Citadel pays SEC $22.6 mln to settle charges of misleading customers

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By Charles Levinson

<span class="articleLocation”>Citadel Securities, the market-making arm of
billionaire hedge-fund manager Ken Griffin, has agreed to pay
$22.6 million to settle charges that it misled customers about
the way it priced trades, the U.S. Securities and Exchange
Commission said on Friday.

The SEC found that between 2007 and 2010, Citadel used two algorithms to execute stock trades on customers’ behalf
that often gave investors a worse price for their trades, even
when Citadel knew better prices existed elsewhere. The SEC
penalized Citadel for failing to disclose the use of those
algorithms to clients.

“This affected millions of retail orders,” said Stephanie
Avakian, the acting director of enforcement at the SEC.

Citadel neither admitted nor denied the findings.

“We take very seriously our obligations to comply fully with
all laws and regulations,” Zia Ahmed, a spokesman for Citadel,
said in a statement.

Reuters first reported on Thursday that Citadel was nearing
a settlement with the SEC.

Citadel executes approximately 35 percent of the daily
trading volume in retail equity shares on U.S. markets, the SEC
said. Citadel, whose hedge fund manages around $25 billion in
assets, agreed to pay $5.2 million in disgorgement of ill-gotten
gains and a penalty of $16 million.

SEC rules require U.S. brokers to seek the “best execution
reasonably available” on stock orders, a standard meant to
ensure that all customers get a favorable price and a swift

Citadel is the latest firm to settle with the SEC over
routing practices.

While the SEC has fined other firms over order routing, this
appears to be the first time any regulator has waded into one of
the most contentious strategies in the high-speed trading world.

The practice, known as latency arbitrage, is when a firm
exploits the difference between stock prices on a slower public
data feed known as a SIP and the numerous faster private data
feeds provided at a hefty cost by each exchange.

For years, the market’s critics and its defenders have
battled over whether such strategies are being used by firms. An
admission that they are would seemingly justify calls for deep
structural changes to financial markets, changes which some of
Wall Street’s most profitable firms strongly oppose.

“The settlement is an admission that latency arbitrage
exists and there are strategies designed to profit from it,”
said Jeff Alexander, a partner at Babelfish Analytics, a firm
that analyzes market structure for institutional investors.

Alexander, whose work gives him access to private trading
data from large investment firms, says abuses such as those
documented in the SEC’s case against Citadel still exist in
today’s markets.

For example, the SEC’s case has already raised questions
about the SEC’s broader regulatory regime for monitoring trading

The SEC currently requires firms such as Citadel, that
execute retail stock trades on behalf of investors, to report
their execution statistics to the SEC to show that they are
indeed giving customers the best reasonably available price. But
it requires them to report trades only against the data coming
over the slower public feed in those reports.

If firms were mispricing orders based on information from
the private data feeds, as Citadel was just found to have done,
the SEC’s routine monitoring protocols would be unable to catch
them, critics say.

“You can’t have a regulatory environment where you claim to
have best-execution standards and then mark the reports off the
slow feeds,” said Alexander. “That makes no sense whatsoever.

SEC spokeswoman Judith Burns declined to comment on the
criticisms of its reporting requirements. (Additional reporting by Sruthi Shankar in Bengaluru)

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