Citi Charged £6.4M for Reporting Error

Citigroup has tightened its internal processes, renegotiated its data license with the London Stock Exchange, and paid the LSE £6.4 million for under-reporting its data usage, sources tell Inside Market Data.

The settlement, made late last year, covered the unauthorized usage of data from the LSE over a substantial period of time—possibly over the past decade, multiple sources say.

LSE officials decline to comment. "Citigroup highly values our relationship with the LSE and is committed to meeting our contractual obligations with them,"says a bank spokesperson.

According to a source familiar with the situation, the LSE's auditing team went into the bank early last year and found "much broader usage than was being claimed and paid for."

No one is suggesting that Citigroup intended to deliberately defraud the LSE. Instead, the error appears to be due to the growth of algorithmic trading and increased moves away from data terminal business models to open feeds. As a result, real-time data from the LSE and its index subsidiary FTSE was being used in algorithmic trading models, which were then proliferated throughout the organization and re-used in other models. By all accounts, the bank did not realize that redistributing these models—which contained LSE data—to people not authorized to receive the data constituted a violation of its agreement.

"It just spreads internally like a virus, because no one is monitoring that the license is tied to a set number of users," the source says.

In addition, delayed data was being distributed to clients and Web sites without a distribution agreement, the source says. Firms are increasingly providing data to clients in this way, but exchanges are wary of such moves because it cannibalizes their own business with buy-side firms.

Following the discovery, Citigroup and the LSE entered into negotiations to resolve the issue to the satisfaction of both parties, and they finalized the settlement in the fourth quarter of last year, the source says. The LSE included the figure in its quarterly financial results ending Dec. 31, but did not provide further details or name the client (IMD, Jan. 16).

The bank has also agreed to tighten its controls, and it has signed up to a new multi-year agreement with the exchange that includes a redistribution license. It has also cut back on data usage beyond the number of users allowed by that agreement.

While the payment, which was reported by the LSE as an exceptional item in its results, may be a drop in the ocean for Citigroup, it was significant for the LSE, adding more than 25 percent to the exchange's quarterly information services revenue of £24.4 million.

However, it may yet have a bigger impact for the bank, if other exchanges follow the LSE's lead by auditing it.

Deutsche Börse officials claim to have no knowledge of the situation, and Euronext officials could not be reached for comment.