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Citadel Securities to pay $22.5 million to settle SEC algorithm case

Citadel Securities will pay $22.6 million to settle charges that its retail customer orders unit misled other brokerage firms about how it priced trades, the Securities and Exchange Commission announced Friday.

According to the SEC order, two algorithms used by Citadel Execution Services, which is Citadel Securities’ equity business, did not try to get the best market price and did not internalize retail orders at the best price, despite suggesting to broker-dealer clients that it followed the practice of taking the trade side of orders, which is known as internalization.

The SEC said the violations occurred from late 2007 through January 2010, and that Citadel Securities has since discontinued the two algorithms.

During that period, CES had approximately 70 broker dealer clients and received an average of 1.2 million equity orders per day, The programs cited in the order “handled a small portion of CES’ overall order flow,” approximately 2.6% of the retail orders and 0.6% of CES’ overall order flow between June 2008 and January 2010, the order said.

Citadel did not admit or deny the findings, but agreed to be censured, which is not a market disqualification. It will pay $5.2 million in disgorgement, $1.4 million in interest and a $16 million penalty.

Citadel Securities spokesman Zia Ahmed said in an email that the agreement “resolved an issue related to the adequacy of certain disclosures from late 2007 to January 2010. We take very seriously our obligations to comply fully with all laws and regulations. As the market leader we are committed to providing superior service and execution quality to our clients each and every day.”

Acting enforcement director Stephanie Avakian said on a press briefing call that the action was important for several reasons. Noting that it involved complex algorithmic strategies, “this case shows that the SEC has the expertise to investigate these strategies,” she said. “The industry should understand that we will remain focused on the handling of market orders.”

Robert Cohen, co-chief of the enforcement division’s market abuse unit, said on the call that “investigating how algos operate is critically important.”

The order is on the SEC website.