The U.S. Securities and Exchange Commission (SEC) has announced that Citadel Securities has settled charges of violating Regulation SHO, a law aimed at controlling short-selling practices. This violation pertained to Citadel Securities’ alleged failure to accurately mark sale orders as long, short, or short exempt.
The SEC’s investigation revealed a pattern of mismarked orders over five years, attributing these inaccuracies to a coding error within Citadel Securities’ automated trading system. During this time, the firm mistakenly classified short sales as long sales and vice versa. Even more concerning to the SEC was that Citadel provided this erroneous data to regulatory authorities, including the SEC, without detection or correction.
Citadel Securities’ Five-Year Error
Mark Cave, the Associate Director of the SEC’s Division of Enforcement, said: “This action against Citadel Securities demonstrates that a broker-dealer’s failure to comply with the requirements of Reg SHO can have negative downstream consequences on the accuracy of the firm’s electronic records, including its electronic blue sheet reporting, depriving the Commission of important information about the markets it regulates.”
Citadel Securities opted for a settlement without admitting or denying the findings, by consenting to a cease-and-desist order. The settlement terms include a censure, a penalty amounting to $7 million, and a series of undertakings aimed at rectifying the situation.
Meanwhile, Citadel Securities is facing a challenging market environment as a result of a slowdown in trading activity, according to a report by the Financial Times released in June. This slowdown follows a period of heightened retail trading earlier this year, driven in part by retail investors moving to online brokers like Robinhood.
Trading Revenue Decline
In particular, Citadel Securities, reported a significant decline in net trading revenue for the first half of the current year, marking a drop of 36% compared to the previous year. Despite this decline, the company continued to distribute substantial second-quarter dividends totaling $500 million to its shareholders, including founder Ken Griffin. Citadel Securities has maintained a streak of generating at least $1 billion in net trading revenue for the past 14 consecutive quarters, as per insiders familiar with the matter.
In June, Wall Street’s giants, including Citadel, Charles Schwab, and Fidelity Investments, teamed up to invest in EDX Markets. The platform facilitates the trading of widely recognized digital currencies, including Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC). The platform plans to enhance market efficiency further with the launch of its clearinghouse, EDX Clearing, later this year.
