DocuSign Envelope ID: CFC62BB0-2006-42DE-BFFE-34AB0A9C0B26
F7EFE8EA-4309-4424-BDDD-F3C6B67C3D12NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NO. 2015046278301
TO:

Nasdaq Phlx LLC
c/o Department of Enforcement
Financial Industry Regulatory Authority (“FINRA”)

RE:

Citadel Securities LLC, Respondent
Member Firm
CRD No. 116797

Pursuant to Rule 9216 of Nasdaq Phlx LLC (“Phlx”) Code of Procedure,1 Citadel Securities LLC(“Citadel Securities,” the “firm,” or “Respondent”) submits this Letter of Acceptance, Waiverand Consent (“AWC”) for the purpose of proposing a settlement of the alleged rule violations
described below. This AWC is submitted on the condition that, if accepted, Phlx will not bringany future actions against the Respondent alleging violations based on the same factual findings
described herein.
I.
ACCEPTANCE AND CONSENT
A.

Respondent hereby accepts and consents, without admitting or denying the findings, andsolely for the purposes of this proceeding and any other proceeding brought by or on
behalf of Phlx, or to which Phlx is a party, prior to a hearing and without an adjudicationof any issue of law or fact, to the entry of the following findings by Phlx:
BACKGROUND
Citadel Securities is a U.S. broker-dealer and a market maker in equity securities andU.S.-listed options. It became a member of Phlx in December 2003 and its registration
remains in effect. The firm, which employs approximately 450 registered individuals,
maintains its headquarters in Chicago, IL and has seven other branch offices.
RELEVANT PRIOR DISCIPLINARY HISTORYOn October 23, 2015, the Cboe Exchange, Inc. (“Cboe”) Business Conduct Committee
issued a decision sanctioning Citadel Securities $100,000 for violations of Rule 15c3-5(c)of the Securities Exchange Act of 1934 (the “Exchange Act”) and Cboe Rule 4.2 as thefirm failed to establish appropriate pre-set credit thresholds and failed to have in place asystem of risk management controls and supervisory procedures reasonably designed toprevent the entry of erroneous orders by rejecting orders that exceeded appropriate priceor size parameters or that assured appropriate surveillance personnel received immediate
post-trade execution reports.

1

Series 9000 of The Nasdaq Stock Market LLC Rules are incorporated by reference into Phlx Rule General 5,
Section 3, and are thus Phlx Rules and thereby applicable to Phlx members, member organizations, persons
associated with member organizations, and other persons subject to the Exchange’s jurisdiction.
20150462783 (including 20170563061 and 20210713605) (CMK)DocuSign Envelope ID: CFC62BB0-2006-42DE-BFFE-34AB0A9C0B26
F7EFE8EA-4309-4424-BDDD-F3C6B67C3D12On June 16, 2014, FINRA, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., The
Nasdaq Stock Market LLC, and NYSE Arca, Inc. sanctioned the firm $800,000 and
imposed an undertaking for violations of Exchange Act Rule 15c3-5 and relevantsupervision rules as Citadel Securities failed to establish, maintain, and enforce
supervisory procedures and risk management controls reasonably designed to check fororder accuracy, reject orders that exceeded appropriate price and/or size parameters,
reject duplicate orders, and monitor appropriate message level activity.
SUMMARY
This matter arose from reviews conducted by FINRA’s Department of Market
Regulation, on behalf of Phlx and other self-regulatory organizations (“SROs”).2 The
conduct described herein occurred between August 15, 2014 and May 2020 (the “review
period”), or more specific time periods within the review period as described below.
During the review period, Citadel Securities had market access, as defined in Exchange
Act Rule 15c3-5. As such, the firm was required to establish, document, and maintain asystem of risk management controls and supervisory procedures reasonably designed to
manage the financial, regulatory, and other risks of this business activity. In certain
scenarios, however, Citadel Securities’s risk management controls and supervisory
procedures were not reasonably designed to prevent the entry of erroneous orders, inviolation of Exchange Act Rule 15c3-5, Phlx Rules 707 and 748 (for conduct that
occurred prior to February 3, 2020), and Phlx General 9, Sections 20 and 1(c) (forconduct that occurred on or after February 3, 2020).
FACTS AND VIOLATIVE CONDUCT
1. Exchange Act Rule 15c3-5(b) requires broker-dealers with market access to“establish, document, and maintain a system of risk management controls andsupervisory procedures reasonably designed to manage the financial, regulatory, andother risks of this business activity.”
2. Exchange Act Rule 15c3-5(c)(1)(ii) requires broker-dealers with market access toestablish written supervisory procedures (“WSPs”) and financial risk management
controls that are reasonably designed to “[p]revent the entry of erroneous orders, by
rejecting orders that exceed appropriate price or size parameters, on an order-by-orderbasis or over a short period of time, or that indicate duplicative orders.”
3. Phlx Rule 748, now General 9, Section 20, requires members and member
organizations to “establish, maintain, and enforce written supervisory procedures, anda system for applying such procedures, to supervise the types of business(es) in which
the member or member organization engages in and to supervise the activities of all
registered representatives, employees and associated persons. The written supervisory
procedures and the system for applying such procedures shall reasonably be designed

