Citadel Securities agrees $22.6m settlement with SEC

Citadel Securities, one of the largest traders on the US equity market, has agreed to pay $22.6m with US markets regulators to settle charges it misled customers over the prices they were getting for some of their deals.

The Securities and Exchange Commission said on Friday that two of the algorithms Citadel used to execute orders on behalf of retail investors had not sought to obtain the best price in the marketplace.

Instead, they triggered to trade based on differences in prices observed through slow and fast data feeds, from late 2007 until January 2010, although this in some cases benefited the customer.

The settlement is the latest case brought by the SEC into the inner workings of trading on the world’s largest equity market. Growing use of high-speed automated tools, coupled with a fragmented market and growing rule complexity has transformed US share trading since the turn of the century. Typically more than a dozen exchanges and 20 alternative venues compete for the majority of business.

Criticism of the system has been amplified by the publication of Flash Boys, by Michael Lewis in 2014, which alleged that the market was “rigged” based partly on the difference in the speed with which various participants receive information.

Banks like UBS, Credit Suisse, Barclays and Deutsche Bank have joined independent operators such as ITG, Pipeline and Liquidnet in finalising cases with the SEC.

Citadel Securities typically executes about 35 per cent of all retail orders in the market. Without admitting or denying guilt, it agreed to be censured and pay $5.2m in disgorgement of gains plus interest of more than $1.4m as well as a penalty of $16m. It no longer uses the two algorithms at issue.

“Citadel Securities made misleading statements suggesting that it would provide or try to get the best prices it saw for retail orders routed by other broker-dealers,” said Stephanie Avakian, acting director of the SEC enforcement division.

Citadel Securities is the market making business of Citadel, which runs a separate hedge fund business.

The two algorithms represented a small part of the internalisation business, but still affected “millions of orders” from retail investors given the large role that Citadel plays in this market, the SEC said.

“We take very seriously our obligations to comply fully with all laws and regulations,” said Zia Ahmed, a spokesperson for the group.