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Citadel Securities Is Accused Of Illicit Trading Tactics; Here’s What You Need To Know

A charge of spoofing, brought by biotech company Northwest against Citadel Securities, also involves other big-name market makers.
  • According to Northwest Biotherapeutics, illegal “spoofing” orders have adversely affected their stock price between 2017 and 2022.
  • So far, Citadel Securities has been the only firm to respond to Northwest’s accusation, although several market makers have been implicated.
  • Citadel says it will take legal action against Northwest for putting the integrity of the capital markets at risk.
Figure 1: Citadel Securities Is Accused Of Illicit Trading Tactics; Here’s What You Need To Know

Figure 1: Citadel Securities Is Accused Of Illicit Trading Tactics; Here’s What You Need To Know

Spoofing Accusations

Northwest Biotherapeutics  (NWBO)  is a biotechnology company that trades over-the-counter (OTC). The company has filed a lawsuit in Manhattan federal court in which it alleges that market makers including Citadel Securities, Susquehanna, and several others have repeatedly engaged in the practice of "spoofing."

Spoofing is a manipulative tactic in which a trader issues an order but then cancels it before it is executed. This creates the illusion of supply and demand, pressuring market participants into buying or selling.

Companies such as Citadel Securities and Susquehanna are responsible for providing accurate stock quotes throughout the trading day. Northwest argues, however, that these market makers are fully aware of the unlawful tactical trading executions they are facilitating and should have procedures in place to stop them.

The legal team representing the Northwest says they "have the hard data" to back up their claims.

According to Northwest, one of the main signs of manipulative spoofing is a rapid reversal of trading direction.

“…a lot of sell orders, followed by buy orders, followed by the cancellation of sell orders—which suggest the original sell orders were not intended to be executed, but were merely a ploy to drive the price down to ‘buy low,’” explained Southwest in their lawsuit.

In response to the allegations of spoofing orders by Northwest, so far only Citadel Securities has spoken out.

In a statement, the firm said that this lawsuit is nothing more than an attempt to distract from the biotech company's history of governance failures. Citadel has also made it clear that it intends to enter a legal battle over what it considers to be trumped-up charges.

“We intend to pursue any and all legal action against Northwest Biotherapeutics for making these false and baseless allegations, which only undermine the integrity of our capital markets.”

Other Recent Market Maker Issues

Market makers such as Citadel Securities are no strangers to controversy. Many, including Citadel, have been closely involved in payment-for-order-flow practices - which are today being scrutinized at the federal level.

Ken Griffin's Citadel Securities is one of the largest market makers in the world and has PFOF agreements with some notable e-brokerages, including Robinhood  (HOOD) - Get Free Report.

Citadel was pushed into a payment-for-order-flow controversy with commission-free broker Robinhood, a platform that was used by hundreds of thousands of retail investors involved in the GameStop  (GME) - Get Free Report short-squeeze of early 2021.

During that historic market event, Citadel’s hedge fund provided $2 billion to investment firm Melvin Capital, one of the largest short sellers of GME.

However, Ken Griffin denied any misconduct. And in November 2021, a U.S. District Court dismissed a class action suit against Robinhood and Citadel, ruling that there was no evidence that the two had colluded.

According to Ken Griffin, PFOF has allowed large e-brokerages to reduce their commission fees to zero - a feature appreciated by many retail investors.

Short Sellers Scrutinized for Spoofing

At the beginning of this year, the U.S. Department of Justice (DOJ) started investigating several short-selling-related practices that retail investors have complained bitterly about.

According to a Wall Street Journal report, the Justice Department has been collecting private conversations and trading records as part of an investigation into whether short sellers have used illegal trading tactics to manipulate the price of shares on the market. Among those illegal practices are "spoofing" and “scalping."

Of the 30 or so firms that have thus far been investigated, perhaps the most notable was Melvin Capital, the fund that bet against GameStop since 2014 and was bailed out by Citadel in 2021.

The investigation is ongoing, and no indictments have yet been made by the Justice Department. Many retail investors are hopeful, however, that their theories concerning market manipulation by hedge funds and market makers bear fruit once the investigation concludes.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)