GameStop Frenzy Focuses On Trading Giant Citadel Stocks

The company – a subsidiary of Mr. Griffin’s hedge fund, Citadel – is fulfilling orders placed by clients of Robinhood Markets Inc., TD Ameritrade and other online brokers who have seen volume spikes during the coronavirus pandemic .

Citadel Securities makes money by selling stocks or options for a little more than it is willing to buy them. The difference is often only a fraction of a penny per share. But repeated millions of times a day, that’s a lot of money.

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

Among the forces propelling this growth was an influx of novice traders, many of whom remained stranded at home due to Covid-19 lockdowns. Attracted by easy-to-use trading apps and the industry’s shift towards commission-free trading, individual investors opened more than 10 million new brokerage accounts in 2020, estimates JMP Securities.

Meanwhile, a thriving subculture of day traders has flourished in corners of the internet like Reddit’s WallStreetBets forum, paving the way for manic trading last week in 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, an investor group. “The last time the environment was this good for retail executives, it was back in the dot-com bubble.”

The company came under scrutiny last week when its majority owner, Mr. Griffin, participated in an emergency $ 2.75 billion injection of funds into Melvin Capital Management, a short seller. which was facing big losses due to the huge rally in GameStop’s shares.

Announced Monday, the deal meant that Citadel, the hedge fund firm, backed a fund that had bet against GameStop stock, 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 over the past week, retail orders pouring into its systems for GameStop were roughly balanced between buyers and sellers, casting doubt on the popular narrative that small investors have led the stock to its record close of $ 347.51 on Wednesday.

Data showed that 29% of GameStop Monday-Thursday trading volume was handled by Citadel Securities, highlighting its huge role in the stock market popular with individual investors. Overall, around 41% of US retail stock trading volume goes through Citadel Securities, while the industry’s second-largest player, Virtu Financial Inc.,

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

“We have seen an extraordinary level of retailing last week,” said a spokesperson for Citadel Securities. “At several times during the week, the large brokerage firms depended on our capabilities to handle the deluge 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 options, futures, treasury bills, and many foreign markets. Founded in 2002, the company has grown into a dominant player in e-commerce due to its technological prowess, quantitative skills and a vibrant corporate culture. Rivals say it has become increasingly difficult to compete with the scale and efficiency of Citadel Securities.

“They’re really trying to take an Amazon approach to trading, where they’re trying to bring out all the others that aren’t on their scale,” said Scott Knudsen, former executive of rival trading firm IMC Financial Markets who now runs Cove Markets, a startup in cryptocurrency trading.

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

Critics say the practice, known as payment for order flow, skews incentives for brokers to seek to maximize revenue rather than guaranteeing customers the best price. The practice is banned in some foreign markets, such as the UK. Earlier this month, former US Senator Carl Levin ran an opinion piece in the Financial Times urging the incoming Biden administration to ban the payment for the order flow, calling it “a conflicting practice that siphons billions of dollars out of US investor funds every year.” “

Brokers and trading companies, including Citadel Securities, claim that paying the order flow benefits investors because they get a better deal than if the orders were 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 the exchanges.

The argument is that in fact both parties win: Citadel Securities may offer individual investors better prices on stocks 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 may end up dealing with a fund manager who pushes a stock up or down with institutional sized buys or sells – a situation that could result in losses for Citadel Securities.

Yet regulatory sanctions have fueled suspicions that the company is transmitting orders from individual investors. In 2017, Citadel Securities paid $ 22.6 million to settle the Securities and Exchange Commission fees, which misled clients into providing the best price on investor trades. Last year, the company paid $ 700,000 to resolve complaints from the Financial Industry Regulator that it was trading ahead of customers’ OTC orders. In both cases, Citadel Securities did not admit fault.

Write to Alexander Osipovich at [email protected]