Two affiliated broker-dealers agreed to settle SEC charges for allegedly misleading institutional customers regarding the operation of a dark pool. The SEC also alleged that the dark pool was an unregistered securities exchange as it did not meet the requirements of the exemption from registration as an exchange provided by Regulation ATS.

According to the SEC Order, Citigroup Global Markets, Inc. ("CGMI") and its affiliated broker-dealer, Citi Order Routing and Execution, LLC ("CORE") marketed a dark pool, Citi Match, as not allowing participation by high-frequency traders. However, the SEC asserted that two proprietary trading firms reasonably characterized as high-frequency traders were significant participants in the dark pool. Further, the SEC alleged that CGMI made insufficient disclosures to investors relating to the routing and execution practices of the dark pool, including that orders seemingly executed on the dark pool were often sent to other venues for execution, and that these venues did not have the same features that were advertised as present on Citi Match.

The SEC also found that the dark pool fell within the definition of a "securities exchange," but did not qualify for the exemption from exchange registration provided by Regulation ATS. Therefore, the SEC alleged that the pool violated Exchange Act Section 6 by acting as an unregistered securities exchange.

Pursuant to the settlement agreement, CGMI will pay disgorgement of approximately $4.7 million, prejudgment interest of approximately $715,000 and a monetary penalty of $6.5 million. CORE will also pay a $1 million monetary penalty. CGMI and CORE neither admitted to nor denied the SEC findings.

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