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Citadel Securities

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This article is about the market maker. For the hedge fund, see Citadel LLC.
Citadel Securities LLC
Company typePrivate
IndustryFinancial services
Founded2002; 22 years ago (2002)
FounderKenneth C. Griffin
HeadquartersSoutheast Financial Center, Miami, Florida, U.S.
Area served
Worldwide
Key people
Peng Zhao (CEO)
RevenueDecrease US$6.3 billion (2023)
Number of employees
1,600 (2023)
ParentCitadel Enterprise Americas LLC
Websitecitadelsecurities.com
Footnotes / references
[1][2]

Citadel Securities LLC is an American market making firm providing liquidity and trade execution to retail and institutional clients, headquartered in Miami.[3][4][5] The firm also trades futures, equities, credit, options, currencies, and Treasury bonds. It is the largest designated market maker on the New York Stock Exchange.[6][7]

Citadel Securities is a separate entity from the hedge fund Citadel LLC, although both were founded and are majority owned by American hedge fund manager Kenneth C. Griffin.[8] Citadel Securities moved its headquarters from Chicago to Miami in 2022[9][10] with plans to build a new headquarters on Brickell Bay Drive.[11][12] Peng Zhao, who joined the company in 2006, has been the CEO since 2017.[13]

History

2000–2010

Citadel Securities was formed in 2002,[14][15][16] as a market maker, providing liquidity and trade execution to retail and institutional clients.[17]

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.[18] By August 2011, Citadel ended its foray into investment banking to instead focus on electronic trading and market making.[19]

2011–2019

In 2014, the firm expanded its market-making offering to interest rate swaps, one of the most commonly traded derivatives.[20] 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.[21]

In August 2014, Citadel was fined $800,000 for irregularities in its trading practices between March 18, 2010, and January 8, 2013.[22] 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.[23]

By 2015 Citadel Securities had become the world's largest interest-rate-swap trader by number of transactions replacing Wall Street banks.[24] In 2016, the company opened a new office in Sydney, Australia.[25] In January 2017, Citadel was fined $22 million by the SEC for misleading clients regarding the way it priced trades.[26]

In October 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.[27] In December 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.[28]

2020–present

2020

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.[29] Citadel Securities was fined $700,000 by FINRA in July for trading ahead of customer orders.[30] 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 January 2020, Citadel paid a 670 million-yuan ($97 million) settlement for alleged trading irregularities dating from 2015.[31] During the coronavirus pandemic, the firm doubled its profit while generating $4 billion in revenue during the first half of 2020 due to an increase in volatility and retail trading.[32]

In October 2020, Citadel Securities announced it would acquire the NYSE market making unit of rival IMC.[33][34][35] The purchase made it the largest designated market maker (DMM) on the NYSE — overseeing over 1,500 NYSE-listed securities.[6][7] In the same 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.[36][37]

In 2020, Citadel Securities began selling US Treasury and dollar interest rate swap products in Hong Kong.[38]

2021

In February 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.[39] This point also emerged on several occasions during the March 17 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."[40][41] In March, 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.[42][43]

That same month, President Biden's nominee for SEC Chairman, Gary Gensler, raised further concerns about Citadel's dominant market position at a congressional hearing in March, 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?"[44] 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."[44]

On May 5, Gensler repeated these concerns in his testimony to the House of Representatives Financial Services Committee.[45] 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.[46] 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, was said to own 85% of Citadel Securities, there were concerns that the market maker's interests might align with the interests of those shorting GameStop to the detriment of those long GameStop.[46][47] Griffin denied any wrongdoing.[47]

In November 2021, a U.S. District Court dismissed a class action lawsuit, ruling that investors failed to show collusion between Robinhood and Citadel.[48] In March, Citadel's payment-for-order-flow arrangements with brokerages such as Robinhood was heavily criticized during Congressional hearings on the GameStop short squeeze.[49] 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.[50][51][52]

2022–2024

As of January 2022, the firm oversaw more than 2,000 listed securities.[53] In August 2022, the firm continued its global expansion with a new office in Tokyo and announced plans to launch US fixed income offerings there.[54] The firm ended 2022 with its record revenue to date, topping its 2021 record and bringing in $7.5 billion.[55] In 2022, the company opened a new office in Japan.[56] By the end of 2022 Citadel Securities traded in over 35 countries and executed more than 20 percent of all US equity trades. The firm also trades futures, options, currencies and Treasury bonds.[57]

As of February 2023, the Hong Kong based subsidiary of Citadel Securities was designated as a "qualified foreign institutional investor" or QFII, by the Chinese government, giving the company more access to mainland China's bond and stock markets.[58]

In June 2023, Citadel Securities became active in corporate debt trading and introduced investment-grade trading to clients.[59]

In September 2023, the SEC initiated legal action against Citadel Securities, citing violations of Regulation SHO. The SEC found that, between 2015 and 2020, Citadel Securities mismarked millions of sell orders due to a coding error in their automated trading system, obstructing regulatory oversight. The firm agreed to a settlement by consenting to a $7 million penalty, without admitting or denying the findings.[60][61]

In June 2024, the company began trading Euro and Sterling interest-rate swaps. Citadel Securities grew its existing 120-person global rates team in London and Paris to support the expansion, and named Paris as the firm's trading hub for European rates.[62]

Performance

In 2012, Citadel Securities was noted for providing reliable trading at lower costs and with tighter spreads.[63] In 2015, Barron's ranked Citadel Securities #1 in providing price improvement for investors in both S&P 500 and non-S&P shares.[64] According to the Wall Street Journal, about one-third of stock orders from individual investors in 2015 was completed through Citadel, which accounts for about 10 percent of the firm's revenue.[65]

Partnerships

In 2009, Citadel Investment Group and the Chicago Mercantile Exchange partnered to create a credit default swaps electronic-trading platform.[66]

In January 2022, Citadel Securities announced that venture capital firm Sequoia Capital and cryptocurrency investor Paradigm had made a $1.15 billion investment in the firm. The transaction valued Citadel Securities at approximately $22 billion.[67][68]

References

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  2. ^ Seligson, Paula; Doherty, Katherine (May 15, 2024). "Citadel Securities Revenue Reaches $2.3 Billion in First Quarter". Bloomberg News.
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  45. ^ Platt & Silverman, Eric & Gary (May 5, 2021). "Gensler raises concern about market influence of Citadel Securities". Financial Times.
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  59. ^ "Citadel Securities Is Muscling Its Way Into Credit Trading". Bloomberg.com. 2023-06-29. Retrieved 2024-02-10.
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  64. ^ Alpert, Bill. "Exclusive: Who Makes Money on Your Stock Trades". www.barrons.com.
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  66. ^ Lynch, Sarah; Ng, Serena (14 May 2009). "U.S. Moves to Regulate Derivatives Trade". The Wall Street Journal. United States. Dow Jones & Company Inc. ISSN 0099-9660. Archived from the original on December 18, 2019. Retrieved 17 December 2019.
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  68. ^ Ross Sorkin, Andrew; de la Merced, Michael J. (11 January 2022). "Citadel Securities, a top trading firm, sells a stake to Silicon Valley investors". The New York Times.
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