Case Study: Deconstructing Citadel Securities

It was July 18, 2018. The scene was the 8th annual Delivering Alpha Conference. One of the main highlights of the event is Andrew Ross Sorkin’s fireside chat-style interview with Citadel founder, Ken Griffin. Among the many topics covered, the discussion confirmed that “1 out of every 5 [US] stocks is trading through Citadel Securities.” In complement to this claim, a Risk.net article, dated November 27, 2018, further revealed that Citadel Securities’ “total market share in US equities now exceeds the 20% it had 12 months ago and the 17% it clocked two years prior.”

Assembling these disparate fragments together with a few additional clues of data lifted directly from the Citadel Securities website, it is possible to illustrate a very impressive path that culminates, in the author’s estimation, at a US equities market share of between 23.5% and 25%, as of the end of 2018, based on the prior year-over-year growth rate. This achievement could otherwise be translated to a market share that is now closer to 1 out of every 4.3 US shares traded.

But, of course, there’s always another side to the proverbial coin: Later in the Delivering Alpha interview, Mr. Griffin underscores his long-held position that “competition creates value for consumers” and “there’s always room for more competition.” Now, if you detect the paradox in these opening statements – the one that exists between high levels of market concentration and the value of more competition – then you are already tuned in to a central theme of the story we are about to present here. To his credit, Mr. Sorkin eventually points out this paradox during the interview. Mr. Griffin’s response to being called out on the apparent contradiction is something we are going to bookmark for later.

Legend in the Making
The early highlights of Citadel are well established among students of the hedge fund and proprietary trading arenas; and, given the extremes of financial and technological success that have taken root here, they are well known to much of the broader financial services industry, too. Certainly, recent tales of the founder’s trophy-hunting exploits in residential real estate have helped to fuel the latest potency of ongoing mystique and mythology surrounding the organization.

Founded in 1990 by 21-year old Harvard University student, Ken Griffin, and initially based on a convertible bond arbitrage strategy, Citadel has consistently evolved in a manner that solidifies its reputation as one of the most legendary trading and asset management powerhouses of the modern era. For example, as of 2017, Citadel’s hedge fund business was ranked by Institutional Investor as #3 in the category of all-time profits since launch, trailing only Ray Dalio’s Bridgewater Associates (#1) and George Soros’ eponymous Soros Fund Management (#2). If you’re into forecasting, this achievement is made by a firm that is 15 and 17 years younger than the other legendary managers it trails in this category, respectively.

Today, this very same hedge fund side of the business - managed by another legal entity known as Citadel Advisors, LLC today - sits atop an estimated $30 billion in assets under management (AUM), putting it at #11 in a ranking of top hedge funds by AUM (trailing Seth Klarman’s highly-concentrated, long-only, debt-focused hedge fund management platform, Baupost Group, Inc., at #10), according to Q2-2018 data from Pensions and Investments.

Headquartered in Chicago, with satellite operations spanning key global financial centers, Citadel’s broad portfolio of market strategies is rivaled by few, if any, others. And with limited exceptions (such as digital assets, to date), Citadel – both the market making side as Citadel Securities LLC and the hedge fund management side as Citadel Advisors LLC - is active in most cash, derivative, listed and OTC markets for financial and commodity products around the world, typically on the cutting edge of the most automated and data-intensive methods possible. To economize on words for a change: They trade just about everything that moves with unrivaled quantitative, automated and technological prowess. Pick your category.

On this basis, and despite profound dominance in US-listed equity markets, the author has historically argued that there is actually no core strategy here. In fact, we believe that Citadel’s “secret sauce” - the blessing (and the curse) that Ken Griffin has bestowed upon and infused throughout the only place he has ever worked - is a maniacal sensitivity to processing. Moreover, we believe this is true no matter the underlying product, asset class, region, or set of signal-producing inputs. The application of intelligence in global markets based on unprecedented data management assets and human capital skills is at the heart of everything that Citadel pursues - and the results, including the expansive and expanding trophy case of its founder, speak volumes.

So, it is with this brief prelude of mostly retreaded scores and highlights as a backdrop that we embark upon our mission to tell a version of the Citadel story that has never been told before because it is based on an assembly of their data that has never been assembled like this before. Thankfully, our accomplice for this mission is the subject of the story itself.