GameStop Frenzy Shines a Spotlight on Giant Citadel Securities Trading

The company – a subsidiary of Mr. Griffin, Citadel – Fulfills orders placed by clients of Robinhood Markets Inc., TD Ameritrade and other online brokers who experienced massive volumes during the coronavirus pandemic.

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

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

One of the forces driving that growth was an influx of newbie traders, many of whom lingered at home due to the Covid-19 lockdown. Lured by easy-to-use trading apps and an industry shift to no-commission trading, individual investors opened more than 10 million new brokerage accounts by 2020, JMP Securities estimates.

Meanwhile, a thriving subculture of day traders grew in remote corners of the internet, like Reddit’s WallStreetBets forum, which set the stage for last week’s manic trading at 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 director of TD Ameritrade who is now a director of Healthy Markets Association, an investor group. “The last time the environment was so good for retail market makers was back in the dotcom bubble.”

The company came under scrutiny last week when its majority shareholder, Mr. Griffin, participated in an emergency infusion of $ 2.75 billion in cash into Melvin Capital Management, a short-seller that faced hefty losses as a result of the huge surge in GameStop’s stock.

The deal, announced Monday, meant that Citadel, the hedge fund firm, backed a fund that had bet against GameStop stocks, while Citadel Securities benefited from the flow of orders from small investors placing bullish bets on GameStop.

Citadel Securities says it is managed separately from the hedge fund side of Mr. Griffin’s company. The company also released data showing that the retail orders that poured into its systems for GameStop over the past week were more or less in balance between buyers and sellers, casting doubt on the popular story that small investors took the stock to the record of Wednesday. Brought in $ 347.51.

The data showed that 29% of GameStop’s trading volume Monday through Thursday was handled by Citadel Securities, underscoring its huge role in the market for stocks that are popular with individual investors. In total, approximately 41% of US retail volume passes through Citadel Securities, while the industry’s second largest player, Virtu Financial Inc.,

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

“We witnessed an extraordinary level of retail sales last week,” said a Citadel Securities spokesperson. “Often times, the big brokerage firms depended on our ability to handle the flood of orders during the week.”

Citadel Securities also accounts for much of the trading volume in public markets such as the New York Stock Exchange, as well as options, futures, Treasurys and many foreign markets. Founded in 2002, the company became a dominant player in electronic commerce due to its technological prowess, quantitative skills and hard-working corporate culture. Rivals say it has become increasingly difficult to compete with the scale and efficiency of Citadel Securities.

“They are really trying to take an Amazon approach to trading, trying to squeeze out everyone else who is not on their scale,” said Scott Knudsen, a former director at rival trading firm IMC Financial Markets who now heads Cove Markets, in a statement. starting up cryptocurrency trading.

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

Critics say this practice, called payment for order flow, disrupts brokers’ incentives so they try to maximize revenues rather than ensuring that customers get the best price. The practice has been banned in some overseas markets, such as the UK. Earlier this month, former U.S. Senator Carl Levin published an op-ed in the Financial Times urging the incoming Biden government to ban payment for the flow of orders, calling it “a conflicting practice. American investors. “

Brokers and trading firms, including Citadel Securities, say that order flow payment benefits investors as they get a better deal than 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 exchanges.

The argument is that, in fact, both sides win: Citadel Securities can offer individual investors better stock prices than on an exchange because it knows it is trading against a player too small to move the market. In contrast, when Citadel Securities is traded on an exchange, it can end up trading with a fund manager who drives a stock up or down with institutional-sized purchases or sales – a situation that could result in losses for Citadel Securities.

Still, regulatory sanctions have raised suspicion that the company is issuing orders from individual investors. In 2017, Citadel Securities paid $ 22.6 million to settle the costs of the Securities and Exchange Commission that it misled clients for offering the best price for investors’ trades. Last year, the company paid $ 700,000 to resolve claims by the Financial Industry Regulatory Authority that it traded in over-the-counter securities prior to client orders. In either case, Citadel Securities did not admit wrongdoing.

Write to Alexander Osipovich at [email protected]