SEC Sanctions Citi Dark Pool

High-frequency trading and its impact on other traders has been a hotly debated question in recent years. Some argue that the practice should be banned while others claim that it has a beneficial impact, adding liquidity to the markets. Regardless of which position one adopts, there is no doubt that many seek to avoid such traders by using alternative trading venues. That point is at the center of a recent Commission enforcement action involving a dark pool that claimed those who engage in high frequency trading were not admitted to the pool. In the Matter of Citigroup Global Markets, Inc., Adm. Proc. File No. 3-18766 (Sept. 14, 2018).

Respondent Citigroup Global Markets is an indirect, wholly owned subsidiary of Citigroup, Inc., and is a registered broker-dealer. Citi Order Routing and Execution, LLC, also named as a Respondent and known as CORE, is an indirect subsidiary of Citigroup and a registered broker-dealer.

CORE was acquired by a Citigroup subsidiary in 2007. At the time the firm was engaged in the equity market making business. It then launched a new trading product called I-Match which catered to institutional users. The product allowed users to place resting orders to trade against retail order flow purchased by the CORE market maker before the market maker had an opportunity to trade against the orders. Later in 2007 CORE rebranded the new product as Citi Match. Marketing for Citi Match stated that it was a dark pool for institutional investors that was separate from CORE’s market maker operations. Citi Match was also depicted as a “premium” and “exclusive” dark pool. The quality of the order flow in Citi Match was emphasized. Premium fees were charged.

During the period Citi Match was marketed as not permitting high-frequency trading firms or HFT to enter orders in the dark pool. Nevertheless, from at least July 2011 through September 2012 at least two HFT firms traded in the venue. During that period about 17% of all executions based on dollar volume were with one of those firms. Those executions represented about $8.4 billion in notional value.

During the same period traders were not adequately informed that in fact Citi Match routed orders to more than twenty different external venues. Those included ATSs, national securities exchanges and electronic market makers. Generally, the commissions charged for executions at those venues were less that the premium charges of Citi Match. In 2013, for example, 37% of Citi Match executions took place in external venues. In 2014 about 54% of the executions were in external venues. Indeed, a significant portion of those orders went through an affiliated ATS that charged lower commissions. In addition, the electronic messages furnished to some users contained inaccurate information about the execution venue for those orders.

Finally, CORE acted as an unregistered exchange in its provision of Citi Match. Section 5 of the Exchange Act prohibits any broker-dealer or exchange to effect transactions in a security unless the exchange is registered as a national securities exchange under section 6 of the Exchange Act or is otherwise exempt. Here Citi Match acted as a marketplace for NMS stocks. Nevertheless, CORE failed to register or qualify for an exemption. The aforementioned conduct constituted violations of Securities Act section 17(a)(2) and Exchange Act section 5.

To resolve the proceedings Citi Group Markets consented to the entry of a cease and desist order based on the Securities Act section cited in the order and to a censure. The firm will also pay disgorgement of $4,718,784.59, prejudgment interest of $718,690.47 and a penalty of $6.5 million. CORE consented to the entry of a cease and desist order based on the Exchange Act section cited in the Order and to a censure. The firm will also pay a civil penalty of $1 million.

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