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Citigroup to Shut LavaFlow Trading Venue on High Scrutiny

Zacks Equity Research

Amid heightened regulatory scrutiny over broker-run trading platforms to increase transparency, Citigroup Inc. (C) has planned to close down its alternative stock trading venue – LavaFlow, the electronic communications network (:ECN). This strategic decision is expected to be executed in Jan 2015.

The decision commensurate with the recent review of LavaFlow ECN, owing to which the bank decided to use capital, resources and efforts allocated to this trading avenue to other sections of Citigroup’s Equities Division.

LavaFlow operates as an electronic communications network, which carries on stock trades on behalf of broker-dealers and other traders. Contrary to dark pool venues, which are not accessible by the investing public and in which the price and the volume of trade are disclosed only after the trading is complete, LavaFlow reveals certain information about pending orders in the system, such as the best bid and offer prices.

However, LavaFlow was not supposed to disclose any information related to individual requests to buy and sell. Notably, earlier this year, on failure to protect customer data from Mar 2008 through Mar 2011, LavaFlow agreed to pay $5 million to the Securities and Exchange Commission. Citigroup did not admit nor deny any charges.

Heightened investigations and lawsuits surrounding dark pool trading and high speed trading also reflect efforts of the regulators and the government to bring transparency and stability in the trading industry and thereby safeguard investors’ interest. Citigroup has three dark pools – Citi Cross, Citi Liquifi and Citi Match to continue to be operated after LavaFlow closes.

Recently, the dark-pool trading probe has been extended to Morgan Stanley (MS) and The Goldman Sachs Group, Inc. (GS). The trading that takes place in dark pools operated by these two big Wall Street firms is being investigated by New York’s Attorney General. Notably, dark pools of many banks including Barclays PLC (BCS) and Credit Suisse Group AG are already under regulatory review.

Though Citigroup has undertaken measures to combat the rise in expenses, persistent litigation issues will be a headwind for the company in the forthcoming quarters. Moreover, the overall subdued economic scenario and stringent regulatory environment will continue to pressure the top line. Currently, Citigroup carries a Zacks Rank #3 (Hold).

Read the Full Research Report on MS
Read the Full Research Report on BCS
Read the Full Research Report on C
Read the Full Research Report on GS


Zacks Investment Research