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Citadel Securities
Company typePrivate
IndustryFinancial services
Founded2002
FounderKenneth C. Griffin
Headquarters
Chicago, IL
,
United States
Area served
Worldwide
Key people
Peng Zhao
Number of employees
1200
ParentCitadel Enterprise Americas LLC
Websitewww.citadelsecurities.com

Citadel Securities is a global market maker[1] that provides liquidity to asset managers, banks, broker-dealers, hedge funds, government agencies and public pension fund programs.[2] It is one of the largest market makers in the global financial system,[3] with locations in Chicago, New York, London, Hong Kong and other cities around the world.[4] The firm is active in more than 50 countries and has more than 1,600 institutional clients.[5] It is the largest designated market maker on the New York Stock Exchange,[6][7] covering more than 2,000 listed securities.[5] Citadel Securities is a subsidiary of the holding company Citadel Enterprises America LLC.[8][9]

Market maker

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Citadel Securities was formed in 2002,[10][11][12] and is a market maker, providing liquidity and trade execution to retail and institutional clients.[13] Citadel Securities automation has resulted in more reliable trading at lower costs and with tighter spreads.[14] Barron's recently ranked Citadel Securities #1 in providing price improvement for investors in both S&P 500 and non-S&P shares.[15] In 2009 Citadel Investment Group and the Chicago Mercantile Exchange partnered to create a credit-default swaps electronic-trading platform.[16]

Citadel Securities is the largest market maker in options in the U.S., executing about 25 percent of U.S.-listed equity options volume.[17] According to the Wall Street Journal, about one-third of stock orders from individual investors is completed through Citadel, which accounts for about 10% of the firm's revenue.[18] Citadel Securities also executes about 13 percent of U.S. consolidated volume in equities and 28 percent of U.S. retail equities volume.[19] In 2014, Citadel Securities expanded its market-making offering to interest-rate swaps, one of the most commonly-traded derivatives.[20] By 2015 Citadel Securities had become the world's largest interest-rate-swap trader by number of transactions replacing Wall Street banks.[21]

During the coronavirus pandemic, Citadel Securities doubled its profit earning $4 billion in revenue during the first half of 2020 due to an increase in volatility and retail trading.[22]

In October 2020, Citadel Securities announced it would acquire the NYSE market making unit of rival IMC.[23][24][25] Also that month, Citadel Securities filed a lawsuit against the Securities and Exchange Commission over the SEC's decision to approve a new "D-Limit" order type for IEX.[26][27]

Regulatory issues

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Over a two-year period until September 2014, hundreds of thousands of large OTC orders were removed from its automated trading processes, rendering the orders "inactive" so that they had to be handled manually by human traders. Citadel Securities then "traded for its own account on the same side of the market at prices that would have satisfied the orders," without immediately filling the inactive orders at the same or better prices as required by FINRA rules.[28]

In 2014, Citadel was fined $800,000 for irregularities in its trading practices between March 18, 2010, and Jan. 8, 2013 [29]

In 2017, Citadel was fined $22 million by the SEC for misleading clients regarding the way it priced trades.[30]

In 2018, Citadel was forced by the SEC to pay $3.5 million over violations stemming from incorrect reporting for nearly 80 million trades from 2012 to 2016.[31]

In 2018, Bloomberg reported that 40% of Robinhood's revenues were derived from selling customer orders to firms such as Citadel Securities and Two Sigma Securities.[32]

In January 2020, Citadel paid a 670 million-yuan ($97 million) settlement for alleged trading irregularities dating from 2015.[33]

Citadel Securities was fined $700,000 by FINRA in July 2020 for trading ahead of customer orders.[34] They delayed certain equity orders from clients to buy or sell shares while continuing to trade the same stocks in its own account as part of its market-making activities, according to FINRA.

