Citadel Securities to pay $7 million fine to SEC for violating short sale rule

Citadel Securities LLC, a renowned broker-dealer, has been charged for violating Rule 200(g) of Reg SHO, a regulation that requires broker-dealers to mark sale orders as long, short, or short exempt. The firm has agreed to the charges, consenting to a stark fine for settlement against the US Securities and Exchange Commission (SEC).

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Citadel Securities settles with the SEC

Citadel Securities has agreed to settle charges with the US SEC after the financial regulator charged the broker-dealer with breaking a clause under Regulation SHO. This is a regulatory structure targeting unlawful short-selling practices.

Short selling, otherwise called shorting, refers to a trading strategy where you borrow a security, sell it, and then buy it back at a lower price. The short seller therefore profits from the asset’s value dropping.

Under Regulation SHO, broker-dealers must order mark (mark a sale order as long, short, or short exempt), with the records helping financial regulators to prevent unlawful activities in shorting activity. Citing the SEC’s Associate Director of the Division of Enforcement Mark Cave:

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.

The regulator indicates that the Miami-based broker-dealer marked millions of orders incorrectly for five years straight. Specifically, Citadel Securities inaccurately denoted that some short sales were long and some long were short. While the commission’s findings attribute this foul play to a coding error in the dealer’s automated trading system, Citadel is charged for presenting inaccurate data to regulators, the SEC included. Notably, Goldman Sachs has also been charged with the same violation.

Citadel Securities and Goldman Sachs & Co. charged by SEC

According to the SEC, Citadel has agreed to pay a $7 million penalty in settlement of the charges, with the commission articulating that broker-dealers failing to comply with the Reg SHO rules would eventually affect the accuracy of its electronic records, “including electronic blue sheet reporting.” In turn, this would deprive the SEC of crucial data pertaining to the very same market it is supposed to be regulating.

While Citadel agreed to the penalty, it did not admit or deny the regulator’s findings but instead consented to a cease-and-desist order. The punishment comprises a censure, a fine, a written confirmation that the coding error has been fixed, and an evaluation of Citadel’s computer programming and coding structure that they use to process transactions.

The incident depicts how unsafe financial markets can be, with leading market makers feasting upon retail investors.