FINRA fines Citigroup Global Markets for failure to prevent trade-throughs
Citigroup Global Markets Inc has agreed to pay a fine of $175,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
FINRA explains that Rule 611 of Regulation National Market System (NMS) promotes intermarket price protection by restricting trade-throughs. These are defined as the purchase or sale of NMS stock during the regular trading hours, either as principal or agent, at a price that is lower than a protected bid or higher than a protected offer. Trade-through protection prevents unfairness to investors and facilitates best execution of customer orders.
Rule 611(a)(1) requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs that do not fall within one of the exceptions set forth in Rule 611(b), and, if relying on such an exception, that are reasonably designed to assure compliance with the exceptions terms.
Rule 611(a)(2) requires trading centers to conduct regular surveillance to ascertain the effectiveness of its Rule 611 compliance program and to take prompt action to remedy any deficiencies.
Between January 2013 and March 2020, Citigroup Global Markets failed to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs that resulted from outdated quotation data. While the firm’s written supervisory procedures (WSPs) identified the need to avoid using outdated quotation data, the WSPs failed to provide for periodic reviews that may have detected the data problems.
In addition, the WSPs did not contain any process for retaining Firm-Specific Quotation Data sufficient to demonstrate the reasonableness of its Rule 611 compliance program.
As a result of these supervisory failures, the firm failed to detect repeated instances in which the firm relied upon outdated quotation data that did not reflect subsequent price changes. Consequently, the firm executed thousands of potential trade-throughs between January 2013 and March 2020.
In addition, between March 2013 and November 2015, Citigroup Global Markets failed to detect that one of its trading desks had improperly configured a third-party market data feed, which caused the desk to rely upon an inaccurate NBBO when trading certain securities. In order to properly configure the feed, the trading desk had to manually enter codes for each security it traded. Because the desk entered the codes incorrectly for 50 securities, its NBBO calculation for those securities failed to capture all protected quotations, resulting in thousands of potential trade-throughs.
In sum, between January 2013 and April 2020, the firm failed to detect and remediate timely approximately 155,000 potential trade-throughs.
Finally, between July 2014 and December 2015, Respondent failed to establish, maintain, and enforce policies and procedures reasonably designed to assure compliance with the Benchmark Exception for ADRs. Specifically, the firm did not have any process to reasonably document the estimated conversion fee included in the ADR equivalent price.
Through this conduct, Respondent violated Rules 611(a) and (c) of Regulation NMS, NASD Rule 3010, and FINRA Rules 3110 and 2010.
On top of the fine, the respondent has agreed to a censure and an undertaking to submit a certification that the firms processes, controls, policies, systems, and procedures are reasonably designed to achieve compliance with Rule 611.