SEC Charges Citadel Securities for Violating Order Marking Requirements of Short Sale Regulations

The Securities and Exchange Commission (SEC) has officially declared that it has resolved charges against Citadel Securities LLC, a broker-dealer, concerning a violation of a provision within Regulation SHO. Regulation SHO is a regulatory framework designed to combat abusive short selling practices. It mandates that broker-dealers must accurately classify sale orders as long, short, or short exempt, with these records serving as a crucial tool for regulators in monitoring and preventing illicit short selling activities. To settle the charges brought by the SEC, Citadel Securities LLC, based in Miami, has agreed to pay a $7 million penalty.

The SEC’s order reveals that over a five-year period, Citadel Securities LLC inaccurately marked millions of orders. Specifically, it erroneously categorized certain short sales as long sales and vice versa. The inaccurate designations were attributed to a coding error in Citadel Securities LLC’s automated trading system, and during this period, the firm provided regulators, including the SEC, with this incorrect data.

Mark Cave, Associate Director of the SEC’s Division of Enforcement, emphasized the importance of complying with the order marking requirements established by Regulation SHO, stating, “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. This action against Citadel Securities demonstrates that a broker-dealer’s failure to comply with the requirements of Reg SHO can have negative downstream consequences on the accuracy of the firm’s electronic records, including its electronic blue sheet reporting, depriving the Commission of important information about the markets it regulates.”

The SEC’s order specifically charges Citadel Securities LLC with violating Rule 200(g) of Regulation SHO. Without admitting or denying the findings, Citadel Securities LLC has consented to a cease-and-desist order. This order imposes a censure, a financial penalty of $7 million, and a series of undertakings. These undertakings include providing written certification confirming the remediation of the coding error and conducting a review of the firm’s computer programming and coding logic associated with processing relevant transactions.