While the GameStop story revealed how small investors were pumping up the stock in an attempt to defy Wall Street, a recent article in The Wall Street Journal reports that Citadel Securities—one of the biggest players in global markets— “stands to benefit from their frenetic trading.”
Citadel, the electronic-trading firm owned by hedge-fund billionaire Ken Griffin, has reportedly “played a quiet but critical role in the frenzy” that occurred in January as it executed orders place by customers of Robinhood Markets Inc., TD Ameritrade and other online brokerage firms “that have enjoyed surging volumes during the coronavirus pandemic.” The article cites data showing that 29% of GameStop trading volume late in January was handled by Citadel.
According to former TD Ameritrade executive Christopher Nagy (now director of Healthy Markets Assocation, an investor group), “This is the market that Ken Griffin and Citadel Securities have been waiting for. The last time the environment was this good for retail market-makers was back in the dot-com bubble.”
Citadel reportedly raised eyebrows last month when Griffin participated in a $275 billion emergency cash infusion into Melvin Capital Management, a short seller that faced sizeable losses due to the huge rally in GameStop’s stock. The article reports that Citadel Securities, like other market makers, has repeatedly drawn scrutiny in that it “pays brokerages for the right to trade against other market makers.” During the first three quarters of 2020, Citadel reportedly earned over $700 million in such payments to major online brokerages. The article notes, “Critics say this practice, called payment for order flow, skews brokers’ incentives so they seek to maximize revenues rather than ensure customers get the best price.” The practice, reportedly banned in some overseas markets, is viewed by some as a conflicted practice that should be banned.
The article reports that in 2017, Citadel Securities paid $22.6 million to settle SEC charges that it “misled customers about providing the best price on investors’ trades,” and that in 2020, it paid $700 million to resolve claims (by the Financial Industry Regulatory Authority) that it traded ahead of customer orders in over-the-counter securities (the article notes that Citadel did not admit to wrongdoing in either case).