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September 14, 2018 01:00 AM

Citigroup settles SEC charges it misled institutional investors in dark pool trades

Hazel Bradford
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    Bloomberg

    Citigroup agreed to pay nearly $13 million to settle charges by the Securities and Exchange Commission that its Citigroup Global Markets subsidiary misled institutional users of its dark pool.

    The SEC order alleges that the Citigroup subsidiary and premium-priced dark pool Citi Match, operated by Citi Order Routing and Execution, misled users by assuring them that high-frequency traders were not allowed to trade in the dark pool, yet two of the most active users qualified as high-frequency traders and executed more than $9 billion of orders through the pool.

    "This representation was material because many market participants, particularly institutional firms, sought to avoid trading against HFT during the relevant period. CGMI charged users a relatively high commission rate for Citi Match executions — generally targeted to be a penny per share for executions of orders placed using a direct connection into Citi Match — based in part on the representation," the order said.

    Citi Match was marketed exclusively to institutional customers, including mutual fund and retirement fund advisers. The period covered in the order is from at least December 2011 through June 2014.

    The SEC defines a dark pool as a trading venue or marketplace that accepts, matches and executes orders without providing its best-priced orders for inclusion in the consolidated quotation data.

    The SEC order also said Citigroup failed to disclose for more than two years that close to half the Citi Match orders were routed to and executed in other, lower cost trading venues, including other dark pools and exchanges, not offering Citi Match's premium features, despite sending trade confirmation messages to some users that their orders had been executed on Citi Match. The SEC also said Citi Order Routing and Execution did not register as a national securities exchange.

    Joseph G. Sansone, chief of the SEC enforcement division's market abuse unit, said in a statement that "all trading venues, regardless of their trade volume, must ensure that their users have accurate information, particularly about key issues like order routing."

    Citigroup did not admit or deny the SEC's findings and agreed to be censured. Citigroup will pay $5.4 million in disgorgement and prejudgment interest and a penalty of $6.5 million, while Citi Order Routing and Execution will pay a penalty of $1 million.

    Citi spokesman Scott Helfman said in emailed statement, "We are pleased to have the matter resolved."

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