In 2020, Citadel Securities was censured by FINRA a total of 19 times for a variety of misconduct, including failing to close failure-to-deliver positions, naked short selling, inaccurate reporting of short sale indicators, executing trades during circuit-breaker halts, and failing to offer its clients best prices on the bid-ask spread.[35]

On March 25, 2021, Citadel agreed to a censure by FINRA and a $275,000 fine for improperly reporting nearly 500,000 Treasury transactions between 2017 and 2019, revealing a systemic failure in Citadel's compliance systems.[36][37]

Concerns about conflicts of interest

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In light of Citadel Securities' role in the GameStop short squeeze event, individuals such as Senator Elizabeth Warren have raised concerns about several potential conflicts of interest.[38] These include the relationship between Citadel Securities, which executes a majority of broker-dealer Robinhood's trades through a payment-for-order-flow relationship, and Citadel the asset manager, which provided a $2 billion investment in Melvin Capital, one of the main short sellers involved in the GameStop short squeeze; because Ken Griffin, the CEO and majority shareholder of Citadel, also owns 85% of Citadel Securities, there are concerns that the market maker's interests might align with the interests of those shorting GameStop to the detriment of those long GameStop.[38][39] Griffin has denied any wrongdoing.[40]

On March 17, 2021 Citadel's payment-for-order-flow arrangements with brokerages such as Robinhood was heavily criticized during Congressional hearings on the GameStop short squeeze.[41]

Citadel's practice of hiring officials from agencies that regulate it, including the SEC and the CFTC, as well its relationships with Ben Bernanke and Janet Yellen, has also been widely observed and attracted concerns about conflicts of interest.[42][43][44]

Concerns about systemic risk posed to U.S. markets

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Analysts of U.S. financial markets have been critical of the SEC's decision to exclude Citadel Securities from its 2014 Regulation Systems Compliance and Integrity (Reg SCI) regulatory regime designed to make U.S. securities markets safer for investors; both Citadel and the SEC declined to comment on Citadel's being exempted from complying with this rule.[45]

On February 17, 2021, House Financial Services Chairwoman Maxine Waters suggested that the systematic importance of Citadel Securities might ultimately pose a threat to the U.S. financial system.[46] This point also emerged on several occasions during the March 17, 2021 hearing by the House Financial Services, with experts observing that Citadel Securities claims to trade "approximately 26% of U.S. equities volume" and "executes approximately 47% of all U.S.-listed retail volume, and acts as a specialist or market-maker with respect to 99% of traded volume in 3,000 U.S.-listed options names."[47][48]

In March 2021, President Biden's nominee for SEC Chairman, Gary Gensler, raised further concerns about Citadel's dominant market position in at a Congressional hearing in March 2021, asking: “one firm now has 40% to 50% of the retail order flow, what does that do to pricing of capital in this country? What does it mean to be best execution in this context?”[49] Invoking Amazon's dominance in the online retail marketplace, another market analyst described Citadel's rise as “the Amazonization of listed markets", a phenomenon he characterized as “very dangerous, not because there are no other players, but because over time it weakens the other players that could be competitive. It’s the essence of concentration risk.”[50] On May 5, 2021, Gensler repeated these concerns in his testimony to the House of Representatives Financial Services Committee.[51]

Investment bank

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In 2008 Citadel Securities hired 70 people and Rohit D'Souza, a banker from Merrill Lynch, who left after eight months "to build an investment bank" and brokerage.[52] By August 2011, Citadel ended its foray into investment banking to instead focus on electronic trading and market making.[53]

