A-share holders may have some memories of Citadel, the company that was rumored to be one of the culprits behind the 2015 crash, when foreign short-selling forces were said to be behind the “massacre” of mainland Chinese stockholders.
We don’t know if the rumors are true or not, but Citadel was indeed fined by the Chinese Communist Party. During the stock market crash, Citadel’s subsidiary, Shanghai Sidu, made a fortune using high-frequency trading and was later suspended from trading on the SSE. Last year, after a five-year-long investigation, Citadel Securities agreed to pay $100 million to reach a settlement agreement with Chinese Communist Party regulation over alleged trading rule violations.
The mysterious predator that cut the leeks of mainland China back then is now the public enemy of U.S. retail investors.
It is widely believed that Citadel pressured Robinhood to impose trading restrictions on retail holdings, allowing only retail investors to sell and not buy, which directly led to the abrupt end of the wild ride of GME, AMC and other stocks.
So who the hell is Citadel? What role did Citadel play in the short-selling war of the century? In this episode, we’ll take a look at the invisible giant standing behind the huge US financial system.
1
Founded in 1990, Citadel has been standing in the treacherous world of Wall Street for three decades, and its name is still unknown to many people, which shows how mysterious and low-key it is.
It has to do with the character of its founder, Ken Griffin, who was born in 1968 and is 53 years old.
In 1987, Griffin, who was still in college, borrowed $265,000 in capital from relatives and friends and started convertible bond arbitrage in his dorm room with a fax machine, a personal computer and a telephone, and secretly installed a satellite dish on the side of the dorm building to speed up bond quotes.
Three years later, at the age of 22, Griffin had earned more than $4 million, and he established his own fund company, also known as Citadel.
Griffin, suspicious by nature, built Citadel, as its name implies, as if it were a military fortress full of secrets. Before entering the trading floor of Citadel’s offices in Chicago, one had to undergo a series of intensive security checks, which many people complained about, and to sign an unusually strict confidentiality agreement to leave his firm.
Peers gave Citadel another nickname – “labor camp” – where a ruthless and brutal corporate Culture prevailed, and analysts and traders were swiftly swept out of the door once their performance declined.
Unlike Warren Buffett, Dalio, these bigwigs, Griffin is reluctant to accept media interviews, trying to protect his private Life, the external image is shaped by a passion for art and charity, in 1999 he spent more than $ 60 million to buy Paul Cézanne’s painting “Curtain, Jug and Fruit Bowl” (Curtain, Jug and Fruit Bowl), set a record for the French Impressionist The sale set a record for a French Impressionist work.
However, out of sight of the spotlight, he has quietly built a huge financial empire.
2
Citadel’s business is now divided into two main segments.
One is the hedge fund business, which started as a multi-strategy fund, the technical side of hedge funds, not concerned with the fundamentals or intrinsic value of stocks, but only with price fluctuations, analyzing the market through a wealth of information and various mathematical models to find opportunities.
A-share investors may be unfamiliar with the role of market makers, as domestic stock trading is generally quoted to the exchange, and the exchange brokers the transactions. The situation is not quite the same for U.S. stocks, where the market maker is the one who sets up the transaction, or even acts as the counterparty itself to provide liquidity.
Simply put, market makers have a bunch of stocks in their hands and constantly quote prices in both directions according to market supply and demand, both selling and buying prices, and they are ready to buy and sell whenever an investor’s quote matches. They can also be roughly understood as wholesalers in the stock market, trading securities to ensure trading volume and liquidity, and then making money from the bid-ask spread.
In the past, market makers used manual quotes and were usually monopolized by large banks or financial institutions. With the development of electronic technology, market making became a very quantitative task and Citadel gradually rose to become the most powerful middleman in the U.S. capital markets, using its strong technical background and high-frequency trading system.
Citadel is now arguably the leader among market makers. It is the largest designated market maker on the New York Stock Exchange, handling 26% of the entire U.S. stock market and 47% of total retail transactions, which means that nearly half of all retail transactions are brokered by Citadel.
Using the data from February 22 as an example, the total number of shares traded in the U.S. stock market in a single day was 14.7 billion, with a total trade value of approximately $633.8 billion. Then Citadel Securities handled 3.8 billion shares in a single day, and the value of transactions handled was about 164.8 billion USD, which is about one trillion RMB, equivalent to the turnover of Shanghai and Shenzhen markets.
