As a market-maker, Citadel Securities now controls about 40% of US retail equity market share

Kenneth Griffin’s wealth is usually identified with his hedge fund. The flagship Wellington fund is up 16.7% this year through November. According to a Bloomberg story, Griffin made $ 870 million from Citadel LP, his hedge fund operations, in 2018. This is not an inconsequential sum by any standards.

What is not so well known, however, is the profitability of Citadel Securities, Griffin’s market-making business. This firm earned $5.7 billion in gross revenue in 2018, and EBITDA of $2.2 billion. Griffin owns 75% or more of both businesses.

Citadel Securities: Stunning growth

The firm rose, phoenix-like, from failed plans to become a full-service investment bank. Restarting life as a high-frequency trader and market-maker in options, it soon pushed into equities. As a market-maker, it aggressively grabbed share from the incumbent banks. Leveraging its ties to a major hedge fund, and deploying advanced technology, Citadel Securities became a very nimble player in market-making.

On the other hand, post-financial crisis regulations such as the Volcker rule hobbled banks. The rule restricted banks from proprietary trading though not market-making. Unwilling to risk regulatory censure, banks were unwilling to test the thin line between proprietary trading and market-making. According to one research, the Volcker rule probably, and permanently allowed nonbank dealers to displace banks in the corporate bond market.

Another Dodd-Frank rule made the clearing of swaps compulsory only on exchanges. These regulatory changes opened up vast market-making opportunities to an aggressive player like Citadel Securities.

In 2016, Citadel acquired a division of KCG Holdings Inc and thereby gained access to the floor of the New York Stock Exchange. Unsurprisingly, it is now the largest market-maker on the exchange handling companies such as Uber, Spotify and Virgin Galactic.

Citadel Securities has not been shy to offer aggressive rebates to brokerages to gain retail client order flow. It now controls about 40% of the US retail equity market share.

Outlook

Business at Citadel Securities is expanding rapidly. It now operates in more than 35 countries and is a top-five liquidity provider in foreign exchange. It has expanded to trading in Treasuries, credit indexes, ETF’s and interest rate swaps.

Citadel is now aiming to become one of the Fed’s primary dealers, a select group of firms that trade directly with the New York Fed. It will, therefore, get to participate in US Treasury auctions.

[Related Story: Citadel Launches Zurich Office (And People on the Move)  ]