Recently, the Financial Industry Regulatory Authority (“FINRA”) fined Citadel Securities LLC (“Citadel”) $700,000 for violations of FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders) and FINRA Rule 6460 (Display of Customer Limit Orders).
According to the Letter of Acceptance Waiver and Consent (the “Letter”) with the FINRA, Citadel established an Over-the-Counter (the “OTC”) equity trading desk that would receive orders from Citadel’s broker-dealers, on behalf of customers. Citadel attempted to program the OTC to comply with FINRA regulations, but that attempt failed and the OTC exempted hundreds of thousands of customer orders from review. Those exempted orders were rendered inactive until a manual trader review could be conducted.
As such, per the Letter, “from September 2012 to mid-September 2014, the OTC, in many instances, traded ahead of those inactive OTC customer orders in violation of FINRA Rule 5320 and failed to display them as required by FINRA Rule 6460.” The Letter continues, “In addition, from at least October 2012 to September 2018, the OTC failed to display certain customer limit orders as required by FINRA Rule 6460 because of other systems and programming logic.”
Additionally, the Letter states that Citadel did not have proper supervisory procedures in place to achieve compliance with FINRA Rules 5320 and 6460.
Ultimately, FINRA concluded that “Citadel Securities violated NASD Rule 3010(a) and (b) (for conduct before December 1, 2014); FINRA Rule 3110(a) and (b) (for conduct on and after December 1, 2014); FINRA Rule 5320(a) and (b); FINRA Rule 6460; and FINRA Rule 2010.”
FINRA Rule 5320(a)
FINRA Rule 5320(a) provides that “a member that accepts and holds an order in an equity security from its own customer or a customer of another broker-dealer without immediately executing the order is prohibited from trading that security on the same side of the market for its own account at a price that would satisfy the customer order, unless it immediately thereafter executes the customer order up to the size and at the same or better price at which it traded for its own account.”
Although “immediately” is not defined in the rule, FINRA has provided guidance that it requires execution as quickly as possible and generally within one minute under normal market conditions. In other words, there should not be a significant delay between the time that a firm accepts a customer’s order, placed through his or her representative, and the time that the order is executed. Such a delay could result in disparate treatment of a firm’s customers.
FINRA Rule 5320(b)
Under FINRA Rule 5320(b) brokerage firms are required to have a written methodology in place governing the execution and priority of all pending orders that is consistent with FINRA Rules 5320 and 5310, and to ensure that the methodology is consistently applied. In Citadel’s case, it “failed to ensure that its written methodology was applied consistently to OTC customer orders.” FINRA Rule 5320(b) is meant to ensure that brokerage firms not only have a procedure for executing orders, but that it is applied fairly and consistently.
FINRA Rule 6460
FINRA Rule 6460 has display requirements for limit orders, which are orders placed by investors to buy or sell a stock or option at a specified price. This rule is meant to improve stock purchase prices by allowing buyers wishing to purchase slightly below the prevailing market price to attract sellers who might be willing to make that trade.
If you have suffered investment losses as a result of the malpractice or misconduct of Citadel Securities LLC, our experienced team of securities attorneys may be able to assist you in recovering some or all of your losses. Call us toll-free at 888-607-4819 for a free consultation or email us through our “Contact” page to schedule a free consultation.