Citi penalized by BaFin for a whopping $13.9 million due to the 2022 flash crash blunder in Germany
In a series of incidents that have raised concerns in the financial sector, Citigroup has found itself in hot water with regulators over control failures in its algorithmic trading operations.
In May 2022, a Citi trader inadvertently created a $444 billion basket of equities instead of the intended $58 million, a mistake known as a "fat-finger error." Though Citi's controls blocked $255 billion of the trade, the remaining $189 billion in shares were sent to a trading algorithm. This incident, along with another in August 2020, has led to significant repercussions for the bank.
In August 2020, a Citi employee mistakenly transferred approximately $900 million to Revlon's creditors, using Citi's funds instead of Revlon's. This incident, known as the Revlon blunder, did not involve algorithmic trading operations.
The Revlon error did not cause a flash crash in European stock markets, as a separate incident in 2022 did. In this instance, control failures led to a flash crash, but the Revlon blunder remained a separate issue.
The German financial watchdog, BaFin, fined a Citi subsidiary, Citigroup Global Markets Europe, €13 million over control failures in its algorithmic trading operations. The fine was imposed on May 24, 2022, two days after two British regulators fined the bank £61.6 million for the same instance.
BaFin asserted that Citi violated the German Securities Trading Act due to inadequate systems and risk control measures. The investment firm failed to prevent the sending of erroneous orders, which may create or contribute to a disorderly market.
The Revlon blunder did not lead to a fine from BaFin, but it did result in a lengthy court battle. The responsible party at the London-based subsidiary of Citigroup Global Markets Europe overseeing the algorithmic trading system was the management team there, but the errors remained under the responsibility of Citigroup Global Markets Europe. The bank has since improved the system to better detect and prevent such errors.
Citi has stated that it immediately took steps to strengthen its systems and controls and remains committed to ensuring full regulatory compliance. The bank received a $400 million fine, likely in part due to the Revlon blunder.
It's important to note that the Revlon blunder did not involve outsourcing of monitoring and management systems for algorithmic trading. Citigroup Global Markets Europe outsourced its monitoring and management system for algorithmic trading to a London-based unit of the bank, but was still responsible for appropriately designing its trading system to detect manual errors.
The Revlon error is not the first of its kind to be attributed to Citi's manual output system. The incidents serve as a reminder of the importance of robust risk management, data, and internal controls in the financial sector. As regulators continue to scrutinise banks' operations, it's clear that maintaining the highest standards of integrity and accuracy is crucial in the digital age.