2

The other SROs include Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe
EDGX Exchange, Inc., The Nasdaq Stock Market LLC; Nasdaq BX, Inc., Nasdaq GEMX, Inc., Nasdaq ISE, LLC,
Nasdaq MRX LLC, The Nasdaq Options Market LLC, The New York Stock Exchange LLC, and NYSE Arca Inc.

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to prevent and detect, insofar as practicable, violations of the applicable securities
laws and regulations, including the By-Laws and Rules of the Exchange.”3
4. Phlx Rule 707, now General 9, Section 1(c), requires members, member
organizations, and persons associated with or employed by a member or member
organizations to not engage in conduct inconsistent with just and equitable principlesof trade.4
The Firm Did Not Apply Certain Pre-Trade Erroneous Order Controls to Certain Options
Limit Orders
5. From August 15, 2014 through May 2, 2018, the firm’s pre-trade erroneous ordercontrols applicable to option limit orders included a price control (the “PriceControl”) that would reject limit orders that were priced at a certain percentage awayfrom the National Best Bid or Offer (“NBBO”).5 However, from August 2014
through November 2017, when an option order was canceled and replaced, the PriceControl was not applied to the replaced option order. Moreover, from August 15,
2014 through June 2015, the Price Control was not applied to option orders placed
prior to market open, and from August 15, 2014 through May 2017, this control was
not applied to child option orders.6
6. After the Price Control was applied to option orders placed prior to market open
starting in June 2015, if a pre-open option limit order that was determined not to be
erroneous was re-routed to another exchange at or after market open, this pricecontrol was not reapplied to the re-routed option limit order. As a result, option limit
orders received prior to the market open that were later re-routed to various markets
were not subjected to reasonably designed pre-trade erroneous order controls.
7. For example, on May 17, 2017 at 6:50:02 a.m., the firm received an option limit orderto buy 2 XYZ May 109 puts at $0.55.7 The order as received was not erroneous andwas priced within the firm’s price control threshold, as the end-of-day quote on theprior trading day was $0.44 x $0.46. At 7:43:06 a.m., the firm routed the order to The
Nasdaq Options Market LLC (“NOM”). When the opening print occurred at 9:30:41
a.m., the NBBO was $2.22 x $2.40. At 9:30:42 a.m., the NBBO was $1.18 x $3.60.
At 9:32:07 a.m., the firm’s order remained unexecuted on NOM. The firm canceled
the order on NOM and, at 9:32:08 a.m., re-routed it to Cboe EDGX Exchange, Inc.
with the original limit price of $0.55, without reapplying the price control. The
NBBO at the time was $2.14 x $2.60. Because the firm did not re-apply the pricecontrol to option limit orders that were re-routed after the market opened, this order
was sent to the market at a price that was not reasonably related to the current NBBO.
This issue did not result in any Clearly Erroneous Filings.

3

As of February 3, 2020, Phlx Rule 748 was renumbered to Phlx General 9, Section 20.

4

As of February 3, 2020, Phlx Rule 707 was renumbered to Phlx General 9, Section 1(c).

5

A limit order is an order to purchase or sell a security at, or better than, a stated price.

6

A “parent” order is the full order size, and may be executed by slicing the order into smaller lots, or “child” orders.

7

A generic symbol is used in place of the name of the referenced security.

