Published On: Wed, May 14th, 2014

HK SFC Resolves Concerns Over Citigroup’s Algorithmic Trading System

Ashley Alder, HK SFC CEO

Ashley Alder, HK SFC CEO

The Securities and Futures Commission (SFC) has reprimanded Citigroup Global Markets Asia Limited (Citigroup) for its failure to ensure that certain securities orders executed through its algorithmic trading system between April 2009 and May 2010 would not cause undue price impact to the market in resolving the SFC’s concerns over Citigroup’s algorithmic trading system (Note 1).

The SFC’s investigations into Citigroup’s use of algorithmic trading system to execute client orders on four occasions found that Citigroup’s execution in those cases resulted in a material increase or decrease in the price of the relevant stocks within a very short period of time, before the stock prices returned quickly to their original levels.

In reaching this resolution, the SFC took into account that:
• Citigroup co-operated with the SFC in resolving the SFC’s concerns;
• Citigroup agreed to engage an independent reviewer to conduct a forward-looking review of its algorithmic trading system to ensure compliance with the new regulation on electronic trading which came into force on 1 January 2014 (Note 2);
• Citigroup has an otherwise clean disciplinary record in relation to its algorithmic trading; and
• the price impacts on the market occurred in 2009 and 2010 in relation to trades conducted through Citigroup’s algorithmic trading system, which had been replaced.

The SFC would have imposed a heavy fine if Citigroup’s failures occurred after 1 January 2014, when the SFC’s revised standards on electronic trading came into effect.

Notes:
1. Citigroup is licensed under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) and Type 7 (providing automated trading services) regulated activities.
2. The regulatory requirements for electronic trading are set out in Schedules 6 and 7 and paragraph 18 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, and Part IV of the Fund Manager Code of Conduct.
3. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.

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