References

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  1. ^ Salzman, Avi. "Citadel Securities Could Become a Crypto Player". www.barrons.com.{{cite web}}: CS1 maint: url-status (link)
  2. ^ "Citadel Securities LLC". www.bloomberg.com.{{cite web}}: CS1 maint: url-status (link)
  3. ^ Detrixhe, John. "Citadel Securities gets almost as much trading volume as Nasdaq". Quartz.{{cite web}}: CS1 maint: url-status (link)
  4. ^ "Citadel Securities:About".{{cite web}}: CS1 maint: url-status (link)
  5. ^ a b Doherty, Katherine (11 January 2022). "Griffin Sets Citadel Securities on IPO Path With Tech Backers". www.bloomberg.com.{{cite web}}: CS1 maint: url-status (link)
  6. ^ "Citadel Securities to buy NYSE market-making unit from IMC". Pensions & Investments. 2020-10-09.{{cite web}}: CS1 maint: url-status (link)
  7. ^ "Citadel Securities to buy rival IMC's NYSE market making business". Reuters. 2020-10-08.
  8. ^ "SECURITIES AND EXCHANGE COMMISSION" (PDF). 18 December 2020.{{cite web}}: CS1 maint: url-status (link)
  9. ^ "Citadel Enterprise Americas LLC".{{cite web}}: CS1 maint: url-status (link)
  10. ^ Bullock, Nicole (2017-04-04). "Citadel Securities hires ex-SEC official as general counsel". Financial Times.
  11. ^ "Citadel 'May Pose a Systemic Threat,' Waters Says". WSJ.{{cite web}}: CS1 maint: url-status (link)
  12. ^ "Citadel's Griffin details firm's role in trading during GameStop rally". Reuters. 2021-02-18.
  13. ^ Marek, Lynne (6 November 2010). "Citadel gets slow start in i-banking". Crain Communications. ISSN 1557-7902. Archived from the original on December 14, 2019.
  14. ^ Marek, Lynne (13 October 2012). "Citadel's big move into the markets". Crains Chicago Business. Chicago, IL, United States: Crain's Chicago Business. Crain Communications, Inc. ISSN 1557-7902. Archived from the original on December 14, 2019. Retrieved 11 December 2014.
  15. ^ Alpert, Bill. "Exclusive: Who Makes Money on Your Stock Trades". www.barrons.com.{{cite web}}: CS1 maint: url-status (link)
  16. ^ Lynch, Sarah; Ng, Serena (14 May 2009). "U.S. Moves to Regulate Derivatives Trade". The Wall Street Journal. Eastern Edition. United States: Wall Street Journal. Dow Jones & Company Inc. ISSN 0099-9660. Archived from the original on December 18, 2019. Retrieved 17 December 2019.
  17. ^ Lynne Marek (5 December 2015). "Citadel wants to shape the rules of the game". Crain's Chicago Business. Archived from the original on October 27, 2020. Retrieved January 15, 2016.
  18. ^ Copeland, Rob (2015-08-04). "Citadel's Ken Griffin Leaves 2008 Tumble Far Behind". Wall Street Journal. ISSN 0099-9660.
  19. ^ Burton, Katherine (10 April 2014). "Citadel Fund Said to Quadruple With High-Frequency Trades". Bloomberg Business. Archived from the original on January 11, 2015. Retrieved 26 February 2015.
  20. ^ Albanese, Chiara (6 June 2014). "Citadel to Offer Trading in Interest-Rate Swaps". The Wall Street Journal. Eastern Edition. No. Markets. United States: Wall Street Journal. Dow Jones & Company Inc. ISSN 0099-9660. Archived from the original on January 10, 2018. Retrieved 27 July 2015.
  21. ^ Zuckerman, Gregory; Cherney, Mike (2 December 2015). "Wall Street Goes Short on Bond Traders". The Wall Street Journal. Eastern Edition. No. MARKETS. United States: Wall Street Journal. Dow Jones & Company Inc. ISSN 0099-9660. Archived from the original on December 17, 2019. Retrieved 17 December 2019.
  22. ^ Maloney, Tom; Bakewell, Sally (September 25, 2020). "Citadel Securities Doubled Profit as Dominance Grew in 2020". Bloomberg News. Archived from the original on October 7, 2020. Retrieved October 3, 2020.
  23. ^ Osipovich, Alexander (2020-10-08). "WSJ News Exclusive | Citadel Securities to Buy NYSE Market-Making Unit of Smaller Rival IMC". Wall Street Journal. ISSN 0099-9660. Archived from the original on October 9, 2020. Retrieved 2020-10-09.
  24. ^ "Citadel Securities to buy NYSE market-making unit from IMC". Pensions & Investments. 2020-10-09. Archived from the original on October 12, 2020. Retrieved 2020-10-09.
  25. ^ Osipovich, Alexander. "Citadel Securities to buy NYSE market-making unit of rival IMC Financial Markets". MarketWatch. Archived from the original on October 9, 2020. Retrieved 2020-10-09.
