The Securities and Exchange Commission has settled charges against broker-dealer Citadel Securities for violating a provision of Regulation SHO, the regulatory framework designed to address abusive short selling practices, which requires broker-dealers to mark sale orders as long, short, or short exempt.
These records are routinely used by regulators in policing prohibited short selling activity. To settle the SEC’s charges, Miami-based Citadel Securities agreed to pay a US$7 million penalty.
A spokesperson for Citadel, said, “This matter had no impact on the quality of our client execution. While updating our systems to accommodate certain client requests, we made a coding change that inadvertently affected a de minimis percentage of our order markings. We detected the issue and promptly fixed it more than three years ago.”
According to the SEC’s order, for a five-year period, it is estimated that Citadel Securities incorrectly marked millions of orders, inaccurately denoting that certain short sales were long sales and vice versa. The SEC’s order finds that the inaccurate marks resulted from a coding error in Citadel Securities’s automated trading system and that the firm provided the inaccurate data to regulators, including the SEC during this period.
“Compliance with the order marking requirements of Reg SHO is a key component of regulatory efforts to curtail abusive market practices, including ‘naked’ short selling,” said Mark Cave, associate director of the SEC’s Division of Enforcement. “This action against Citadel Securities demonstrates that a broker-dealer’s failure to comply with the requirements of Reg SHO can have negative downstream consequences on the accuracy of the firm’s electronic records, including its electronic blue sheet reporting, depriving the Commission of important information about the markets it regulates.”
Without admitting or denying the findings, Citadel Securities consented to a cease-and-desist order imposing a censure, a $7 million penalty, and a set of undertakings, including a written certification that the coding error has been remediated and a review of the firm’s computer programming and coding logic involved in processing relevant transactions.
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