Citigroup’s LavaFlow to Pay $5 Million in SEC CaseNeil Weinberg, Dakin Campbell and Doni Bloomfield
Citigroup Inc.’s LavaFlow Inc. agreed to pay $5 million to settle claims that it failed to protect customers’ confidential trading data, the Securities and Exchange Commission announced.
LavaFlow, which executes trades on behalf of broker-dealers and others, let an affiliate gain access to the system and use confidential information related to subscriber orders that weren’t displayed to the public, the SEC said today.
This isn’t the first case involving accusations of misdeeds at an alternative U.S. stock trading platform, which have won market share from exchanges such as the New York Stock Exchange. New York’s attorney general recently sued Barclays Plc for misleading customers about the participation of high-frequency traders in its dark pool, or private trading system. Also this year, the SEC said Liquidnet Holdings Inc.’s private market had failed to be private enough.
“This is worse than Barclays,” said Michael Friedman, the New York-based chief compliance officer at Trillium Management LLC, a trading and trading-technology firm. “In the Lava situation, you’re actually acting upon individual hidden orders in real-time. This is the first time I’ve seen any case involving that level of actual improper usage of hidden orders.”
Unlike dark pools, electronic communication networks such as LavaFlow display information about pending orders. LavaFlow didn’t have adequate safeguards and procedures in place to protect confidential information, the SEC said.
The $5 million that LavaFlow agreed to pay includes a $2.85 million penalty, the largest involving an alternative trading system, the SEC said. It also includes $1.85 million in disgorgement of money earned by Lava Trading Inc., a LavaFlow affiliate that was found to have continued providing broker-dealer services for several months after deregistering.
LavaFlow and Lava Trading are both owned by Citigroup Financial Products. LavaFlow, which consented to the findings without admitting or denying wrongdoing, agreed to pay an additional $350,000 in prejudgment interest.
The SEC’s director of enforcement, Andrew Ceresney, said operators of alternative trading systems must protect confidential information.
“We will continue to hold accountable firms that fail to follow the rules applicable to off-exchange venues,” Ceresney said in today’s statement from the regulator.
Citigroup’s stock fell 0.2 percent to $49.99 at 1:34 p.m. New York time today. The shares had dropped 3.9 percent this year through yesterday, compared with a 5.3 percent gain for the 84-company Standard & Poor’s 500 Financials Index.
“We are pleased to put this matter behind us,” Citigroup spokesman Scott Helfman said in an e-mail.
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(The penultimate paragraph of an earlier version of this story was corrected to fix a typographical error in Citigroup’s statement.)