Why do Professionals Get Do-Overs – Citadel Edition

Themis Trading’s Sal Arnuk forwarded me a copy of this FINRA letter of Acceptance, Waiver and Consent involving Citadel.

Let me recap some history and views for new readers:  I’m generally not hot & bothered by hullabaloo about high frequency trading (HFT), because I know that the current market structure is the best it’s ever been for the “poor ignorant retail investor” who some commentariat polyannas try to make out as the victim of evil light-speed machines who are stealing our poor ignorant money.  I don’t lose an iota of sleep worrying about microseconds, because they’re meaningless to me anyway: any latency in data feeds pales in comparison to latency in my internet connection, or latency between my brain and my keyboard.   It’s *literally* meaningless to me if my data feed is 25, 50, 100, or 1000 milliseconds slower than another guy’s data feed.  I do not care in the least bit, and I also would never try to fight the laws of physics which dictate that someone will always have the data first.   All day long I look at my screen and lift offers in penny wide markets or smack bids in penny wide markets, reaping the insta-fill and minimal spread benefit that others are still trying to complain about.  I, the retail investor/trader, am indubitably the big winner from current market structure.  It is, as we say in the Northeast, “Friggin’ Awesome.”

However, something I think is ridiculous is “erroneous trade” cancellations, which I’ve written about more than once.    I’d strongly suggest taking a look at the two brief links in the prior sentence, but the TL:DR summary of my thoughts  is 1) if we’re going to cancel trades after the fact, prevent them from happening in the first place, and 2) canceling “erroneous” trades removes incentive for the error-sender to get his act together and stop sending erroneous orders.   You know what makes firms clean up their act and fix their bugs in a hurry?  L – as in the LOSS part of P/L.

The FINRA/Citadel letter at hand is important because it involves a number of concepts which I’ve written about multiple times.  First off, the first problem cited was 24 cases of erroneous CLIENT orders which were sent at market.



What that’s saying is that in 24 cases, Citadel customers transmitted orders through Citadel’s system that were erroneous and caused price impact as a result.  If only someone could have possibly noted that market orders should be banned and that it’s client market orders causing these price impacts… Who could have possibly realized that this was happening?   If you’re not getting the heavy sarcasm there, what I mean is that it was obvious this was happening.  I’ve written about it at least twice:  market orders shouldn’t be allowed at all.  There is no reason to have market orders. Customers NEVER mean “market” when they send a market order. Ever.      Anyway, back to the FINRA letter: it’s hard to get too fired up about this item:  it’s clear that regulators don’t want to penalize customers (but why? anyway) so they focus on the problem of Citadel not having policies in place to realize that these orders would have impact.  Whatever – there’s more substance to get fire up about later in the Letter.

The next item detailed is an erroneous order that Citadel itself sent in PCGR:


The letter then goes on to talk about Citadel’s inadequate policies and procedures around software upgrades which may cause issues – which boggles my mind.  Who gives a crap if Citadel has a 1000 page manual of policies and procedures designed to prevent errors like this?  There’s only one thing that matters: the erroneous order was submitted.  It doesn’t matter how many policies they may or may not have (the letter makes a big deal out of the “they did NOT have” part) to prevent erroneous orders – they didn’t work.    In other words, if Citadel DID have “formal written policies” in place, would that make the problem any less of a problem?  HELL NO!   It’s unclear from the letter, but I’m assuming that these executions were canceled?  Does anyone have the facts/data on that?

The FINRA letter then goes on to detail a number of occasions where Citadel’s systems sent out large numbers of orders in error, but managed to immediately cancel the orders before execution.   This happened on several occasions, and you can read the details in the letter if you like.  The conclusion is that FINRA thinks Citadel’s risk management controls are lacking.  For example:


And the remedy?   An $800,000 fine, and an order to remedy policies and procedures.  Now, this is is the point where I think that those people who are complaining about current market structure (and even those who aren’t – like myself!) should stand up and lobby politicians and regulators:  the problem isn’t that the fine is extremely small in proportion to Citadel’s dominance in the industry* – the problem, as I noted above, is that policies and procedures don’t matter if erroneous orders continue to get submitted.   Here, Citadel has been censured and warned about a pattern of poor controls.  What will happen next time?  Does Citadel *still* get the privilege of having “erroneous” orders canceled the next time it happens? 

I am guessing that the answer is “yes,” and my simple follow up question to any regulator or politician involved is:  WHY?  Let this FINRA letter serve as a warning not only to Citadel, but to every market participant: you’re on notice.   You better have your act together, because the rest of us aren’t going to eat your errors anymore.

In my philosophically perfect market regulatory environment, the next time Citadel changed their software and sent out a hundred, thousand or ten thousand erroneous orders, they’d call up some arbitration council and the conversation would go like this:

Citadel:  “Hi, we had a systems issue – we screwed up and sent out 10,000 erroneous orders that we need cancelled.”

Judge: “Howdy, Citadel – you and everyone else have been warned about this in the past.  Why on Earth would we continue to cancel your mistakes for you?”

Citadel: “Well, ummm, because, ummm..

Judge: “No – no more mulligans.  You’re responsible for the orders you send.  End of story.”

I guess I’ll just keep dreaming about that – but it doesn’t have to be a dream.   Maybe instead of pandering to ignorant populists (AIYAHHHH!! THE HFT’S ARE FRONT-RUNNING YOU!!!), politicians like Elizabeth Warren could think about things like this and address why people accept the term “erroneous” trade when firms enter them at a regular frequency…

We shouldn’t be canceling erroneous trades, but beyond that, given that we continue to not only cancel the bad trades, but to make a big deal out of censuring the parties responsible and telling them that they don’t have the proper policies in place, it makes the next “erroneous trade cancellation” event all the more mind boggling.


FINRA – Citadel Letter

HFT – The Little Guy Is the Big Winner

DEAR NYSE: Canceling Trades Destroys the Integrity of the Market

Canceling Erroneous Trades – You’re Asking The Wrong Questions

Don’t Lose Faith in Markets, Lose Faith in Market Orders

Ban Market Orders

The Idea of Banning Market Orders Goes Mainstream



* oh by the way, the letter details another error which was going to cost Citadel $1.4MM in PnL, but because of partial cancellations by the exchange due to “erroneous orders,” the error cost was reduced to $ 400,000.  So even with the $800k fine, they’re making out with respect to this single event!




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