Citadel Takes SEC To Court To “Protect Millions Of Retail Investors”
Citadel Securities, the well-known market maker in the Robinhood/GameStop drama, is heading towards a collision with the Securities and Exchange Commission (SEC). On October 25th, both parties have a court date to settle a dispute over changes the SEC has introduced surrounding high-frequency trading and D-Limit orders.
Citadel Securities’ Role in the Equity Market
As we have previously covered, the pathway between an executed and a settled trade can be treacherous. This is why the SEC allows FAST agents like Computershare to bring in extra reliability. As a market maker, Citadel Securities plays a key role between traders and brokers. Synonymous with liquidity providers, market makers ensure that assets can be exchanged without much friction or delay.
This means that Citadel Securities covers both sell and buy orders (ask/bid spreads) for market participants. This allows assets to be exchanged quickly for price quotes the traders want. In return, Citadel Securities, or any other market maker, gets a small cut of each trade.
In practice, this means that Citadel Securities receives orders and sells them for a bit more than it’s willing to buy them for. Ken Griffin’s company boasts that it covers about 27% of the US’ entire equity market, so the bulk of the market maker’s profit comes from trading volume.
What is a D-Limit Order?
The D-Limit order, which is short for a discretionary limit order, issued by the SEC and proposed by the IEX on August 26, 2020, interferes with this business model.
“A D-Limit order could be a displayed or non-displayed limit order that, upon entry and when posting to the IEX [Investors Exchange] order book, is priced to be equal to and ranked at the order’s limit price.”
IEX goes into greater detail here.
Simply put, if the price of an asset changes unfavorably after traders give out the order – constituting latency – the D-Limit order would protect them from the shift. Market makers engaged in high-frequency trading (HFT) commonly buy or sell orders instantaneously, preventing other market parties from adjusting their orders.
In short, the D-Limit order is an AI algorithm that prevents arbitrage players, like Citadel Securities, from picking up LIT orders – Limit-if-Touched (LIT) orders.
A LIT order is an ask/bid order held in the processing system until the specified price is triggered/touched. Because they are no longer available to be plucked indiscriminately, the D-Limit order widens the competitive space between market makers.
Citadel Securities Takes Issue with D-Limit Orders
Ahead of the court battle with the SEC, a Citadel Securities spokeswoman framed the issue as one in which the D-Limit order places a burden on retail traders:
“The SEC failed to properly consider the costs and burdens imposed by this proposal that will undermine the reliability of our markets and harm tens of millions of retail investors,”
Citadel Securities has claimed that this proposal will endanger the integrity of the entire US equity market. Although it is still unclear how that would be the case, the firm suggested it could possibly put into doubt whether a posted quote is genuine.
Citadel Securities, as a high-frequency trader (HFT) and market maker, relies on processing up to 37% of all US-listed retail trading volume. Additionally, HFT makes for approximately 50% of US equity trading volume.
Without the D-Limit order, latency arbitrage makes it possible to buy a stock on another market before its price has been adjusted. More so, it makes it possible to short stocks, which has been the subject of a pending lawsuit against Citadel Securities for conspiring with Robinhood.
Furthermore, the SEC’s Chair, Gary Gensler, named Citadel Securities, without naming it, when he talked about dark pools:
”Within the off-exchange market maker space, we are seeing concentration. One firm has publicly stated that it executes nearly half of all retail volume.”
Presently, there are hundreds of platforms to execute stock orders – 13 exchanges, 59 dark pools and over a hundred brokers that internalize order flows like Robinhood. By accepting the D-Limit order from the IEX, Gensler aims to mitigate the monopoly of certain market makers, having previously noted that:
“…as a significant and growing share of retail orders are routed to a small, concentrated group of wholesalers, certain market makers have more data than others.”
Therefore, when it comes to market integrity, it would seem that more competition and less concentration of data would be more conductive, not less, as the Citadel Securities spokeswoman claims. Interestingly, other major market players – Vanguard Group, Allianz Global Investors, the New York State Common Retirement Fund – have already accepted the IEX proposal.
Do you think there is merit to Citadel Securities’ claim that the new order would bring chaos into the market, or is it simply a matter of reduced profits?