[Asia Economy Reporter Lee Jung-yoon] Financial authorities have imposed a fine of approximately 11.9 billion KRW on Citadel Securities, a subsidiary of the US hedge fund Citadel, for disrupting market order through ultra-high-frequency trading.
The Securities and Futures Commission under the Financial Services Commission decided on the 26th to impose a fine of 11.88 billion KRW on Citadel Securities for violating the Capital Markets Act.
It was found that Citadel Securities engaged in market disorderly conduct in a total of 264 domestic stock items (a total of 6,796 trading intervals) through Merrill Lynch Securities Seoul branch from October 2017 to May 2018.
Ultra-high-frequency trading or high-frequency trading is a type of algorithmic trading technique where computers place numerous orders in a short period of time. This is the first time Citadel Securities has been fined in Korea for market disorderly conduct due to high-frequency algorithmic trading.
Citadel Securities repeatedly executed large-scale fictitious orders and induced bid price increases by placing orders instantaneously according to computer programs, then quickly canceling the orders.
They artificially created bid price gaps through high-price and volume-consuming buy orders, then filled the bid price gaps by submitting limit buy orders to induce bid price increases, and repeatedly canceled orders in a concentrated and repetitive manner within a short time.
To minimize order processing time, Citadel Securities used the Direct Market Access (DMA) method, which allows investors to send orders directly to the exchange’s computer system, enabling them to obtain bid and execution information faster than general investors.
During the relevant period, it was found that they traded over 500 billion KRW daily on an average of 1,422 stock items. Additionally, Citadel Securities was fined about 110 million KRW for violating regulations on naked short selling besides the market disorderly conduct.
Financial authorities plan to strengthen market risk management for high-frequency algorithmic trading. Investors intending to engage in high-frequency algorithmic trading will be required to pre-register with the exchange, and the exchange will assign separate identification codes to registered traders to monitor their trades. This registration will be mandatory starting April 25, after a three-month grace period.
Furthermore, securities firms will be encouraged to prevent customers’ unfair conduct using high-frequency algorithmic trading by utilizing the Korea Exchange’s 'Market Surveillance Standards.' Also, a separate system to easily analyze abnormal trades using high-frequency algorithms will be established at the Korea Exchange within the first half of the year.
A Financial Services Commission official stated, "In the mid to long term, we plan to review measures to strengthen the regulatory framework for unfair trading practices related to algorithmic trading by referring to cases in major countries."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
