Hong Kong’s securities regulator has reprimanded a unit of Citigroup for failing to ensure that its algorithmic trading systems functioned properly between April 2009 and May 2010.
Four Hong Kong-listed stocks traded on behalf of clients by Citigroup Global Markets Asia were affected in trades on four occasions during that period.
The firm’s execution had resulted in a material increase or decrease in the price of the stocks within a very short period of time, before the stock prices returned quickly to their original levels.
Citigroup narrowly avoided a heavy fine, because the trades took place before the Securities and Futures Commission (SFC) imposed new rules on electronic trading in January.
The rules place additional responsibilities on both sell-side brokers and buy-side fund managers to ensure they are effectively managing and adequately supervising their e-trading systems and algos.
In this case, the first failure occurred on April 8, 2009, when Citigroup’s algo system executed a client’s order to buy stocks of Belle International Holdings.
However, its algo system subsequently sent out successively higher bid orders, causing the shares to move to HK$8 from HK$4.69 within the first five minutes of trading that day. The orders caused the stock to move 286 spreads within 65 seconds.
(The bid-ask spread is the difference between the highest price that a buyer is willing to pay for a stock and the lowest price that a seller is willing to accept.)
After the incident, Citigroup informed the SFC that it had added a safeguard to its algo trading system that prevents bid orders from exceeding the historical spread of a stock.
However, the spread-check function failed to work properly on three subsequent occasions.
The SFC took into account several factors in coming to its decision, including that Citigroup had agreed to engage an independent reviewer to assess its algo trading system to ensure compliance with the new rules; and that the firm had an otherwise clean disciplinary record in relation to its algorithmic trading.
Citigroup has replaced the algo trading system following the four incidents.
In a statement, a Citi spokesman notes the bank co-operated fully with the SFC. "We are pleased to have resolved this matter," he says. "As the SFC notes, the underlying events occurred in 2009 and 2010 and involved past-generation algorithmic trading systems that are no longer in operation at Citi."