Citi To Pay $12.9 Million Related to "Dark Pool" Trading Violations

By Micah Maidenberg and Alexander Osipovich 

Citigroup Inc. will pay regulators $12.9 million to settle charges related to its operation of a so-called "dark pool" trading platform called Citi Match.

The Securities and Exchange Commission said the Citi affiliate that marketed Citi Match misled users between at least December 2011 and June 2014 by informing them that high-frequency traders weren't permitted to trade in the pool.

Dark pools are private, off-exchange stock-trading venues that arrange transactions without broadcasting their users' orders to the broader market. They are often used by big investors that want to buy or sell large quantities of shares without tipping off other market players about their intentions.

Such investors are often wary of letting high-frequency traders see their orders, out of fear that the traders will infer that a large buyer or seller is at work. That can cause the speedy trader to adjust its price quotes in response, resulting in the investor getting a worse price for its transaction.

In the Citi example, the users of the dark pool, such as mutual fund and retirement fund advisers, paid what the SEC called a "relatively high commission rate" that was generally a penny per share to trade in Citi Match. The Citi affiliate also marketed it as free from high-frequency traders.

One PowerPoint presentation frequently used to market Citi Match said "No High Frequency Flow," the SEC said.

However, two high-frequency trading firms accounted for more than 17% of all transactions by dollar volume in Citi Match during the period the SEC reviewed, the agency said.

In addition, the affiliate failed to tell customers that nearly half of orders in Citi Match were routed to and executed in other trading venues, like other dark pools. Some customers received notices saying trades were made in Citi Match when they weren't, according to the SEC.

"All trading venues, regardless of their trade volume, must ensure that their users have accurate information, particularly about key issues like order routing," Joseph Sansone, chief of the SEC Enforcement Division's Market Abuse Unit, said in prepared remarks.

The agency also found a different Citi affiliate that operated Citi Match failed to register as a national securities exchange.

Citigroup agreed to the settlement without admitting or denying the SEC's findings. A spokeswoman for Citigroup said the company was pleased to have the matter resolved.

In addition, the bank's affiliates involved in the matter were both censured by the agency.

The Citigroup settlement is a latest in a string of SEC penalties related to banks' dark pools and dealings with ultrafast traders.

In June, Bank of America Merrill Lynch agreed to pay $42 million to settle SEC allegations that it sent clients' orders to high-speed traders while telling the clients that it was handling the orders internally. Bank of America admitted violations of federal securities laws as part of the settlement, which followed a similar settlement between the bank and New York's attorney general in March.

The SEC approved new rules in July aimed at forcing dark pools to be more transparent about their practices.

Write to Micah Maidenberg at [e-mail] and Alexander Osipovich at [e-mail]

(END) Dow Jones Newswires

September 14, 2018 16:00 ET (20:00 GMT)

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