GameStop Frenzy focuses on trading giant citadel securities

The firm – a subsidiary of mr. Griffin’s hedge fund, Citadel – executes orders placed by clients of Robinhood Markets Inc., TD Ameritrade and other online brokers that had a rising volume during the coronavirus pandemic.

Citadel Securities makes money by selling stocks or options for something more than it is willing to buy. The difference is often only a fraction of a cent per share. But if it is repeated millions of times a day, it is a lot of money.

Last year, Citadel Securities’ net trading revenue was $ 6.7 billion, almost double the previous high in 2018, a person familiar with the matter said.

Among the forces exerted by the growth, there was an influx of greengrocers, and many were sitting at home due to Covid-19 closures. Attracted by easy-to-use trading programs and a shift in the industry to commission-free commission, individual investors will open more than 10 million new brokerage accounts by 2020, JMP Securities estimates.

Meanwhile, a thriving subculture of day traders has grown in the corners of the internet like the WallStreetBets forum of Reddit, which set the scene for the manic trading last week in GameStop, AMC Entertainment Holdings. Inc.

and several other popular stocks.

“This is the market that Ken Griffin and Citadel Securities have been waiting for,” said Christopher Nagy, a former TD Ameritrade CEO. He is now a director of Healthy Markets Association, an investor group. “The last time the environment was so good for retail marketers, it was in the dot-com bubble again.”

The firm launched an investigation last week when its majority owner, Mr. Griffin participated in a $ 2.75 billion emergency cash inflow in Melvin Capital Management, a short seller that suffered heavy losses due to the sharp rise in GameStop’s share.

Announced on Monday, the deal means that Citadel, the hedge fund company, has set up a fund that sits against GameStop’s share, while Citadel Securities has benefited from the order flow of small investors who have placed a bet on GameStop.

Citadel Securities says it is managed separately from the hedge funds side of Mr. Griffin. The company also released data showing that the retail orders thrown into GameStop’s systems in the past week were balanced between buyers and sellers, which led the popular narrator to doubt that small investors were holding the stock to its record high of $ 347. 51 Wednesday drove.

The data showed that 29% of the GameStop trading volume was handled by Citadel Securities from Monday to Thursday, highlighting the large role in the stock market popular among individual investors. Overall, approximately 41% of US retail shares are held by Citadel Securities, while Virtu Financial is the second largest player in the business. Inc.,

has a market share of about 32%, the companies say.

“We were at an extraordinary level of retail last week,” a Citadel Securities spokesman said. “Over the course of the week, the big brokerage firms have many times relied on our ability to handle the deluge of orders.”

Citadel Securities is also responsible for a large portion of the trading volume on public markets such as the New York Stock Exchange, as well as in options, futures, Treasurys and many foreign markets. The company, founded in 2002, has become a dominant player in electronic commerce due to its technological prowess, quantitative skills and a hard management culture. Competitors believe that it has become increasingly difficult to compete with Citadel Securities’ scope and efficiency.

“They’re really trying to follow an Amazon approach to trading, where they’re trying to express all other people who are not on their scale,” says Scott Knudsen, a former CEO of rival trading firm IMC Financial Markets, now head of Cove Markets, launches cryptocurrencies

Citadel Securities’ retail business has repeatedly sparked controversy. Like Virtu and other market makers, Citadel Securities pays brokers the right to trade against orders from individual investors. According to Piper Sandler, the company made more than $ 700 million in such large payments to major online brokers during the first three quarters of 2020.

Critics believe that this practice, called payment for order flow, skews the brokers’ incentives, so they try to maximize revenue rather than ensure customers get the best price. The practice is prohibited in some overseas markets, such as in the United Kingdom. Earlier this month, former US Senator Carl Levin published a detailed article in the Financial Times urging the incoming Biden government to ban payment for the order flow, calling it ” a conflicting practice. which sifts billions from US investor funds annually. ”

Brokers and trading companies, including Citadel Securities, say the payment for order flows benefits investors because they get a better deal if the orders are sent to the NYSE or the Nasdaq stock market. Citadel Securities says it saved individual investors a total of $ 1.3 billion last year by executing their orders at better prices than those available on stock exchanges.

The argument is that both parties are in fact winning: Citadel Securities can offer individual investors better stock prices than it would on a stock exchange, knowing that it is trading against a player too small to move the market. On the other hand, if Citadel Securities trades on a stock exchange, it could eventually trade with a fund manager who drives an up or down stock with institutional-sized purchases or sales – a situation that could lead to losses for Citadel Securities.

Yet regulatory fines have raised suspicions about handing over the orders of individual investors. In 2017, Citadel Securities paid $ 22.6 million to settle the Securities and Exchange Commission’s allegations that it misled customers about the best price for investors. Last year, the company paid $ 700,000 to settle claims by the Financial Industries Regulatory Authority that it trades in off-the-counter securities before ordering clients. In both cases, Citadel Securities did not unlawfully acknowledge.

Write to Alexander Osipovich by [email protected]