GameStop Frenzy focuses on the trading of giant Citadel stocks

The firm, affiliated with Mr. Griffin’s hedge fund, Citadel, executes orders placed by customers of Robinhood Markets Inc., TD Ameritrade and other online brokers that have enjoyed increasing volumes during the coronavirus pandemic.

Citadel Securities makes money selling stocks or options for a little more than they are willing to buy. The difference is usually only a fraction of a penny per share. But, repeated millions of times a day, it adds up to serious money.

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

Among the forces driving growth was an influx of novice traders, many were trapped at home due to Covid-19 blockades. Attracted by easy-to-use trading applications and a shift from the industry to commission-free transactions, individual investors opened more than 10 million new brokerage accounts in 2020, according to JMP Securities.

Meanwhile, a thriving subculture of day traders grew in corners of the Internet, such as Reddit’s WallStreetBets forum, which set the stage for last week’s manic trading at GameStop, AMC Entertainment Holdings Inc.

and several other popular actions.

“This is the market that Ken Griffin and Citadel Securities were looking forward to,” said Christopher Nagy, a former TD Ameritrade executive who is now director of the Healthy Markets Association, a group of investors. “The last time the environment was as good for retail market makers it was back in the knit bubble as it was.”

The firm examined last week when its majority owner, Mr Griffin, took part in a $ 2.75 billion emergency cash infusion to Melvin Capital Management, a short-selling seller facing heavy losses in due to the huge concentration of GameStop shares.

Announced Monday, the deal meant Citadel, the hedge fund company, was backing a fund that had bet on GameStop shares, while Citadel Securities had benefited from the flow of orders from small investors making bullish bets. a GameStop.

Citadel Securities claims it is managed separately from Mr. Griffin’s business hedge funds. The firm also released data showing that over the past week, retail orders entered into its GameStop systems were roughly balanced between buyers and sellers, questioning the popular narrative that small investors carried the shares closed at a record high of $ 347.51 on Wednesday.

The data showed that Citadel Securities managed 29% of GameStop’s trading volume from Monday to Thursday, highlighting its huge role in the stock market among individual investors. Overall, approximately 41% of U.S. stock trading volume passes through Citadel Securities, while the next largest player in the business, Virtu Financial Inc.,

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

“Last week we witnessed an extraordinary level of retail trade,” a Citadel Securities spokesman said. “On many occasions throughout the week, large brokerage firms relied on our capabilities to handle the flood of orders.”

Citadel Securities also accounts for a large portion of trading volume in public markets such as the New York Stock Exchange, as well as in options, futures, treasuries and many foreign markets. Founded in 2002, the firm became a dominant player in e-commerce because of its technological skills, quantitative skills and business culture. Rivals say it is becoming increasingly difficult to compete with the scale and efficiency of Citadel Securities.

“They’re really trying to take Amazon’s approach to trading, where they’re trying to eliminate all the others that aren’t on their scale,” said Scott Knudsen, a former executive at trading firm IMC Financial Markets that now leads Cove Markets. , a cryptocurrency trading startup.

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

Critics argue that this practice, called payment for order flow, affects brokers ’incentives to try to maximize revenue rather than ensure customers get the best price. The practice is banned in some overseas markets, such as the United Kingdom Earlier this month, former U.S. Senator Carl Levin published an article in the Financial Times urging the incoming Biden administration to ban the payment of the order flow, calling it a “conflicting practice”. which absorbs billions of funds from American investors every year ”.

Brokers and trading companies, including Citadel securities, say paying the flow of orders benefits investors, as they get a better deal than if orders were shipped on the New York Stock Exchange or the Nasdaq. Citadel Securities claims that last year it saved $ 1.3 billion for individual investors by executing their orders at better prices than those available on the stock exchanges.

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

However, regulatory sanctions have fueled suspicions about the company’s processing of orders from individual investors. In 2017, Citadel Securities paid $ 22.6 million to settle the Securities and Exchange Commission charges that tricked customers into offering the best price on investors ’transactions. Last year, the firm paid $ 700,000 to resolve claims from the Financial Industry Regulatory Authority that traded prior to customer orders in over-the-counter securities. In both cases, Citadel Securities did not admit any wrongdoing.

Write to Alexander Osipovich to [email protected]