Citigroup will pay a record fine to settle charges that it failed to protect confidential equity trading data in the latest regulatory crackdown aimed at restoring investor confidence in the structure of the US stock market.
LavaFlow, a Citi unit that operates an alternative trading system (ATS), will pay the Securities and Exchange Commission $5m, including a $2.85m penalty following allegations that it failed to safeguard some order information. It is the SEC’s largest fine to date of an ATS.
The case comes amid heightened scrutiny of the US equity trading business after the 2010 Flash Crash. The publication of Michael Lewis’ Flash Boys this year has sparked debate about whether equity trading in dark pools and other venues outside the established exchanges is conducted fairly.
Unlike the secretive dark pools, LavaFlow operates an electronic communications network (ECN) that displays some information about pending orders in its system, such as best bid and offer. But it is supposed to keep individual requests to buy and sell confidential.
But the SEC said LavaFlow allowed an affiliate operating a technology known as a smart order router access to information about individual orders from LavaFlow’s subscribers.
LavaFlow discontinued the practice, but only after the smart order router had traded more than 400m shares in a three-year period based partly on subscriber information contained in orders placed but not executed through LavaFlow.
“LavaFlow’s subscribers trusted and expected that knowledge of their hidden orders would not escape the ATS,” said Daniel Hawke, chief of the SEC enforcement division’s market abuse unit. “Because much of today’s equity trading is automated, firms must protect sensitive information within computer networks just as aggressively as they police against the misuse of information by people.”
Citigroup did not admit or deny wrongdoing. “We are pleased to put this matter behind us,” the bank said.
The case is the latest in a series of regulatory efforts focused on making sure trading venues live up to their promises to the investors who use them.
The New York Stock Exchange, Nasdaq and BATS Global Markets have each settled with the SEC over the past few years. When the SEC fined NYSE in 2012 it was the first case ever brought against an exchange.
Barclays this week filed a motion to dismiss a lawsuit from the New York attorney-general alleging the bank misled clients about the level of high-frequency trading in its dark pool.
In July, US regulators fined Goldman Sachs $800,000 for failing to ensure that trades executed in the bank’s trading venue met US laws protecting investors’ right to best market prices. The SEC has a broad review of market structure under way.