A Deep Dive into Citadel Securities’ Track Record of Anti-Transparency
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A Deep Dive into Citadel Securities’ Track Record of Anti-Transparency

Citadel claims to serve brokerages as an impartial market maker—but the data suggests otherwise.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Citadel Securities’ involvement in the GameStop revolt has shone a spotlight on underhanded dealings. Public records show how Citadel has been fined multiple times—yet such fines seem to be chalked up as the cost of doing business. The real expense burdens retail investors however, which certain regulatory agencies were designed to protect. What happens when regulators have little to no effect in discouraging such activity?

Inevitable Foibles of a Centralized Financial System

As with most things in life where human interest is involved, there is a chasm between how something is supposed to work and how it actually works. This has long-been accepted as predictable, something that has to be taken into account of doing business. At times when this self-evident truth was rejected, utopian ideologies stepped in, only to make life far worse.

However, we have largely moved on from all-encompassing ideologies onto piecemeal fixing of problems. The chasm between the nominal and the practical is now bridged by regulatory agencies. Their purpose is to balance public interest with the private one. Unfortunately, the evidence is growing that this technocratic approach too is failing:

  • Financial Crisis of 2007 – 2008 caused by banks joining hands with hedge funds to engage in speculative derivatives trading. The government had to bail them out via TARP (Troubled Asset Relief Program), putting the $498 billion bailouts bill to taxpayers, which accounted for 3.5% of 2009’s GDP.
  • The famous 2014 Princeton study which revealed that average citizens have near-zero influence on the formation of policies. This was later confirmed in 2019 by USA TODAY and the Arizona Republic after a two-year investigation revealed that about 10,000 bills introduced during an 8-year span were directly copy-pasted from corporate lobby groups. Of those, 2,100 became laws.
  • The global sensation of GameStop’s short squeeze became in many ways digital reincarnation of the defunct Occupy Wall Street movement. Social media platforms were flooded with the sentiment that you should buy GME stock not to make a profit but to bring pain to short-selling hedge funds. One could say it pushed the envelope of socially responsible investing (SRI)—an entirely different manner than what is conventionally known.

All of this leads us to the current predicament. When trying to play by the rules of engagement, retail investors tend to be de-platformed from the battle.

Acute Conflict of Interest between Market Makers and Brokerages

In January 2020, popular stock trading brokerages implemented trading restrictions on GME, along with other short-squeezed stocks, as soon at became apparent that hedge funds would lose even more billions than they already had lost. However, the relationship between the most popular trading app, Robinhood, and Citadel Securities, one of the key hedge funds involved with GME’s short-squeeze, is particularly troubling.

To offset its pioneering zero-commission trading feature, Robinhood’s income comes from selling order flows. As a market maker, Citadel buys them for the purported purpose of ensuring that traders get the best market prices. To give you an idea how lucrative the selling of these order flows is, Robinhood sold them for $271 million in the first half of 2020 alone.

Likewise, a competing online brokerage, TD Ameritrade, made $560 million during the same time period. While Citadel may say they use this data to improve their trading algorithms, the fact remains that order flows give market makers like Citadel critical trading patterns from retail investors. If the same market maker, Citadel Securities, is also a hedge fund trying to short-sell GME, would it be reasonable to think they would not leverage trading patterns from order flows?

How Big is Citadel Securities?

Everyone understands that you can accurately gauge a person by their past behavior. At the end of last year, the SEC had already fined Robinhood for $65 million for failing to disclose its income sources. Furthermore, recent hearings before the U.S. House Committee on Financial Services had revealed multiple problems with the short-selling process itself.

One could speculate whether this was intentionally set up in such a manner. Of more importance is contextualizing Citadel Securities within the established trend we have noticed for the last couple of decades. If we assume the following trajectories to be true, how does Citadel come out looking?

  • Debt-based economy is becoming increasingly fragile to perceptions and smaller failures.
  • Therefore, financial institutions that become too big, in large part due to risky behavior, are not allowed to fail, thus introducing even greater moral hazard.
  • In turn, this leads to financial institutions viewing violations and fines as costs of financial friction.

Citadel is not only a market maker or a hedge fund but a conglomerate. Citadel Advisors LLC holds $384 billion in assets under management (AuM). Although Citadel Securities has at least $234 billion in AuM, which is a pittance compared to BlackRock’s $8.7 trillion, its sway over the market is enormous. According to Bloomberg Intelligence, Citadel is right up there with NYSE and Nasdaq in terms of U.S. stock trading volume.

Image credit: qz.com

In other words, despite engaging in different financial activities, the growth of retail trading has grown to such an extent that a market maker like Citadel is encroaching on the world’s largest stock exchanges. This growing off-exchange space that relies on brokerages tying themselves to market makers now makes for at least 47% of the U.S. stock market.

How Do FINRA and the SEC View Citadel Securities?

Although not a part of the government, FINRA – Financial Industry Regulatory Authority – works under the SEC (Securities and Exchange Commission) to regulate brokerages as an independent body. On the other hand, the SEC’s mission is to protect investors from foul play, by going after investors who have violated securities laws.

Both FINRA and the SEC have their work full fining and censuring Citadel.

  • This FINRA report for Citadel’s activities in the period between 2017 and 2019, tracked over-reporting of 452,451 securities transactions and incorrectly reporting internal transfers as Treasury transactions, to just name the “few” types of infractions.
  • In the same report, Citadel Securities misreported transactions with affiliates as transactions with customers in 11,989 instances.
  • One of those affiliates is Citadel Securities Institutional LLC, another cog of the Citadel conglomerate but registered as a separate company, seemingly for the purpose of receiving treasuries that are then misreported.
  • As recent as March 26, 2021, FINRA fined Citadel Securities with $275,000 for various reporting violations. This is similar to the previous fine of $700,000 in July 2020 for failure to protect customer orders and ensure market transparency.

Interestingly, the current Treasury Secretary and former Federal Reserve Chair Janet Yellen received $810k for “speaking fees” from Citadel, the same hedge fund that engaged in short selling US treasuries. Exorbitant speaking fees seems to be an artefact of evolved bribes for a more cultured, technocratic society.

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If all of this rings a bell in the form of repeat-violators such as Deutsche Bank or Goldman Sachs, it’s because they are record-holders in fines. As such, they make for a steady source of income, as they keep being too big to fail.

A Way Out of Centralized Finance

If all of this sounds too complicated and obtuse, it’s because it is. Much more so than the ongoing Ethereum 2.0 upgrade, which is poised to become the wellspring of decentralized finance. Even some WallStreetBets moderators are ready to plunge into this exciting arena of automated market makers and liquidity pools on decentralized exchanges.

Furthermore, it seems that the centralized world of finance is getting even more compacted. The same actors, from the same schools, continue to circulate through various financial power centers. The Eastman Kodak scandal perfectly exemplified this, but having predictably received zero sanction. With lockdowns drastically accelerating wealth transfer and further centralization to set up a new kind of society, weening off of these systems looks to be a legitimate potential reality.

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Do you think there is a threshold for institutional credibility, or it can be managed indefinitely? Let us know in the comments below.

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