Citadel Securities大啖散戶的價差獲利

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Higher volumes and wider spreads have driven outsized returns for market makers

Citadel Securities and its majority owner Ken Griffin are among the big winners from a boom in retail investing, cashing in on the zero-fee trading that has lured huge numbers of first-time investors to the US stock market.

Chicago-based Citadel Securities accounts for 40 of every 100 shares traded by individual investors in the US, making it the number one retail market maker, according to Piper Sandler. The company is a big buyer of customer trades from the leading US retail brokerages such as Charles Schwab and TD Ameritrade, which have slashedcommissions to zero to keep up with fast-growing challengers such as Robinhood.

Citadel Securities pays tens of millions of dollars for this order flow but makes money by automatically taking the other side of the order, then returning to the market to flip the trade. It pockets the difference between the price to buy and sell, known as the spread.

Easy access to the market against the backdrop of wild swings in prices have led to higher trading volumes for stocks and options this year — increasing the raw material Citadel Securities uses to turn a profit. At the same time, the rise in volatility has forced spreads wider, increasing the potential income for market makers.

“In the stay-at-home environment people don’t have anything to do and are locked in front of a computer,” said Rich Repetto, an analyst at Piper Sandler.

Citadel Securities, a sister firm to Citadel, Mr Griffin’s Chicago-based hedge fund, is privately held and does not share financial data. But Virtu Financial, the closest rival to Citadel in retail market making with about a one-third share, acknowledged a sharp upturn during its first-quarter earnings presentation last month. It called the higher volumes and wider spreads a “powerful combination” that “drove outsized returns for market makers”.

Virtu’s figures offer clues to the profits on offer. Earnings from market making, which in Virtu’s case included retail and institutional orders, jumped 267 per cent in the first quarter from the same period a year ago to $652m. Money spent on buying order flow, the biggest cost after exchange and clearing fees, increased much less, up 167 per cent to $62m.

Shares in Virtu have leapt 47 per cent so far this year, while the broader financials sector is down 18 per cent.

“Not only are retail market makers getting increased trading volume, they are likely getting increased profitability per trade,” said Tyler Gellasch, executive director of Healthy Markets Association, a trade group.

Payment for order flow, or PFOF, is a controversial practice. Some critics chafe at the idea that a Wall Street giant such as Citadel — run by the richest man in Illinois — can profit from activity on platforms such as Robinhood, which was explicitly set up to “democratise” the business of share trading.

“We didn’t build Robinhood to make the rich people richer,” co-founder Baiju Bhatt told the FT in 2016. “The mission is to help the everyman, the rest of us, to be part of the financial system.”

Critics of PFOF also argue that market makers can, in theory, “front run” orders by, for example, jumping ahead of a customer’s stock purchase to buy it themselves, making a small gain if the share price increases.

Some wave away the idea, saying that concerns over front-running should be limited to ultrafast proprietary trading groups targeting big block trades from institutional investors that can move the market, rather than smaller orders from everyday investors. Instead, supporters of PFOF highlight the fact that retail customers tend to receive better pricesfrom market-makers than are available on the stock market.

Citadel Securities said that its handling of retail trades in the first quarter “resulted in significant savings for [investors] and underscored the value that liquidity providers like us bring to this market”.

What is clear is that PFOF has become vital to the brokers, who rely on the revenue to offset a collapse in commissions from trading.

TD Ameritrade made $202m from selling its equities and options order flow in the first quarter, according to company filings, the most of the big brokers, including $83m received from Citadel Securities. TD Ameritrade said the amount of orders sent to any particular market maker “is reflective of their outperformance” in achieving a price that matches or beats the stock market. The brokerage said it monitored trades to ensure customers received fair prices and used the proceeds from PFOF to invest in its platform.

Robinhood’s revenues from equities and options order flow came to $91m for the period, with $39m from Citadel Securities. In the past, the company paid to settle charges with Finra, the US regulator, for failing to properly monitor trades sent to market makers.

Robinhood and Virtu declined to comment.