Citadel Securities gets a slap on the wrist for violating Nasdaq rules

Citadel Securities has agreed to pay a fine of $15,000 as a part of a settlement with the Nasdaq Stock Market LLC.

The broker-dealer allegedly violated Nasdaq rules between August 15, 2014 and May 2, 2018.

During the review period, Citadel Securities had market access, as defined in Exchange Act Rule 15c3-5. As such, the firm was required to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity.

In certain scenarios, however, Citadel Securities’s risk management controls and supervisory procedures were not reasonably designed to prevent the entry of erroneous orders, in violation of Exchange Act Rule 15c3-5 and Nasdaq Rules 3010 and 2010A, as detailed below.

During the review period, Citadel’s pre-trade erroneous order controls applicable to both equity limit orders included price controls that would reject limit orders that were priced at certain percentages away from the National Best Bid or Offer (NBBO). However, from August 15, 2014 through November 2017, when an equity limit order was canceled and replaced, a price control was not applied to the replaced order.

For instance, on August 9, 2017, at 9:03:24 a.m., the firm received an order from another broker-dealer to buy 3,850 shares of security ABCD with a limit price of $53.81. At the time of receipt, the order was priced within the firm’s price control threshold, as the NBBO was $53.84 x $53.87. The order did not trigger the firm’s price control.

At 9:23:46 a.m., the broker-dealer canceled and replaced the order, changing the limit price to $5,393.00, which was an error. The NBBO was $53.99 x $54.03. Because Citadel Securities did not apply its price controls to replaced orders, the erroneously replaced order with a limit price of $5,393.00 was routed to an exchange at a price that was over 9,880% through the NBO. This issue did not result in any Clearly Erroneous Filings.

Moreover, for the review period, the firm’s price controls did not apply when its order routing systems did not have NBBO or pricing data. This resulted in the submission of equity orders to various markets with prices that were not reasonably related to the current NBBO. This issue did not result in any Clearly Erroneous Filings.

Also, during the review period, the firm applied certain pre-trade erroneous order controls that incorporated soft blocks. In contrast to a hard block, which generally prevents an order from being submitted by automatically rejecting it, a soft block prevents an order from being routed to a market center until it is either overridden or confirmed by a person.

During the review period, Citadel Securities had in place soft blocks that were triggered when the parameters of the applicable price or size controls were met. Once triggered, the subject orders were required to be manually reviewed by certain firm personnel dedicated to this task to determine whether the order should be rejected or submitted to a market center.

From August 15, 2014 through November 2016, the firm’s procedures failed to provide sufficient detail concerning how firm personnel were to review soft block alerts. The firm’s procedures did not sufficiently detail the steps firm personnel were to take when reviewing a subject order or the circumstances under which a soft block should be overridden or confirmed.

Furthermore, from August 15, 2014 through May 2018, the firm failed to require that those persons responsible for reviewing soft block alerts contemporaneously document their review of orders that triggered a soft block, including documenting the rationale for releasing the subject orders into the market after completing the manual review.

Because Citadel’s procedures did not require a reasonable review of the orders that triggered soft block alerts, or require the person reviewing soft block alerts to contemporaneously document the rationale for resolving such alerts, the applicable pre-trade erroneous order controls were not reasonably designed. This issue did not result in any Clearly Erroneous Filings.

As a result of Citadel’s failure to establish and maintain reasonable risk management controls and supervisory procedures reasonably designed to prevent the entry of erroneous orders, by rejecting orders that exceed appropriate price or size parameters, the firm, during the review period, violated Section 15(c)(3) of the Exchange Act and Rules 15c3-5(b) and (c)(1)(ii) thereunder and Nasdaq Rules 3010 and 2010A.

On top of the fine of $15,000, Citadel Securities agrees to a censure and an undertaking to revise the firm’s risk management controls and supervisory procedures with respect to the areas of deficiencies and to ensure that it has implemented controls and procedures that are reasonably designed to achieve compliance with the rules and regulations herein.

2021-12-30