  26. ^ Osipovich, Alexander (2020-10-17). "Citadel Securities Sues SEC for Approving New Stock-Order Type". Wall Street Journal. ISSN 0099-9660. Archived from the original on October 22, 2020. Retrieved 2020-10-22.
  27. ^ "Citadel Securities sues SEC". Crain's Chicago Business. 2020-10-17. Archived from the original on October 22, 2020. Retrieved 2020-10-22.
  28. ^ Henderson, Richard (July 20, 2020). "US regulator fines Citadel Securities over trading breach". Financial Times. Archived from the original on December 20, 2020. Retrieved January 28, 2021.
  29. ^ McCrank, John (2014-08-05). "Citadel fined $800,000 by U.S. regulators for trading violations". Reuters. Retrieved 2021-02-20.
  30. ^ "SEC.gov | Citadel Securities Paying $22 Million for Misleading Clients About Pricing Trades". www.sec.gov. Retrieved 2021-02-20.
  31. ^ "Citadel Securities Among Firms Fined Over Trading Data Errors". www.bloombergquint.com. Retrieved 2021-02-20.
  32. ^ "Robinhood Gets Almost Half Its Revenue in Controversial Bargain With High-Speed Traders". Bloomberg.com. October 15, 2018. Archived from the original on January 19, 2019. Retrieved January 28, 2021.
  33. ^ "Citadel Securities Agrees to $97 Million Settlement in China". Bloomberg.com. 2020-01-20. Retrieved 2021-02-20.
  34. ^ "Citadel Securities Fined by Finra for Trading Ahead of Clients". Bloomberg.com. 2020-07-21. Retrieved 2021-01-28.
  35. ^ "FINRA BrokerCheck Report Citadel Securities LLC" (PDF).{{cite web}}: CS1 maint: url-status (link)
  36. ^ "FINRA fines Citadel Securities for multiple issues with transaction reporting". FX News Group. 2021-03-26. Retrieved 2021-03-27.
  37. ^ "FINANCIAL INDUSTRY REGULATORY AUTHORITY LETTER OF ACCEPTANCE, WAIVER, AND CONSENT NO. 2019061038301" (PDF).{{cite web}}: CS1 maint: url-status (link)
  38. ^ a b Fitzgerald, Maggie (2021-02-18). "Warren presses Citadel CEO Griffin about relationship with Robinhood, payment for order flow". CNBC. Retrieved 2021-03-14.
  39. ^ Son, Hugh (2021-02-19). "Citadel billionaire Ken Griffin defends Melvin stake against 'an insane conspiracy theory'". CNBC. Retrieved 2021-03-14.
  40. ^ Son, Hugh (2021-02-19). "Citadel billionaire Ken Griffin defends Melvin stake against 'an insane conspiracy theory'". CNBC. Retrieved 2021-03-14.
  41. ^ Phillips, Matt (2021-03-17). "Congress hears testimony again on GameStop, focusing on the financial plumbing behind the frenzy". The New York Times. ISSN 0362-4331. Retrieved 2021-03-17.
  42. ^ "Citadel's Ken Griffin Adds to Hires From a Preferred Locale: the SEC". Bloomberg.com. 2018-03-16. Retrieved 2021-04-10.
  43. ^ "Subscribe to a slice of the FT | Financial Times". www.ft.com. Retrieved 2021-04-10.
  44. ^ "Subscribe to a slice of the FT | Financial Times". www.ft.com. Retrieved 2021-04-10.
  45. ^ Morgenson, Gretchen (2017-09-22). "S.E.C. Rules to Protect Investors From Cyberthreats Fall Short". The New York Times. ISSN 0362-4331. Retrieved 2021-03-26.
  46. ^ "Citadel 'May Pose a Systemic Threat,' Waters Says - WSJ.com". WSJ. Retrieved 2021-03-24.
  47. ^ Phillips, Matt (2021-03-17). "Congress hears testimony again on GameStop, focusing on the financial plumbing behind the frenzy". The New York Times. ISSN 0362-4331. Retrieved 2021-03-24.
  48. ^ "Testimony of Dennis M. KelleherPresident and CEO Better Markets, Inc. Before The U.S. House Committee on Financial Services, March 17, 2021" (PDF).{{cite web}}: CS1 maint: url-status (link)
  49. ^ "Citadel Securities Gets the Spotlight". Bloomberg.com. 2021-04-06. Retrieved 2021-04-10.
  50. ^ "Citadel Securities Gets the Spotlight". Bloomberg.com. 2021-04-06. Retrieved 2021-04-10.
  51. ^ Platt & Silverman, Eric & Gary (May 5, 2021). "Gensler raises concern about market influence of Citadel Securities".{{cite web}}: CS1 maint: url-status (link)
  52. ^ Zuckerman, Gregory; Checkler, Joseph (30 October 2009). "Citadel Opens Its 'Gates' on Better Results". The Wall Street Journal. ISSN 0099-9660. Archived from the original on December 17, 2019.
  53. ^ McCrum, Dan (August 11, 2011). "Citadel abandons plan to rival banks". Financial Times. Archived from the original on January 27, 2020. Retrieved January 27, 2020.
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