In a significant regulatory move, the Financial Conduct Authority (“FCA”) fined Citigroup Global Markets Ltd £27,766,200 for system and control failures that resulted in a substantial trading incident on 2nd May 2022. Citigroup, a leading international broker-dealer, serves institutional clients with services such as Delta 1 trading, financing, and investment products. The trading error led to $1.4bn of sell orders being executed across European markets, highlighting severe flaws in the firm’s risk management systems and its ability to monitor and prevent market disruptions.
Background
The incident in question occurred when a Citigroup trader made a “fat finger” error. The trader mistakenly entered a basket of equities valued at $444 million instead of the intended $58 million into the firm’s Order Management System (“OMS”). This mistake resulted in $1.4 billion of sell orders being executed across European markets and a temporary drop in several stock indices.
The FCA identified multiple breaches of its regulatory principles, particularly in how Citigroup’s systems failed to prevent erroneous orders from being executed. Initially set at £39,666,000, the fine was reduced by 30% for early settlement, bringing the total penalty to £27,766,200.
Fundamental Failings and Regulatory Breaches
Citigroup’s failures spanned multiple areas, with the FCA finding breaches of both Principle 2 (Skill, Care and Due Diligence) and Principle 3 (“Management and Control”), along with a violation of Rule 7A.3.2 of the Market Conduct Regulations (“MAR”). Below are the core areas of non-compliance:
- Inadequate Controls in the OMS
One of the critical failures was in Citigroup’s OMS, where critical controls were either deficient or absent. The system allowed a trade with a notional size of $196 billion to pass through without being fully cancelled despite triggering 711 warning messages. The FCA found that:
- The firm failed to adjust the control that suspended live orders to reflect market conditions after it had been raised to high volatility levels during the COVID-19 pandemic.
- Traders could override multiple soft limit warnings without sufficient scrutiny or the requirement to scroll through the entire list of triggered warnings.
- Hard blocks, designed to prevent erroneous trades, were insufficiently implemented, and the few that existed were poorly designed, allowing the incorrect order to slip through the cracks.
- Real-Time Monitoring Failures
Real-time monitoring of transactions was found to be inadequate. On the day of the incident, Citigroup’s Algorithmic Service Desk (“ASD”) passed responsibility for monitoring internal executions to the Electronic Execution Desk (EE Desk), which primarily focuses on external clients’ algorithmic orders. This shift in responsibility contributed to a lack of timely action to halt the erroneous orders. Additionally, Citigroup’s E-Trading Risk and Controls (“ETRC”) team filtered out most of the alerts regarding the erroneous trade, further delaying the response.
- Weak Trade Limit and Alert Systems
While the OMS triggered many warning messages, the way these were presented was poorly designed. Traders could override “soft” alerts without being forced to read them fully, and the final pop-up confirmation window displayed the incorrect details, which went unnoticed by the trader. The flawed design of these alerts undermined their effectiveness as risk management tools.
- MAR Rule 7A.3.2: Prevention of Erroneous Orders
According to the FCA’s MAR, firms must ensure their trading systems can prevent erroneous orders, particularly when using algorithmic trading. Citigroup failed to implement effective systems to mitigate these risks, which resulted in an avoidable and significant disruption to the market.
Lessons for Firms in Algorithmic Trading
This case highlights the significant risks posed by algorithmic trading and the need for firms to implement robust systems and controls to prevent erroneous orders from being executed. Firms must be vigilant in ensuring their systems are up-to-date, well-monitored, and designed to mitigate the risk of operational errors turning into market-wide events. The following lessons are essential for firms operating in wholesale markets:
- Review and Adjust Key Controls Regularly
The FCA criticised Citigroup for failing to review and adjust an essential control designed to suspend live orders. Firms should regularly review their controls to ensure they remain effective, particularly in response to changing market conditions. Controls implemented during extraordinary events, such as the COVID-19 pandemic, must be reassessed to ensure they continue to provide appropriate protection. - Design Effective Alert Systems
Citigroup’s alert system allowed traders to override multiple warnings without fully reading them. Firms must ensure alert systems are designed to force traders to review critical information before trading. This can include requiring traders to scroll through alerts manually or ensuring that vital information is displayed prominently and cannot be bypassed. - Implement and Test Hard and Soft Limits
The firm failed to maintain adequate hard and soft trade limits, allowing erroneous orders to proceed. Firms must implement stringent limits on trade sizes and ensure that these limits cannot be overridden without scrutiny. Regular testing of these limits should be part of ongoing risk management. - Real-Time Monitoring is Critical
Effective real-time monitoring is a crucial safeguard against erroneous trades. In this case, Citigroup’s monitoring teams failed to escalate the issue quickly, contributing to the significant financial impact. Firms must ensure that transparent processes are in place for real-time monitoring, with dedicated teams who understand the importance of immediate action when anomalies arise. - Adequate Communication Between Teams
Citigroup’s failure to communicate effectively between teams was vital in the delayed response to the erroneous orders. The E-Trading Risk and Controls team escalated the incident via email, but no response was received for several hours. Firms should establish clear communication protocols between teams, especially during incidents, and ensure that alerts are acted upon immediately.
Self-Assessment Questions for Firms Using Algorithmic Trading Systems
To help identify and address weaknesses in your firm’s systems and controls, consider the following self-assessment questions:
- Are our critical controls regularly reviewed and adjusted to reflect changing market conditions?
- Do our alert systems require traders to thoroughly review and acknowledge warnings before overriding them?
- Are hard and soft limits in place to prevent erroneous trades, and are they tested regularly?
- Do we have robust real-time monitoring, and are our teams adequately trained to respond immediately to unusual trading activity?
- Is communication between risk management teams clear and prompt, especially during trading incidents?
Conclusion
The FCA’s enforcement action against Citigroup Global Markets Ltd is a stark reminder of the risks posed by algorithmic trading and the importance of maintaining robust systems and controls. By reviewing and improving critical controls, firms can significantly reduce the risk of erroneous orders disrupting the market. Transparent monitoring processes and effective communication channels ensure that issues are identified and resolved swiftly, minimising potential financial and reputational damage.
Firms must take proactive steps to review their systems and controls in light of this case to ensure they meet the FCA’s expectations and regulatory requirements.
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References
- FCA fines CGML £27,766,200 for failures in its trading systems and controls [Press release], Financial Conduct Authority.
