In 2017, Citadel paid the SEC $22.6 million to settle charges that it misled customers about the way it priced trades.
The SEC found that between 2007 and 2010, Citadel used two algorithms to execute stock trades on customers’ behalf that gave investors a worse price for their trades, even when Citadel knew better prices existed elsewhere.
The SEC penalized Citadel for failing to disclose the use of those algorithms to clients.
“This affected millions of retail orders,” said Stephanie Avakian, the acting director of enforcement at the SEC at the time.
Citadel neither admitted nor denied the findings.
Today, Citadel has lost the court case against the IEX order type crippling its trading strategy, more on that down below.
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Citadel cheats retail investors
Citadel has been cheating retail investors for years now through a variety of loopholes the SEC has failed to stop.
The market maker is responsible for processing almost 50% of retail orders.
Citadel receives these orders by paying brokers such as Robinhood in what’s known as PFOF, or payment for order flow.
The problem arises when these orders are then traded through foreign exchanges allowing Citadel to pocket the best trading bid, essentially stealing from retail.
They accomplish this through HFT, or high frequency trading.
And because 90%-95% of retail orders are not executed through the lit exchange (NYSE), it gives Citadel’s short positions a massive advantage against retail investors going long.
This means only a small fraction of the demand is truly reflected in a company’s share price.
What is currently being done about the market manipulation?
The SEC has publicly discussed the possibility of banning PFOF for good, but the industry has lashed out.
In October of last year Citadel sued the SEC over the new D-Limit order that would protect displayed lit orders from being picked off by latency arbitrage players.
IEX is an exchange that relies heavily on the D-Limit order to outperform displayed order prices on other exchanges.
This means that predatory strategies such as market arbitrage, where high frequency firms profit from lower prices in foreign exchanges, will no longer be able to do so.
High frequency trading has been used against retail investors to not only gain better prices on stock from other ‘slow loading’ exchanges, but by also using this advantage to sell stock significantly cheaper.
So when you find an exchange that is showing lower prices, hedge funds betting against certain tickers may borrow high in another exchanges while benefiting the difference from selling the stock in those displaying lower prices.
The D-Limit order uses AI technology that provides more consistent and accurate data across all exchanges.
How will IEX affect Citadel?
In short, Citadel Securities and other high frequency trading firms will lose a lot of money.
The reason being is they are making money every second from using this high frequency trading technology to their benefit by getting better prices than anyone else in the market.
The IEX Exchange would put Citadel Securities in the same courtyard as retail investors, leveling the playfield.
IEX would create a foundation for a fairer market.
Citadel paid the SEC $22.6 million to settle charges on misleading conduct in 2017, but karma seems to be catching up for the hedge fund and market maker.
On July 29th, 2022, it was announced that Citadel has lost the court case against the IEX order type.
This is massive win for retail investors and a huge blow to the market maker and hedge fund.
But the SEC still has a lot of work ahead, especially if they’re looking to earn the trust of retail investors.
Only time will tell how significant this battle truly is.
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