pool users.