Citadel securities violations and fines

During 15 years, Citadel did not pay more than $32 million in fines for 59 market violations

Citadel securities violations and fines

In the light of the one-year anniversary since the buy button was taken away today, we will take a look at some of the citadel violations.

In the GameStop and AMC revolt, Citadel Securities' underhanded deals have been exposed. Despite being fined multiple times; Citadel appears to chalk them up to the cost of doing business. 

A number of instances were documented as 'wilful' naked shorting by Citadel Securities. They have been fined 59  times for infractions of FINRA, REGSHO & SEC rules.

Citadel paid less than $32 million dollars for about 59 market violations over 15 years.

How big are citadel securities?

As everyone knows, a person can be judged by their past behavior. By the end of last year, Robinhood had already been fined $65 million by the SEC for failing to disclose its sources of income.

The U.S. House Committee on Financial Services has recently conducted hearings into the short-selling process, which revealed multiple issues.

Citadel Advisors LLC holds $384 billion in assets under management as of 2020. Citadel Advisors LLC is not simply a market maker or a hedge fund.

Even though Citadel Securities manages at least $234 billion in assets, it still pales in comparison to BlackRock's $8.7 trillion.

Citadel's U.S. stock trading volume ranks right up there with that of NASDAQ and NYSE, according to Bloomberg Intelligence.

Market makers and brokerages conflict of interest

Following the realization that hedge funds would lose even more billions than they had already suffered, popular stock exchanges placed trading restrictions on GME and AMC, along with other meme stocks, in January 2020. Robinhood, the most popular trading app, has a close relationship with Citadel Securities, one of the key hedge funds involved in the short-squeeze.

Robinhood generates revenue by selling order flow to offset its zero-commission trading feature. Citadel, which acts as a market maker, buys them to guarantee that traders get the best market price. In the first half of 2020, Robinhood sold these order flows for $271 million alone.

The same period, TD Ameritrade, a rival online brokerage, made $560 million. Citadel may claim to use this data to improve their trading algorithms, but the fact remains that order flows provide market makers like Citadel with vital information on retail investor trading patterns. Does it make sense to believe that Citadel Securities, the same market maker that is also a hedge fund, would not leverage trading patterns from order flows when short-selling GME and AMC ?

SEC and Finra

Financial Industry Regulatory Authority, or FINRA, is an independent organization that works under the Securities and Exchange Commission (SEC) to regulate brokerages. It is not part of the government. Meanwhile, the SEC's goal is to protect investors from deceptive practices by prosecuting investors who violate securities laws.  

FINRA REPORT ON CITADEL ACIVITITIES 

FINRA and the SEC are both busy fining and censuring Citadel.

  • FINRA recently fined Citadel Securities $275,000 for different violations of reporting requirements. This is like the prior fine of $700,000 in July 2020 because customer orders were not protected, and market transparency was not ensured.
  • Citadel's FINRA report for its activities from 2017 to 2019, tracked 452,451 securities transactions that were over-reported, as well as internal transfers that were incorrectly reported as Treasury transactions.
  • The same report revealed that Citadel Securities misreported 11,989 transactions with affiliates as transactions with customers.
  • The Citadel conglomerate has multiple affiliates, including Citadel Securities Institutional LLC, registered as a separate entity that appears to be set up to receive treasuries that are then misreported.
  • Cease and desist for market manipulation between 2007- 2010. Date 13/01/2017, Fine $22,668,268
  • ANOTHER CEASE AND DESIST ORDER was issued on 10/12/2018 due to failure to submit complete and accurate data to the Commission's Blue Sheet ("EBS") Requests. (BASICLY failed to provide the SEC with proof of the transactions). Between Nov 2012 and Aug 2016, Citadel Securities submitted 2,774 EBS statements to the Commission, All contained incomplete information, resulting in incorrect trade execution time data on 80 million trades. DATE OF INITIATION 12/10/2018 - $3,500,000 fine.
  • Failed to close out a failure to deliver position. Affected short sales. Date 14/2/2020- $10,000 Fine
  • Short sale indicators were incorrectly reported in the report. Finra requires a supervisory system to me in place to comply with finra rules requiring short sale indicators. Fine: $180,000 Date: 13/11/2020

More violations here

 Also worth noting Treasury Secretary Janet Yellen received $810k from the hedge fund Citadel, which engaged in short-selling US treasuries.

Citadel securities are not the only one:

Merrill Lynch Fined $12,500,000 in 2016 

Goldman Sachs fine $7,000,000

Wedbush fined $2,440,000

Knight capital fined $12,000,000 

Latour Trading Fined $5,000,000

Key takeaways

The smallest fine that was imposed was $4,000 for a trading rotation violation.

It appears that Citadel is violating FINRA regulations more and more each year. In 2020, Citadel was fined almost 20 times for violations including failing to deliver, failing to have oversight to comply with FINRA, naked short selling, and trading during market halts.

In addition, a spike in violations always precedes or occurs around major market events (such as the 2008 financial crisis).

From 2006 to 2021, Citadel was convicted of 59 market violations.

Their largest fine was $22,668,268 for manipulating market data over a 3-year period from 2007 to 2010. They misrepresented the function of the algorithms they used. This violates section 17a of the Securities Act.

My final thoughts

I don't know about you but if I broke the law 59 times even if it is just a fineable law I would probably be in prison right now or let's say we owned a business and we constantly kept breaking the regulations we would very likely get shut down and banned, Now this brings the question why is citadel securities even allowed to be a market maker and a hedge fund, Why haven't they been banned after breaking the law 59 times?, 

The fines are also way too low in my opinion they should be fine 5-6x the amount they made while breaking the law and there should be a three-strike policy on strike 3 they get banned for life from the markets.

One must also ask why is the SEC not the default market maker?

References

Reddit.com. 2021. Citadel Has No Clothes. [online] Available at: <https://www.reddit.com/r/GME/comments/m4c0p4/citadel_has_no_clothes/> [Accessed January 2022].

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