The investigation by the Securities and Exchange Commission came on the heels of the publication of Michael Lewis’ Flash Boys that looked into equity trading in dark pools and other venues with little to no transparency. The settlement is related to LavaFlow, a Citigroup Inc (NYSE:C) unit that operates an alternative trading system (ATS), and includes a $2.85 million penalty regarding LavaFlow’s lackadaisical protection of older data.
Citigroup: Smart order routing
LavaFlow, unlike some dark pools, uses an electronic communications network (ECN) that displays information about pending orders like bid and offer amounts but failed to keep individual orders confidential by allowing an affiliate operating a smart order router access to LavaFlow subscriber information. While this process was already halted, that smart order router did trade more than 400 million shares outside of the LavaFlow system.
“LavaFlow’s subscribers trusted and expected that knowledge of their hidden orders would not escape the ATS,” said Daniel Hawke, chief of the SEC enforcement division’s market abuse unit. “Because much of today’s equity trading is automated, firms must protect sensitive information within computer networks just as aggressively as they police against the misuse of information by people.”
As per usual when reporting on settlements with the SEC, the company admitted no wrongdoing but simply stated through a spokesperson that, “We (Citigroup) are pleased to put this matter behind us.”
BATS Global Markets, the New York Stock Exchange and Nasdaq have all settled similar suits with the SEC over the last two or three years with the fine on the NYSE in 2012 being the first time that a case was brought directly against and exchange.
Earlier this week, Barclays PLC (ADR) (NYSE:BCS) (LON:BARC)’s filed a motion of dismissal in a lawsuit brought by the New York attorney-general’s office, which believes that the bank misled clients about the use of high-frequency trading in its dark pool.
Also this month, Goldman Sachs Group Inc (NYSE:GS) was fined $800,000 for failing to ensure that some of its trades failed to protect investors’ right to the best market prices.