Ken Griffin, the founder and CEO of Citadel, is the third highest-earning hedge fund manager of 2023, trailing only TCI Fund’s Chris Hohn and Millennium’s Israel Englander. While Griffin’s hedge fund attracts significant attention and praise, he earns nearly as much from the similarly named yet far lesser-known separate entity, Citadel Securities. Citadel Securities is one of the largest market makers in the world. It earned $2.3 billion in revenue in the first quarter of 2024, Bloomberg reported earlier this month. Last year, Citadel Securities earned $6.3 billion in revenue, compared with the eponymous hedge fund business’s $7 billion in net return. The market-maker posted a 54 percent profit margin in the first quarter of 2024, a significant increase from 42 percent in the previous quarter and 40 percent a year prior.
Founded in 2002, 12 years after the hedge fund, Citadel Securities provides liquidity and trade execution to retail and institutional investors by matching buyers and sellers in equities, fixed income and derivative markets. By leveraging state-of-the-art algorithms to exploit tiny price discrepancies, it generates billions by serving as a trading middle man. In 2015, it became the largest trader of interest-rate swaps by transaction volume, leaving traditional Wall Street banks in the dust.
Citadel Securities’ growing dominance draws scrutiny
Citadel Securities is run by Peng Zhao, who joined the firm in 2006 as a quantitative researcher and rose to the CEO position in 2017. The market-making behemoth is behind a significant share of U.S. retail equity orders. (Bloomberg reported the number at around 40 percent.) Its growing prominence has drawn criticism from the likes of SEC chair Gary Gensler, who has compared the firm’s market dominance to that of tech giants like Amazon. “One firm now has 40 percent to 50 percent of the retail order flow. What does that do to the pricing of capital in this country?” Gensler hypothesized during his Congressional nomination hearing in March 2021. Gensler’s concern could describe that retail and institutional investors’ over-concentration in a single market-maker could have negative impacts on the free market pricing of securities.
Citadel Securities received its peak scrutiny during the meme stock craze of 2020 when it was revealed that Robinhood was earning significant portions of its revenue from selling customer orders to the market-maker while retail investors were trying to short squeeze Citadel’s hedge fund’s bearish position on GameStop. A 13F SEC filing by Citadel from the reporting period most recently before the GameStop short-squeeze reveals the hedge fund held puts on Gamestop, a derivative to take advantage of expectations that the underlying stock price will fall. Citadel had also made a $2 billion investment in Melvin Capital, which held shorts on GameStop.
Some observers speculated that Citadel Securities may have asked Robinhood to halt the trading of GameStop in order to protect the hedge fund business’ books, which Citadel Securities called “absurd.” The firm was cleared of any collusion allegations by a judge that found no evidence of wrongdoing.
Still, Gensler criticized Citadel’s cozy relationship with the no-fee trading platform Robinhood, saying in an interview with CNBC in October 2021, “They have information that the rest of the market may not have, at least for a short period of time. And even milliseconds matter in these markets.”
It wouldn’t be the firm’s first bout with the regulator. Citadel Securities was ordered by the SEC to pay multi-million dollar fines in 2017 and 2018 over misleading statements on how it priced trades and data errors that caused incorrect reporting.
Correction: This article has been updated to accurately reflect Citadel Securities’ market share of retail equity orders and recent revenue figures, citing third-party sources.