Citadel Securities fined for inaccurate reports of 6.5M equity sale transactions
A system issue that affected trade reporting has turned out to be expensive for Citadel Securities LLC, as the firm has agreed to pay a $180,000 fine as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA) concerning inaccurate reporting.
The violations of FINRA rules occurred between September 14, 2015 and July 21, 2016.
On September 14, 2015, Citadel Securities released a new system designed to implement the new order marking and trade reporting methodologies required pursuant to Regulation SHO FAQ 2.5 and FINRA Trade Reporting FAQ 407.13, respectively. However, the firm inadvertently omitted one of its execution systems as part of the release, and thus reported trades using the historical methodology.
This omission caused Citadel Securities to report 6.5 million short sale equity transactions to the TRF without the short sale indicator. The firm remediated the issue on July 21, 2016 after FINRA notified the firm of the issue. The 6.5 million trade reporting violations represented approximately 4-6% of Citadel Securities’ daily reported trades during the period from September 14, 2015 through July 21, 2016.
This way, Citadel Securities violated FINRA Rules 6182 and 2010.
In addition, between September 14, 2015 and July 21, 2016, Citadel Securities reported approximately 6,660 long sale trades to the TRF with a short sale indicator as a result of the system issue. Therefore, Citadel Securities violated FINRA Rules 7230A(d) and 2010.
Finally, Citadel Securities’ supervisory system, including its written supervisory procedures, was not reasonably designed to achieve compliance with short sale indicator reporting pursuant to FINRA Rules 6182 and 7230A(d). Between September 14, 2015 and July 21, 2016, Citadel Securities conducted end of day reviews for the accuracy of short sale transaction reporting, but these reviews did not include trades effected through all of its execution systems. Even if Citadel Securities had included all execution systems in its supervisory reviews, it would not have reviewed the misreported transactions for short sale reporting requirements because the supervisory reviews only looked at order activity covered by Regulation SHO.
Unlike FINRA’s trade reporting rules, Regulation SHO did not apply to the misreported transactions because Regulation SHO mandates the marking of sell orders and here the misreported transactions were limited to the execution of incoming orders rather than order entry or routing. Citadel Securities addressed the deficiencies in its WSPs in July 2016 after FINRA brought the issue to its attention.
Consequently, between September 14, 2015 and July 21, 2016, Citadel Securities did not have in place a supervisory system, including WSPs, reasonably designed to achieve compliance with FINRA Rules 6182 and 7230A(d) in violation of FINRA Rules 3110(a) and (b) and 2010.
On top of the fine, the firm has consented to a censure.