- Citadel and Citadel Securities are separate companies but share the same founder: billionaire Ken Griffin
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Citadel Securities’ market-making business helps to facilitate trading across Wall Street, and pays online brokerages like Robinhood for their order flow.
- Citadel’s hedge fund bailed out Melvin Capital at a cost of $2 billion and could stand to benefit from the surge in trading silver.
- Visit the Business section of Insider for more stories.
It seems that wherever you look in the GameStop frenzy, there’s a Ken Griffin connection.
In the past two weeks, the concentrated effort of retail traders, mobilized in large part on Reddit’s WallStreetBet’s forum and other social media sites, helped push shares of heavily-shorted companies like GameStop, AMC, and others to dizzying heights.
As the trading volume and price of these companies surged, brokerages were forced to issue trading restrictions on their apps, a move that managed to unite the likes of Mark Cuban, Rep. Alexandria Ocasio-Cortez, and Dave Portnoy.
Robinhood, the trading app that offers free trading and is a hit with millennial investors, has played a significant role in the trading boom. And Citadel Securities is a key player in executing Robinhood users’ trades and one of the largest market makers operating in the US, helping to manage the increased volatility in the markets.
Meanwhile, Citadel, which is one of the largest hedge funds in the world, offered a capital infusion to Melvin Capital, the fund that was a focus of the Reddit-fueled trading into GameStop due to its short positions.
As a result of the recent trading frenzy, both firms have been pushed into the mainstream spotlight.
And while Citadel and Citadel Securities are separate companies that operate independently of each other, they do share a founder in common: Ken Griffin.
Paying for retail orders
Robinhood led the charge when it came to offering commission-free trading. Instead of charging trading fees, the startup makes money, as many other brokerages now do, by selling its customers stock and option orders to trading firms like Citadel Securities, Virtu Financial, and Two Sigma Securities.
The practice of paying for these retail orders has become more common over the past decade.
According to Robinhood’s fourth-quarter order-routing public report, the startup routed all its customers’ stock and options orders to market makers as opposed to going directly to trading venues.
Brokerages like Robinhood are legally required to route their orders to where they can get the best execution, and are also required to set a standard payment structure across market makers so no single firm is privileged.
In December 2020, Citadel Securities paid $12.4 million to Robinhood to handle a portion of its stock orders. PFOF for options trading proved even more profitable, with Citadel Securities handling the majority of Robinhood trades for the month of December, for which it paid more than $28 million.
Market volatility
Citadel Securities handled slightly less than a third of all retail flow in the GameStop stock through January 28, or more than $508 million in volume, according to Bloomberg. It was a volatile week in equity markets, which typically means wider spreads for market makers and more profit.
That being said, the severe price detachment from fundamentals exhibited by stocks like GameStop could also have made it more difficult for market makers to accurately quote spreads and ease price discovery.
Also, Citadel Securities isn’t just trading with Robinhood, or vice versa. More than a fifth of all US equities pass through the firm’s automated trading desk and it executes nearly 40% of retail volume in the country, according to the company.
“Citadel Securities has been a driving force in reducing the costs of trading for retail investors,” a spokesperson for the market maker said in a statement. “Last year alone, we provided $1.3 billion of price improvement that went directly into the pockets of retail investors.”
And Citadel Securities isn’t the reason Robinhood curtailed trading in some stocks, despite lots of social media chatter that it may have been behind the decision.
Instead, Robinhood and other brokerages have said the Depository Trust & Clearing Corp., or DTCC — the central clearing and settlement organization for US stocks — raised collateral requirements for brokers in response to the market volatility. In response, some firms chose to curtail trading in certain shares like GameStop.
Still, the rumors about Robinhood’s connection to Citadel Securities grew so loud that Tesla chief Elon Musk brought up the question in an interview with Robinhood CEO Vlad Tenev on Clubhouse.
“There was a rumor that Citadel or other market makers kind of pressured us into doing this,” Tenev said, “and that’s just false.”
“Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business,” a spokesperson said. “Citadel Securities remains focused on continuously providing liquidity to our clients across all market conditions.”
Citadel bailed out Melvin Capital
The extent to which legions of retail traders had executed a short squeeze on GameStop, and the damage inflicted on funds that were short the stock, wasn’t truly visible until Gabe Plotkin’s star hedge fund Melvin Capital announced on January 25 it was receiving a capital infusion from the $33 billion hedge fund Citadel and Steve Cohen’s $19 billion Point72.
The cost was $2.75 billion, $2 billion of which was paid by Citadel and the rest by Cohen’s own fund. It was still barely enough to stem the bleeding, as Melvin Capital closed its GameStop short position on January 27 and was down 53% in January, Insider reported. Citadel, meanwhile, is reportedly only down 3% through January, with 1% of that loss related to its investment in Melvin.
Even with Melvin’s recent down performance, the investment was a remarkable opportunity for the two funds to grab a share of a highly-competitive rival hedge fund by grabbing a stake in the firm.
“I am incredibly proud to partner with Ken Griffin and Steve Cohen,” said Plotkin in a statement at the time. “The team at Melvin is eager to get to work and reward the confidence of these two great investment icons.”
Silver rush
As retail traders appeared to move on from GameStop early this week — the stock is now down 70% from its opening price on Monday — they instead turned their attention to silver.
Traders pushed the price of silver to an eight-year high Monday in an effort to target the short-sellers of the commodity.
In particular, the popular silver exchange-traded fund iShares Silver Trust ETF (SLV) saw record inflows of $1.2 billion in January, and the fund jumped as much as 16% on Monday to more than $27 before dropping down to around $25 on Wednesday. Among the biggest shareholders in SLV: Citadel.
Data compiled by Bloomberg shows that Citadel owned about 6 million shares of the ETF worth more than $130 million, as of its 13-F filing with the SEC last September, although it’s unclear how much of the fund Citadel might still own.
Reddit members of the WallStreetBets forum have hardly been united in pumping the commodity, in both a recognition of the vastly larger size of the silver market compared to the one for GameStop, and that firms like Citadel only stand to benefit from an increase in silver’s price.
One Reddit member titled a post on Sunday, “Those of you getting into silver just made Citadel and the banks millions, well done…” Another post sarcastically asked “Is this how I buy silver?” and included a screenshot of a buy order of, naturally, 50 shares of GameStop.
The profile of Citadel and Citadel Securities continues to rise
Ken Griffin’s connection to the GameStop trading frenzy illustrates the prominence on Wall Street of both Citadel and Citadel Securities, one that is the product both of the enduring power of one of the world’s largest hedge funds and advancements in trading and market making as a result of cutting-edge technology.
Citadel played a key role in propping up the very target of the coordinated WallStreetBets effort to bring down short-sellers, nabbing a stake in a competitor in the process, and is coming off what seems to be one of its better years in history.
Citadel Securities, meanwhile, further solidified its role as one of the top market makers on Wall Street as it helped to handle significant volatility.
And while both Citadel and Citadel Securities have long been a staple of Wall Street, recent events have pushed their profiles into the spotlight. As a result, both firms are now more recognizable to the general public than ever before.
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