Citadel Pays $22 Million Settlement For Frontrunning Its Clients

Tyler Durden's picture

Last May we reported that, after years of railing against Citadel's dominant position at the intersection of HFT trading and retail orderflow - Citadel was recently found to be the largest private US trading venue - Federal authorities were investigating the market-making arms of Citadel LLC and KCG Holdings looking into the possibility that the two giants of electronic trading are giving small investors a poor deal when executing stock transactions on their behalf.

As a reminder, Citadel is so big and its own private stock-trading platform is so large that, if it were an official exchange recognized by the Securities and Exchange Commission, it would one of the largest registered exchanges in the United States - bigger than Nasdaq. Citadel Execution Services, the firm’s wholesale market-making unit, recently executed 35% of all trades by retail investors in U.S.-listed stocks.

It was this retail trading giant that authorities were probing, and specifically looking at internal data concerning the firms’ routing of customer stock orders through exchanges and other trading systems, to see whether they are giving customers unfavorable prices on trades in order to capture more profit on the transactions.

In other words, the DOJ is looking into whether Citadel is frontrunning its clients, something we have claimed for years.

So what would happens if the DOJ did find what has been obvious to most market participants for years, namely that Ken Griffin's firm was frontrunning retail orderflow fore years?

As we summarized at the time, if authorities do move ahead, they would be marching forcefully into the debate over high-speed trading. Critics of HFT, such as this website, have alleged that firms with the fastest trading technology are using speed to manipulate stock prices, giving investors a raw deal. The industry counters that its technology delivers cheaper and more transparent trades to investors.

It also delivers guaranteed profits to itself, because while on one hand Citadel is a massive market-maker, responsible for the biggest portion of retail flow traffic, on the other it happens to be the most leveraged hedge fund in the world in terms of regulatory to net assets.

* * *

Or maybe nothing at all. Because fast forward to today, when without much fanfare at all, Citadel announced it would pay $22.6 million to settle allegations that it "misled clients about pricing trades", a euphemism for it was frontrunning its clients.

The Securities and Exchange Commission, soon to be run by a former deal lawyer who was particularly close to Goldman Sachs, said in a statement on Friday that Citadel, without admitting or denying the findings, had agreed to pay $5.2m disgorgement of ill-gotten gains, plus interest of $1.4m, in addition to a $16m penalty.

The SEC found precisely what we had said all along: that the company's business unit handling retail suggested to its broker-dealer clients that it would internalize retail orders to provide the best price, but it used algorithms that failed to perform the task from 2007 to 2010; i.e. Citadel was actively trading against the best interests of its clients, and adverse in its own best interests.

"These two algorithms represented a small part of Citadel Securities' internalization business, but they nevertheless affected millions of orders placed by retail investors because of Citadel Securities' large role in that market," said Robert Cohen, co-chief of the SEC enforcement division's market abuse unit.

Citadel, which has since discontinued use of the algorithms, said in a statement Friday that it takes legal compliance "very seriously." 

Today, Citadel Securities resolved an issue related to the adequacy of certain disclosures from late 2007 to January 2010. We take very seriously our obligations to comply fully with all laws and regulations. As the market leader we are committed to providing superior service and execution quality to our clients each and every day.

To those who want to see a Citadel internalizer algo in action, we recommend you read the following article by Nanex' Eric Hunsader, who explains the entire process: "Retail Trades Disadvantaged by Direct Feeds  Internalizers buy at the direct feed price, sell to retail at the SIP feed price."

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hedgeless_horseman's picture

Citadel announced it would pay $22.6 million to settle allegations that it "misled clients about pricing trades", a euphemism for it was frontrunning its clients.

I am Jack's complete lack of suprise.


We understand that Wall Street does everything to maximize its PROFIT, thus minimizing our WINNINGS.  Or do we?

The central planners's picture

But frontrunning is an old accepted dicipline in the hedge funds olimpics.

Two-bits's picture

But Sir, it was skynet. Oh, well in that case, cut em a check and call it square.

Government needs you to pay taxes's picture

So they net $100 million on illegal front-runs which only cost them $22 million in fines.  BIDNESS IS GOOD!

The Saint's picture

Limit orders, Muppets, limit orders.


atomp's picture

limit orders are where they make the big spreads.

Four chan's picture

clients see...not one red cent.

VD's picture

a 0.01% settlement on the theft... not even a wrist-slap... sad, but expected.

PirateOfBaltimore's picture

Compare to EPA settlement - where manufacturers are being criminally charged for circumventing emissions controls on vehicles with relatively tiny fleets in the US. Real question is what % of diesel producers get dinged? If it's not 100% I'll question it - they're being asked to bend the limits of physics. 