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F7EFE8EA-4309-4424-BDDD-F3C6B67C3D12

Certain Pre-Trade Price and Size Controls Were Not Reasonably Designed Because theAccompanying Procedures Were Not Sufficiently Detailed
8. From August 15, 2014 through May 2, 2018, the firm applied certain pre-tradeerroneous order controls that incorporated soft blocks for certain broker-dealer
options orders. In contrast to a hard block, which generally prevents an order frombeing submitted by automatically rejecting it, a soft block prevents an order frombeing routed to a market center until it is either overridden or confirmed by a person.
9. From August 15, 2014 through May 2, 2018, Citadel Securities had in place soft
blocks that were triggered when the parameters of the applicable price or size controls
were met. Once triggered, the subject orders were required to be manually reviewed
by certain firm personnel dedicated to this task to determine whether the order should
be rejected or submitted to a market center.
10. From August 15, 2014 through November 2016, the firm’s procedures failed toprovide sufficient detail concerning how firm personnel were to review soft block
alerts. The firm’s procedures did not sufficiently detail the steps firm personnel were
to take when reviewing a subject order or the circumstances under which a soft block
should be overridden or confirmed. Furthermore, from August 15, 2014 throughOctober 2019 for options orders, the firm failed to require that those persons
responsible for reviewing soft block alerts contemporaneously document their review
of orders that triggered a soft block, including documenting the rationale for releasing
the subject orders into the market after completing the manual review.
11. Because the firm’s procedures did not require a reasonable review of the orders thattriggered soft block alerts or require the person reviewing soft block alerts tocontemporaneously document the rationale for resolving such alerts, the applicable
pre-trade erroneous order controls were not reasonably designed. This issue did not
result in any Clearly Erroneous Filings.
Delays in Processing Market Data Updates Impacted the Efficacy of Certain Pre-Trade
Erroneous Order Controls
12. Additionally, during the review period, the firm applied certain pre-trade erroneousorder controls to options market orders. However, delays in processing market data
updates reduced the effectiveness of the firm’s controls in times of volatility.
13. For example, on March 3, 2020, after the Federal Reserve Bank announced an interest
rate cut at 10:00 a.m., the firm received a number of market orders in two optionsclasses from other broker-dealers and applied its pre-trade erroneous order controls tothese orders upon receipt. These orders were not erroneously submitted to the firm.
However, the firm experienced delays in processing the market data updates thatensued following the announcement of the interest rate cut. As such, the bid-ask
spread drastically widened during this time but because the firm’s controls referenced
stale data, the market orders routed by the firm, even though not erroneous, were
executed at erroneous prices. As a result, the firm filed six obvious error petitions
with Phlx, one trade was busted on Phlx, and the price of six trades were adjusted on
Phlx. Because the firm’s pre-trade erroneous order controls for options market orders4DocuSign Envelope ID: CFC62BB0-2006-42DE-BFFE-34AB0A9C0B26
F7EFE8EA-4309-4424-BDDD-F3C6B67C3D12

did not reference accurate market data, they were not reasonably designed to preventthe entry of erroneous orders.
14. As a result of the firm’s failure to establish and maintain reasonable risk management
controls and supervisory procedures reasonably designed to prevent the entry oferroneous orders, by rejecting orders that exceed appropriate price or size parameters,
the firm, during the review period, violated Section 15(c)(3) of the Exchange Act andRules 15c3-5(b) and (c)(1)(ii) thereunder, Phlx Rules 707 and 748 (for conduct that
occurred prior to February 3, 2020), and Phlx General 9, Sections 20 and 1(c) (forconduct that occurred on or after February 3, 2020).
B.

Respondent also consents to the imposition of the following sanctions:
1. A censure;
2. A fine of $15,000;8 and3. An undertaking to revise the firm’s risk management controls and supervisory
procedures with respect to the areas of deficiencies described in this AWC and toensure that it has implemented controls and procedures that are reasonably designed
to achieve compliance with the rules and regulations herein. Within 90 business daysof acceptance of this AWC, a registered principal of the Firm shall submit to Carly
Kostakos, Senior Counsel a signed, dated letter, or an email from a work-related
account of the registered principal to Carly.Kostakos@finra.org, providing thefollowing information: (a) a reference to this matter; (b) a representation that the Firm
has addressed and corrected the deficiencies described above, including the specificmeasures or enhancements taken to address those deficiencies; and (c) the date thedeficient controls and procedures were addressed and corrected by the Firm.
Respondent agrees to pay the monetary sanction upon notice that this AWC has been
accepted and that such payment is due and payable. Respondent has submitted an
Election of Payment form showing the method by which it proposes to pay the fine
imposed.
Respondent agrees to pay the monetary sanction in accordance with its executed paymentform.
Respondent specifically and voluntarily waives any right to claim that it is unable to pay,
now or at any time hereafter, the monetary sanction imposed in this matter.
The sanctions imposed herein shall be effective on a date set by FINRA staff.

8

Citadel Securities consents to a fine payable to Phlx and the SROs referenced in footnote 2 above, totaling$225,000.

