Hong Kong regulator fines Citigroup US$509,660 for dark pool compliance failure

The SFC found the problem during a thematic review of Citigroup’s alternative liquidity pool, which is commonly known as a dark pool, and found the firm has failed to comply with certain code of conduct requirements from December 2015 to August 2016.

Dark pools are off-exchange electronic trading systems that match buy and sell orders without disclosing the identity of the parties, prices or volumes.

The SFC tightened regulations for dark pool operators by banning retail investors under rules that took effect in December 2015. Only sophisticated professional investors, insurers, fund managers and pension fund managers were allowed to trade on the platforms under the new rules.

The SFC found that Citigroup had made some preparations for its dark pool platform Citi Match before December 2015 to prepare for compliance with the new regulation, including a review of investors trading on the platform.

“However, it [Citigroup] overlooked that its system had defaulted certain clients as allowed to match trades in Citi Match, when their orders should not have been enabled access to alternative liquidity pool,” the SFC said. “The incorrect default setting was not discovered until the SFC’s thematic review in 2016. As at August 1, 2016, the default setting of over 470 clients was incorrect and the orders of over 130 clients were routed to Citi Match for execution without having assessed the clients as qualified investors and without providing them with the alternative liquidity pool guidelines.”