Citadel Securities agreed to pay $22.6 million in fines, disgorgement and prejudgment interest to settle SEC charges that its business unit handling retail customer orders from other brokerage firms made misleading statements to them about the way it priced trades.

According to the SEC order …..   from late 2007 to January 2010, Citadel Execution Services suggested to its B/D clients that, upon receiving retail orders they forwarded from their own customers, it either internalized the order – i.e., took the other side of the trade - and provided the best price observed on various market data feeds, or it sought to obtain that price in the marketplace.

As a “wholesale market maker” or “internalizer” that specializes in handling retail orders from investors who are customers of other broker-dealers, Citadel Securities executes approximately 35% of the average daily volume of retail equity shares traded in the U.S. markets.

However, the SEC says that the 2 algorithms used by Citadel Securities did not internalize retail orders at the best price observed nor sought to obtain the best price in the marketplace. Instead, they were triggered when they identified differences in the best prices on market feeds, comparing the SIP feeds to the direct feeds from exchanges. 

• One strategy, known as FastFill, immediately internalized an order at a price that was not the best price for the order that Citadel Securities observed. 
• Another strategy, known as SmartProvide, routed an order to the market that was not priced to obtain immediately the best price that Citadel Securities observed.

While acknowledging that the two algorithms represented a small part of Citadel Securities’ internalization business, Robert Cohen, Co-Chief of SEC Enforcement, said they “nevertheless affected millions of orders placed by retail investors because of Citadel Securities’ large role in that market.”