Citadel Securities Fined $97m in China for Malicious Short Selling

Citadel Securities, one of the largest market makers in US stocks and options, has agreed to pay 670 million-yuan ($97 million) to settle charges that it participated in “malicious short selling”. The term was invented by the Chinese securities regulator in 2015 to describe a stock plunge that has erased nearly $4.0 from the cap of mainland metal market.

Citadel Securities is a unit of Citadel LLC, which also runs one of the world’s largest hedge funds and is led by billionaire investor Ken Griffin.

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The move comes after the China Securities Regulatory Commission pledged to strictly punish local institutional investors, who were charged with short selling, rumor-mongering and foreign meddling for fueling the stock slide. Each respective fine was “based on differing circumstances, such as the amount of money made through the suspected illegal acts,” said the regulator.

The global financial services group neither admitted nor denied the charges, but consented to the entry ‎of CSRC’s findings. Also, Chicago-based Citadel Securities has agreed to implement enhancements to meet ‎regulatory reporting requirements and to remedy ‎issues related to short sales, as part of its settlement with the Chinese regulator.‎

In 2015, the unit of US hedge fund saw one of its account, managed by a Shanghai-based futures trading firm, barred from trading shares by securities regulators. Citadel was the first foreign broker to be caught up in Beijing’s crackdown that barred 24 other accounts from the mainland’s two major stock exchanges.

China moves to open up the financial sector

Short selling – which allows investors to make gains in a falling market by borrowing a security they don’t own, selling it and agreeing to buy it back at a lower price – plays a vital role in developed capital markets since it makes price discovery more efficient and smooths volatility whilst providing investors with a host of risk-management tools.

Chinese regulator, however, didn’t ban the practice entirely, but after the scrutiny investors can’t sell and then buy shares back the same day. Instead, they must now wait after completion of a short sale transaction until at least the next day to repurchase.

The attack against the so-called “malicious” short selling was part of a wider crackdown on automated trading of stocks and futures which was blamed for alleged trading irregularities during the 2015 rout.

Zia Ahmed, a spokesperson for Citadel Securities, said: “Citadel Securities has worked closely with the CSRC through the reconciliation process to reach this agreement. Constructive resolution of this matter was important to Citadel Securities as China continues to expand opportunities for foreign participation in its financial markets.”

The settlement comes as new Chinese regulations that lift investment caps and allow foreign banks’ majority control of their mainland business have come to effect on January 1, 2020.

China has pledged to open its $40 trillion financial markets, including allowing foreign firms to own as much as 51 percent of their securities ventures, up from the current 49 percent ceiling.

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