Financial Industry Regulatory Authority is reported to have fined a unit of Chicago-based Citadel Investments $800,000 for erroneous orders sent to other exchanges.
FINRA: Citadel’s orders were mis-priced or duplicated
Reuters is reporting that from March 18, 2010 to January 8, 2013 Citadel did not have in place a supervisory system to check the accuracy of its orders and to reject orders that were mis-priced or duplicated, according to a FINRA letter dated June 12.
In other words, false orders were submitted by Citadel to other exchanges. The motivation for this is unclear, but a regulatory source indicated the bulk of the issue was related to testing new software.
It is a known high frequency trading strategy for computer-based systems to submit repeated false order types and quotes that serve the purpose of moving a market in one direction or another. The fine to Citadel does not allege intentional market manipulation, however.
The $800,000 fine levied against Citadel provides the hedge fund pay NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) exchange $420,000, the NYSE Euronext (NYSE:NYX) $160,000 and the BATS Global Markets, Inc. (BATS:BATS) exchange $170,000. $50,000 went to FINRA.
Citadel’s letter of Acceptance, Waver and Consent
The BATS agreement notes that from March 18, 2010 to February 28, 2014 on 24 occasions Citadel “used the exchanges’ clearly erroneous petition processes to obtain cancellations of erroneous customer orders that the firm’s supervisory procedures and risk controls failed to reasonably detect and prevent.”
The BATS document also noted that in April 2010, nearly a month before the infamous flash crash, Citadel, while implementing a software upgrade, “released a test version of a previously abandoned software update, causing a quoting system to send aggressively priced marketable sell limit orders to the exchanges.” The testing issue caused Citadel to “erroneously sell short 2.75 million shares of PC Group during an eleven minute period of time,” the legal document said.
Documents relating to the case regarding the NYSE and NASDAQ told a similar story of how excessive order types happened on multiple occasions and specifically included one on December 13, 2012 when the Citadel trading desk sent “during a two minute period, erroneous hyper-marketable limit orders in 16 different stock symbols.”
HFT software entrepreneur Eric Hunsader, who monitors mini-flash crashes, said his firm “detected anomalies in real-time – when they occurred,” in a variety of instances “as well as the 16 stocks that had mini flash crashes on December 13, 2012” and wrote a report on the issue that day.
The fine is viewed in some quarters as too little too late. “FINRAs token fine imposed on Citadel looks to be little more than a parking ticket for behaviors worthy of a serious penalty,” said Larry Doyle, a former JP Morgan executive and author of the book In Bed With Wall Street that was highly critical of FINRA.
The violations were related to Rule 15c3-5 of the Securities Exchange Act of 1934, also known as a market access rule, requires brokerage firms to maintain proper risk controls.