The SEC has now charged Citadel Securities for illegal short selling violations according to a new SEC filing published on Friday.
The Securities and Exchange Commission says the market maker violated a provision of Regulation SHO, the regulatory framework designed to address abusive short selling practices, which requires broker-dealers to mark sale orders as long, short, or short exempt.
To settle the SEC’s charges, Miami-based Citadel Securities agreed to pay a $7 million penalty.
$7 million is merely a slap on the wrist to the market maker giant.
The gains Citadel collected over the years trump the SEC’s fine — retail investors allege it’s simply the ‘cost of doing business’.
According to the SEC’s order, for a five-year period, it is estimated that Citadel Securities incorrectly marked millions of orders, inaccurately denoting that certain short sales were long sales and vice versa.
The SEC’s order finds that the inaccurate marks resulted from a coding error in Citadel Securities’ automated trading system and that the firm provided the inaccurate data to regulators, including the SEC during this period.
“Compliance with the order marking requirements of Reg SHO is a key component of regulatory efforts to curtail abusive market practices, including ‘naked’ short selling,” said Mark Cave, Associate Director of the SEC’s Division of Enforcement.
“This action against Citadel Securities demonstrates that a broker-dealer’s failure to comply with the requirements of Reg SHO can have negative downstream consequences on the accuracy of the firm’s electronic records, including its electronic blue sheet reporting, depriving the Commission of important information about the markets it regulates.”
Retail Investors Proven Right Once Again
Since the ‘meme stock’ frenzy of 2021, retail investors have alleged Citadel Securities of ‘naked short selling’ the market.
Mainstream media personalities such as Charles Gasparino have defended Ken Griffin and his hedge fund, ridiculing investors on their claims.
Now there’s no denying the regulators’ filing.
“The game is not fair and it never has been. Individual investors, even when operating in a swarm, are destined to lose. How do I know? I helped design the game,” says Patrick McConlogue, an ex-Citadel data scientist.
Patrick McConlogue appeared on Fox Business during the ‘meme stock’ frenzy of 2021 when retail investors created one of the biggest scares in Wall Street history.
GameStop and AMC shareholders were able to create panic on Wall Street by heavily buying shares of the overleveraged shorted stocks.
As share prices soared, short sellers experienced massive losses.
GameStop was able to put Melvin Capital out of business, but Patrick McConlogue says other hedge funds were able to make back billions in losses during the halt.
The halts allowed hedge funds to enter AMC and GameStop knowing shares would plummet, allowing them to capitalize on the deflation of the price.
Patrick says the rules of the game also heavily favor hedge funds, something retail investors have urged SEC Chairman Gary Gensler for years to change.
“I respect many of my colleagues, the problem isn’t the people, it’s the rules of the game which heavily favor the funds.”
Without admitting or denying the findings, Citadel Securities consented to a cease-and-desist order imposing a censure, a $7 million penalty.
The SEC’s investigation was conducted by Seth M. Nadler of the SEC’s Home Office.
Christopher Ray of the SEC’s Division of Trading and Markets; Elcin Yildirim, Alan Lenarcic, and Peter Csatorday of the SEC’s Division of Examinations; Mandy Sturmfelz of the SEC’s Market Abuse Unit; Damon Taaffe and Melissa Armstrong of the Home Office Trial Unit; and Kevin Gershfeld and Robert Nesbitt of the Enforcement Division’s Office of Investigative and Market Analytics provided assistance.
The investigation was supervised by Mr. Cave.
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