5DocuSign Envelope ID: CFC62BB0-2006-42DE-BFFE-34AB0A9C0B26
F7EFE8EA-4309-4424-BDDD-F3C6B67C3D12II.
WAIVER OF PROCEDURAL RIGHTS
Respondent specifically and voluntarily waives the following rights granted under Phlx’s Codeof Procedure:A.

To have a Formal Complaint issued specifying the allegations against the firm;B.

To be notified of the Formal Complaint and have the opportunity to answer the
allegations in writing;C.

To defend against the allegations in a disciplinary hearing before a hearing panel,to have a written record of the hearing made and to have a written decision issued;andD.

To appeal any such decision to the Exchange Review Council and then to the U.S.
Securities and Exchange Commission and a U.S. Court of Appeals.

Further, Respondent specifically and voluntarily waives any right to claim bias or prejudgmentof the Chief Regulatory Officer, the Exchange Review Council, or any member of the Exchange
Review Council, in connection with such person’s or body’s participation in discussions
regarding the terms and conditions of this AWC, or other consideration of this AWC, including
acceptance or rejection of this AWC.
Respondent further specifically and voluntarily waives any right to claim that a person violated
the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144,
in connection with such person’s or body’s participation in discussions regarding the terms andconditions of this AWC, or other consideration of this AWC, including its acceptance orrejection.
III.
OTHER MATTERS
Respondent understands that:A.

Submission of this AWC is voluntary and will not resolve this matter unless anduntil it has been reviewed and accepted by FINRA’s Department of Enforcement
and the Exchange Review Council, the Review Subcommittee, or the Office ofDisciplinary Affairs (“ODA”), pursuant to Phlx Rule 9216;

B.

If this AWC is not accepted, its submission will not be used as evidence to prove
any of the allegations against the Respondent; andC.

If accepted:
1.

This AWC will become part of the Respondent’s permanent disciplinary
record and may be considered in any future actions brought by Phlx or any
other regulator against the Respondent;
6DocuSign Envelope ID: CFC62BB0-2006-42DE-BFFE-34AB0A9C0B26
F7EFE8EA-4309-4424-BDDD-F3C6B67C3D12D.

2.

Phlx may release this AWC or make a public announcement concerning
this agreement and the subject matter thereof in accordance with Phlx
Rule 8310 and IM-8310-3; 9 and3.

Respondent may not take any action or make or permit to be made any
public statement, including in regulatory filings or otherwise, denying,directly or indirectly, any finding in this AWC or create the impressionthat the AWC is without factual basis. Respondent may not take any
position in any proceeding brought by or on behalf of Phlx, or to which
Phlx is a party, that is inconsistent with any part of this AWC. Nothing inthis provision affects the Respondent’s right to take legal or factual
positions in litigation or other legal proceedings in which Phlx is not a
party.

Respondent may attach a Corrective Action Statement to this AWC that is astatement of demonstrable corrective steps taken to prevent future misconduct.
Respondent understands that it may not deny the charges or make any statementthat is inconsistent with the AWC in this Statement. This Statement does notconstitute factual or legal findings by Phlx, nor does it reflect the views of Phlx or
its staff.

9 Series 8000 of The Nasdaq Stock Market LLC Rules are incorporated by reference into Phlx Rule General 5,

Section 2, and are thus Phlx Rules and thereby applicable to Phlx members, member organizations, persons
associated with member organizations, and other persons subject to the Exchange’s jurisdiction.

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DocuSign Envelope ID: CFC62BB0-2006-42DE-BFFE-34AB0A9C0B26
F7EFE8EA-4309-4424-BDDD-F3C6B67C3D12

The undersigned, on behalf of the firm, certifies that a person duly authorized to act on its behalf
has read and understands all of the provisions of this AWC and has been given a full opportunity
to ask questions about it; that the firm has agreed to the AWC’s provisions voluntarily; and that
no offer, threat, inducement, or promise of any kind, other than the terms set forth herein and theprospect of avoiding the issuance of a Complaint, has been made to induce the firm to submit it.
December 23, 2021_____________
Date_________________________________
Citadel Securities LLC
Respondent
By: ______________________________
Scott Kloin

Print Name: _______________________
Chief Compliance Officer and Senior Deputy GC

Title: _____________________________

Reviewed by:_______________________Paul R. Eckert, Esq.
Counsel for Respondent
Wilmer Cutler Pickering Hale and Dorr LLP
1875 Pennsylvania Avenue, NW
Washington, DC 20006

Accepted by Phlx:
December 27, 2021_________________
Date____________________________________
Carly M. Kostakos
Senior Counsel
Department of Enforcement
Signed on behalf of Phlx, by delegatedauthority from the Director of ODA

8