SEC Charges Citigroup for Dark Pool Misrepresentations

There’s huge news from the financial industry this morning as the SEC just announced charges against Citigroup “for dark pool misrepresentations.”

As reported by the commission’s official SEC News Twitter, Citigroup and an affiliate have been ordered to pay more than $12 million in disgorgement and penalties.

SEC charges Citigroup for dark pool misrepresentations https://t.co/mw4upUi427 — SEC_News (@SEC_News) September 14, 2018

Citigroup and its affiliate, Citi Order Routing and Exchange (CORE) allegedly misrepresented trading activity to users. CORE and its flagship platform Citi Match were caught processing orders on other platforms while telling users that orders were processed through CORE. Citigroup and CORE also misled high-frequency traders seeking to make trades through CORE.

The orders involve dark pools, which are private forums for trading securities, derivatives, and other financial instruments away from the general public. Although it’s an ominous sounding term, dark pools and dark pools of liquidity are used by many to participate in traditional markets in a legal and regulated way.

The full explanation of the charges can be found at SEC.gov here. Here’s how the SEC explains things:

“The Securities and Exchange Commission today entered an order finding that Citigroup Global Markets Inc. misled users of a dark pool operated by one of its affiliates.”

According to the SEC:

“[Citigroup] misled users with assurances that high-frequency traders were not allowed to trade in Citi Match, a premium-priced dark pool operated by Citi Order Routing and Execution (CORE), when two of Citi Match’s most active users reasonably qualified as high-frequency traders and executed more than $9 billion of orders through the pool.”

The SEC also found that Citigroup failed to disclose that approximately half of Citi Match orders were routed to and executed I other trading venues over a two year period of time. Citi Match was sending orders to other dark pools and exchanges that did not have the same premium features as Citi Match. At the same time, Citi Match was sending confirmation emails to users acknowledging that their trades had been completed on Citi Match when in reality, they had been completed on other trading platforms.

“Market participants deserve to make informed decisions about where they execute their orders,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit in the original press release on SEC.gov.

“All trading venues, regardless of their trade volume, must ensure that their users have accurate information, particularly about key issues like order routing.”

Because of the actions above, Citigroup violated an anti-fraud provision of the federal securities laws. Citigroup has not admitted to the SEC’s charges, nor have they denied them, but they “have agreed to be censured.”

Citigroup will pay disgorgement and prejudgement interest totaling $5.44 million along with a penalty of $6.5 million while CORE will pay a penalty of $1 million.