(Data source: https://markets.cboe.com/us/equities/market_share/)
In addition to stocks and options, its market-making business involves U.S. bonds, interest rate swaps, credit indices, foreign exchange transactions, etc. It provides liquidity to more than 500 institutional clients including custodians, banks, hedge funds, insurance companies, pensions, etc.
Citadel has been described as the Amazon of trading, bending the rules through technology and disrupting the industry while solidifying its position.
The dramatic market volatility since the Epidemic has made Citadel even more profitable. Trading revenue reached a record $6.7 billion last year, almost double the highest level two years ago.
Griffin’s personal assets have also risen, and he now ranks 28th on the list of the world’s richest people, compared to 150th just a few years ago.
3
So why has Citadel, which seems to have no connection with retail investors, suddenly become the enemy of retail investors?
At the end of January, when the battle between retail investors and institutions was in full swing, several U.S. brokerage firms, represented by Robinhood, suddenly issued a notice to restrict trading in several retail holdings, allowing only selling and not buying. The instruction was given, and the retail holdout stocks plummeted, and the retail investors were beaten to the punch.
This unethical operation immediately sparked public anger, and Robinhood changed from a “retail investor’s helper” to a “tool of capital”. Citadel became the center of the “conspiracy theory”.
Citadel is believed to be a shareholder of both Robinhood and Melvin Capital. In this short-selling war of the century, Melvin Capital can be counted as one of the heaviest losers, being forced by retail investors to burst their positions, with a loss of 53% in January. Retailers believe that Citadel instructed Robinhood to manipulate market rules and take restrictions on retail trading to protect Melvin Capital from further losses.
So what is the truth?
Citadel did take a stake in Melvin Capital, but only after the hedge fund had already been bludgeoned by retail investors. in late January, as Melvin Capital was suffering heavy losses from a failed short sale, Citadel and Point72 Asset Management together injected a $2.75 billion investment into it to help Melvin Capital escape bankruptcy.
And Citadel and Robinhood did have a relationship on the occasion, but it was a client-supplier relationship. Robinhood, the favorite stock trading platform for U.S. retail investors, is a discount brokerage that offers commission-free trading, so what does it do to make money? Primarily, it makes money by selling stocks and options order flow to market makers.
When an investor places an order for 100 lots of tesla with Robinhood, Robinhood hands the trade over to Citadel to put together for a fee. Citadel is currently Robinhood’s largest client, with $91 million in revenue from stock and options order flow in the first quarter of last year, of which $39 million, or more than 40 percent, came from Citadel Securities.
Although not a direct holding relationship, it is considered an interest implication, so Citadel was the focus of questions during a recent hearing. During the hearing, Griffin denied having instructed Robinhood to restrict stock trading, saying he only learned of the trading suspension after Robinhood announced it.
However, angry retail investors simply did not listen and instead focused on Griffin’s poor performance, opening up a group mockery mode.
As you can see on the video at the Time, Griffin was not looking at the camera and was speaking slowly and jerky, supposedly reading from a teleprompter. Some users mocked him for looking like a scared kitten, while others suggested he hire someone who could align the teleprompter with the camera lens, or a lawyer who could type as fast as he could read.
Such a “public execution” would be a nightmare for a man like Griffin, who has devoted decades to portraying a low-key, high-class, philanthropist image.
4
The battle between American retail investors and institutions has been raised to the level of “class confrontation”.
Since the financial crisis in 2008, the Federal Reserve has been deflating, the financial asset bubble has been expanding rapidly, and the distribution of wealth has been shifting in favor of the wealthy.
The gap between the rich and the poor was widening, and the sudden epidemic exacerbated this trend. The emotions and grievances that had been building up over the years as America’s social classes ripped apart needed an outlet, and Citadel was right at the gunpoint.
But is it really innocent between Citadel and Robinhood, with Robinhood claiming that trading restrictions are due to margin considerations and Citadel looking innocent, but behind the huge bundle of interests, a look and a greeting can change the situation, and the truth is unknown.
Back to the story of ants against elephants, although the blood is hot, but the retail investors crush the institutions is only the surface, the “fisherman” is more or financial and capital predators.
Although Citadel was pushed into the limelight, it made a lot of profit in this wave of short-selling war.
The Robinhood, although under the banner of “financial democratization,” is essentially a commission-free way to attract retail investors, who are then packaged into products and sold to traditional Wall Street powers like Citadel.
And the retail investors, the movement is still big, but in the end, the capital on the chopping block of fish meat.
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