We need to begin reverse engineering all diesel models - emissions test protocol is public knowledge, right? Worst case we put the best performer (I.e. non cheater) into the public spotlight (golf clap for their innovation). Best case we expose 1) government incompetence at identifying others and/or 2) the absurd difficulty of the regulations, which are killing mature manufacturers. Do, pray tell, how new market entrants can enter into such a market? Yuuuuge risk due to artificial costs.

phoolish's picture

Effectively, a "pardon."

barysenter's picture

Yes, but did they pay in pennies?

Satan's picture

Looks like the PPT is being dismantled...

Yen Cross's picture

   That's ALL!!!   I fully expect Citadel to continue it's front-running, without any fear of recourse.

knukles's picture

Dey only front runned the Fed.  Youda tink dat dey wuz dumping trash out in the Meadowlands again, so whazza mattah?

Vinividivinci's picture

"Frontrunning clients"...
doesn't that involve handcuffs, lube and a 13" dildo?

SumTingWongJr's picture

These clients were just muppets. They deserve to be fully fleeced or f'd in the butt without benefit of K-Y.

SumTingWongJr's picture

"As the market leader we are committed to providing superior service and execution quality to our clients each and every day."


Code to clients:  Bend over, we are gonna fuck you all in the butt, then take as much of your money as we can.

SumTingWongJr's picture

Kenny "Fuck face" Griffin takes 1 % off the top of all trades.  That is why he makes $100M per month.

He earns the puny fine in just 1 week.  

okiecarl's picture

What has always struck me about these settlements and fines... the government gets a nice big fine but the taxpaying investor gets hung out to dry.  I guess that's the way it's supposed to be, eh?

GRDguy's picture

It's call "absolution."  

The Deep State (new religion) forgives their sins upon completion of payment.

Just like "The Church" did in olden times.

JailBanksters's picture

The way I see it, any broker that isn't frontrunning their clients, well they aren't a very good broker.

The only difference between a good and bad broker is just the scale of the frontrunning.


GRDguy's picture


Just another word for lyin' and stealin'.

Vinividivinci's picture

" Profit " means never having to say your sorry.
(ripped off from A Love Story).

JailBanksters's picture

It's all covered in the Ferengi: Code of Acquisition

Ban KKiller's picture

Accounting is honest. No, really. Stop laughing.

DirtySanchez's picture

Any other nation on earth, this mutt, Griffin, would be dragged down stairs, taken behind the building, and receive two in the chest and one to the brain.

Grandad Grumps's picture

Did they compensate the clients they stole from or was this a governmment insider deal?

HoserF16's picture

I've been reading for years about "Fines" being paid by all these criminals on Wall Street. Question, where does all that money go?

order66's picture

It's part of what the SEC relies on for its budget.

Wanna know what the other part is?

Transaction fees on trades from the very industry they are tasked to regulate. Not only that, but these fees are per transaction so there is a huge incentive to promote volume. That's why they go easy on HFT.

Total fucking sham.

Raging Debate's picture

Ben Bernanke landed there at Citadel. He is giving them the best advice. He told them to buy big printing machines, print out currency then hand to friends and yourself. 

overmedicatedundersexed's picture

yrs ago told a young phone agent for fidelity..look you guys front run my orders..the dumb as rocks kid, replied : "what is front running?"

want to see real crime look at mutual funds..they have massive buy and sell orders- but of course nobody would think to front run that..would they?

only angels would not use mutual fund buys and sells to rip em off..and as you can guess there are no Angels on wall street..

almost as good as being a FED bankers printing money outta thin air..and front running interest rate info..naww can't happen right ben? Janet? Alan? 

order66's picture

After all that pushback from the HFT/Dark Pool crowd, all the fucking denial from Bill Hart and his minions, the SEC confirms what EVERYONE in the investment community already knew:

These fucking douchebags were ripping off everyone they executed for by gaming the SIP.

I just wish I could have been in on it because the $200 million or so in fines that these fuckers paid to date is less than 1% of the money they stole.

Fraud is the best trading strategy there is for U.S. markets. Huge ROI.

Thanks SEC.

Conax's picture

It certainly is a Free Country for Wall Street. Lee Greenwood should play their lunchroom.

Citadel's fine is no punishment, only a muppet would be satisfied that their paying a token fine would bring some justice to them. It does bring some easy cash to the fine receivers which are not even among the victims here.

Nope, they are Free At Last to snatch a bit from each muppet, profit off every order, put their dick in the ass of Americans trying to invest, and get off the hook with a bit of their loot and move on.

They're laughing and snorting, shagging and cavorting, you get back to work, losers!