Citi Settles For $5 Million For Not Protecting Consumer Data In Off-Exchange Trades

Yet another ding for big banks from regulators and law enforcement for their off-exchange trading venues.

Pedestrians walk past the facade of a Citibank building in New York July 14, 2014. Lucas Jackson / Reuters

Yet another bank is running into trouble over how it operates a venue for trading stocks away from one of the major exchanges. This time it is Citigroup, which settled with the Securities and Exchange Commission for $5 million for not protecting user data in its trading subsidiary LavaFlow.

The SEC said that LavaFlow violated rules about protecting trading information between March 2008 and March 2011, by showing clients’ trading orders in its trading venue LavaFlow ECN — which were not supposed to be displayed — to another trading application called ColorBook, which was owned by an affiliate of LavaFlow.

ColorBook used the data from the LavaFlow customers, for its own customers who used the application for order routing, the SEC said. Of the $5 million settlement, $2.85 million will be a civil penalty and $1.8 million will be a disgorgement of revenues. The SEC said the penalty will be the largest paid by an alternative trading system.

“Although ColorBook customers could not themselves see or access the direct subscriber non-displayed order flow,” the SEC said sharing the data ran afoul of data-sharing rules “because the smart order router was outside the LavaFlow ECN and had access to, and retained, information about the direct subscriber non-displayed order flow.”

The SEC said that the protections LavaFlow did implement were inadequate and also said Citigroup failed to get the consent of LavaFlow’s customers for their data being used by ColorBook. ColorBook stopped accessing the order data in March 2011, but for the three-year period it did have access, the SEC said, over 400 million shares were traded on ColorBook using information from LavaFlow.

“Operators of alternative trading systems must protect confidential subscriber data and take steps to ensure that affiliates do not improperly use order information,” the SEC’s enforcement director Andrew Ceresney said in a statement. “We will continue to hold accountable firms that fail to follow the rules applicable to off-exchange venues.”

“We are pleased to put this matter behind us,” a Citigroup spokesperson said.

According to data collected by FINRA, LavaFlow operated the ninth most active alternative trading system in the week of June 30 with 97 million shares traded, the most recent week FINRA has publicly available data.

Alternative trading systems make up over 10% of US equity trades and have come under increasing scrutiny for how they handle customer orders and whether they provide special access for high speed traders or properly protect client information. Critics of the current trading structure say that conflicts of interest and preferential treatment for some customers at the expense of others are rampant, especially in trading venues run by the largest brokerages and banks.

Barclays was sued by the New York Attorney General for allegedly misleading investors about the presence of high-speed traders in its dark pool, Barclays LX, which provides less public information than LavaFlow. Goldman Sachs was fined $800,000 by the financial industry self-regulator FINRA for executing 400,000 trades at prices other than the best price in violation of the rules of its dark pool Sigma X.

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