GameStop Frenzy highlights title trading for the giant Citadel

The company – an affiliate of Mr. Griffin’s hedge fund, Citadel – executes orders placed by customers of Robinhood Markets Inc., TD Ameritrade and other online brokers who have increased in volume during the coronavirus pandemic.

Citadel Securities makes money by selling shares or options for a little more than it is willing to buy. The difference is usually only a fraction of a cent per share. But, repeated millions of times a day, it results in a lot of money.

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

Among the forces driving this growth was an influx of novice traders, many trapped at home due to Covid-19 blockades. Attracted by easy-to-use trading apps and an industry shift towards zero commission trading, individual investors opened more than 10 million new brokerage accounts in 2020, estimates JMP Securities.

Meanwhile, a thriving subculture of day traders has grown up in corners of the Internet, like Reddit’s WallStreetBets forum, setting the stage for last week’s manic trades at GameStop, AMC Entertainment Holdings Inc.

and several other popular actions.

“This is the market that Ken Griffin and Citadel Securities have been waiting for,” said Christopher Nagy, a former TD Ameritrade executive who is now a director of the Healthy Markets Association, a group of investors. “The last time the environment was so good for retailers was back in the dot-com bubble.”

The company was scrutinized last week, when its majority owner, Griffin, participated in a $ 2.75 billion emergency cash injection at Melvin Capital Management, a short seller who was facing huge losses due to the huge rise in GameStop’s stock. .

Announced on Monday, the deal means that Citadel, the hedge fund firm, is supporting a fund that bet against GameStop shares, while Citadel Securities profited 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 the Griffin business. The company also released data showing that, over the past week, retail orders arriving on its GameStop systems have been balanced between buyers and sellers, casting doubt on the popular narrative that retail investors pushed stocks to a record closing time. $ 347.51 on Wednesday.

The data showed that 29% of GameStop’s trading volume from Monday to Thursday was managed by Citadel Securities, highlighting its huge role in the popular stock market among individual investors. Overall, about 41% of the US retail stock trading volume goes through Citadel Securities, while the next largest player in the business, Virtu Financial Inc.,

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

“We witnessed an extraordinary level of retail trading last week,” said a spokesman for Citadel Securities. “Many times throughout the week, large brokerage houses depended on our ability to handle the deluge of orders.”

Citadel Securities is also responsible for a large share of trading volume in public markets such as the New York Stock Exchange, as well as options, futures, Treasury bills and many markets abroad. Founded in 2002, the company has become a dominant player in e-commerce due to its technological prowess, quantitative skills and a vigorous business culture. Competitors say it is increasingly difficult to compete with Citadel Securities’ scale and efficiency.

“They are really trying to take an Amazon trading approach, where they try to squeeze out everyone else that is not on their scale,” said Scott Knudsen, a former executive at rival trading firm IMC Financial Markets who now leads Cove Markets, a startup cryptocurrency trading.

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

Critics say this practice, called order-flow payment, distorts brokers’ incentives to seek to maximize revenue instead of ensuring that customers get the best price. The practice is prohibited in some foreign markets, such as the United Kingdom. Earlier this month, former US Senator Carl Levin published an article in the Financial Times urging the new Biden government to ban payment for the flow of orders, calling it “a conflicting practice that drains billions of funds from American investors each year. “

Brokers and trading firms, including Citadel Securities, say that order flow payments benefit investors because they get a better deal than if orders were sent to the NYSE or Nasdaq Stock Market. Citadel Securities says it saved individual investors a total of $ 1.3 billion last year by executing their orders at prices better than those available on the stock exchanges.

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

Still, the regulatory penalties fueled suspicions about the delivery of orders from individual investors by the company. In 2017, Citadel Securities paid $ 22.6 million to settle the Securities and Exchange Commission charges that deceived customers about offering the best price in investor trades. Last year, the company paid $ 700,000 to resolve complaints from the Financial Sector Regulatory Authority that it had negotiated before customers’ orders for over-the-counter securities. In both cases, Citadel Securities did not admit irregularities.

Write to Alexander Osipovich at [email protected]