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Citigroup Fined for Algorithmic Trading Blunder

Citigroup

Story Highlights

  • Citigroup was fined £61.6 million for a trading error that triggered a $1.4 billion sell-off in European markets.
  • Trader’s data entry mistake created a massive order instead of the intended $58 million basket.
  • Regulators highlight control deficiencies and emphasize the need for robust safeguards in algorithmic trading.

Citigroup Global Markets Limited (CGML) has been dealt a £61.6 million blow by British regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). This hefty fine stems from a May 2022 incident where a seemingly minor error by a trader snowballed into a significant market disruption.

A Basket Gone Wrong

The incident unfolded with a simple data entry mistake. The CGML trader intended to sell a basket of equities valued at a modest $58 million. However, a fat-finger error resulted in the creation of a basket worth a whopping $444 billion – a massive discrepancy.

Citigroup

Safety Nets With Holes

While CGML’s safeguards managed to catch a significant chunk of the erroneous order, a substantial amount – $189 billion – slipped through the cracks. This remaining sum was then fed into a trading algorithm designed to gradually execute the sale throughout the day.

Unfortunately, the error remained undetected for a critical period. Before the mistake was identified and the order canceled, the algorithm had already sold $1.4 billion worth of equities. This massive sell-off triggered a brief but significant drop in several European indices, showcasing the potential for algorithmic trading blunders to disrupt markets.

Regulators Unveil Control Deficiencies

The FCA’s investigation revealed critical shortcomings in CGML’s trading control framework. A key oversight was the absence of a mechanism to automatically reject abnormally large orders. This meant such errors could potentially reach the market. Additionally, the ability of traders to bypass certain alert messages highlighted a weakness in the firm’s risk management system design.

Steve Smart, Joint Executive Director of Enforcement and Market Oversight at the FCA, emphasized the crucial role of robust controls for firms engaged in algorithmic trading. “These failings led to over a billion pounds of erroneous orders being executed and risked creating a disorderly market,” he commented. The hefty fine serves as a stark reminder of the financial and reputational risks associated with system failures, underlining the need for watertight controls and clear communication protocols to prevent such incidents in the future.