The reach of Citadel founder Ken Griffin’s empire was on full display during the rise and fall of GameStop Corp. -- and Washington took note.
One of his businesses executed many of the trades that drove the retailer’s shares into the stratosphere last month, while another provided a $2 billion lifeline to a hedge fund that got crushed by the stock surge. But some lawmakers are wondering if such pervasiveness poses a threat to markets, as Congress seeks to determine whether the Reddit-fueled trading frenzy was just a blip or a sign that something is broken on Wall Street.
Griffin, 52, will be in the spotlight Thursday, when he’s scheduled to testify before the House Financial Services Committee. With Capitol Hill awakening to Citadel’s power, the firm may have much to lose if the government gets serious about overhauling rules that underpin the U.S. stock market.
What lawmakers learned so far has triggered demands for investigations into potential conflicts of interest and fueled conspiracy theories that Citadel teamed up with online brokerage Robinhood Markets to harm retail investors -- claims that both firms have repeatedly rejected. Explaining Citadel’s inner workings will be a priority for Griffin, who’s about to face a potentially hostile audience.
“Ken sits in a unique position,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “The more roles you play in the industry and the bigger roles you play work to your advantage until something goes wrong and they’re looking for somebody to blame. Then those bigger roles make you a bigger target.”
Citadel Securities, the company’s trading unit, “has long been a driving force in advocating for more open, fair and transparent markets,” spokeswoman Julia Kosygina said in a statement. “As a result, retail investors today benefit from faster execution, better prices and lower costs.”
Citadel’s success has come in large part from the complexity of U.S. markets and taking advantage of the migration of trading from established venues like the New York Stock Exchange to a fractured system where shares are swapped in dark pools or internally at high-frequency-trading firms. Citadel Securities handled 27% of all daily trades last year, generating $6.7 billion of revenue. The separate hedge fund business oversaw $34 billion at the start of 2021.
Citadel Securities was among the first to invest heavily in the technology that now dominates the trading business. One way the firm makes money is by paying brokerages such as Robinhood for the right to handle customer orders and then capitalizing on minuscule price changes.
Griffin, one of the largest donors to Republicans, is no stranger to Washington. He forcefully defended Citadel in a 2014 appearance before the Senate Banking Committee after the firm was portrayed as a high-speed-trading villain in “Flash Boys,” the best-selling book by Michael Lewis.
He will have to be just as effective when he testifies this week, along with leaders of Robinhood, Reddit and Melvin Capital Management, the hedge fund that he and Steve Cohen’s Point72 Asset Management helped shore up after it lost 53% betting against GameStop. Keith Gill, the trader known as Roaring Kitty who posted a series of now-infamous videos urging people to jump on the GameStop bandwagon, will also testify.
Citadel was drawn into the morass after Robinhood was forced to prevent customers from buying shares of the video-game retailer and others because the volume overwhelmed the brokerage’s required capital buffers. A number of lawmakers immediately called for a probe, including asking whether Citadel had ordered the halt because its hedge fund business was taking losses.
Though the assertion was quickly batted down by the companies -- including in a sworn affidavit from a top Robinhood executive filed earlier this month in federal court -- the suspicion provoked a strange-bedfellows response. Demands for answers came from both ends of the political spectrum, with Republican Senator Ted Cruz of Texas and Representative Alexandria Ocasio-Cortez, a New York Democrat, finding rare common ground, if only for a moment.
Much of that populist reaction is likely to be on display Thursday.
Representative Jesus “Chuy” Garcia, an Illinois Democrat, said he’s “eager to hold these hedge fund managers and tech giants to account” and ensure they’re properly regulated. “Hedge funds and Wall Street elites get rich off instability in our financial system and don’t care if making a quick buck means playing with people’s livelihoods,” he said in a statement.
Still, Citadel will have support at the hearing, particularly from Republicans, some of whom said bringing in Griffin was a political ploy. “Citadel’s inclusion in the hearing is a sideshow to some of the real questions we should be asking about what happened and what’s going on with the retail investor,” said Representative Trey Hollingsworth of Indiana.
Citadel’s influence in Washington is hard to overstate.
Its executives are among those in the finance industry that regulators frequently consult with in making decisions, according to people familiar with the matter who asked not to be identified discussing private conversations.
The firm has also hired several former Securities and Exchange Commission officials, including Stephen Luparello, who ran the agency’s trading and markets division and is now Citadel Securities’ legal chief. The hedge fund counts former Federal Reserve Chairman Ben Bernanke as a senior adviser, and U.S. Treasury Secretary Janet Yellen, also an ex-Fed chief, collected more than $800,000 in speaking fees from Citadel while she was out of government.
While Citadel isn’t alone in having trading and asset-management arms, the firm’s growth has prompted some lawmakers, regulators and Wall Street executives to ask privately whether it has essentially become what Goldman Sachs Group Inc. was in the years before the 2008 financial crisis -- an entity that’s less regulated than the biggest banks but with such a large footprint that it potentially poses a danger to the financial system. Others, who also asked not be identified, said they see Citadel as the equivalent of the New York Stock Exchange with a hedge fund bolted on, a recipe for conflicts.
Lawmakers want to know whether Citadel has too big a grasp on the market and if it gains any advantages from the retail trades it buys. One concern, which Citadel disputes, is that its hedge fund might benefit unfairly by getting an early peek at order flows that the securities arm purchases.
Citadel says its hedge fund is kept separate from the securities operation. While the latter does trade for its own accounts, it is legally barred from doing so ahead of the orders it receives.
Paying for order flow is banned in some countries, including the U.K. But in the U.S., the practice has made it much cheaper for individuals to buy and sell stocks. Based on the revenue it receives from Citadel Securities and others, Robinhood decided to offer commission-free trading, and most other major online brokers eventually followed suit.
Regulators have brought a number of enforcement actions in the area. In 2017, Citadel Securities paid more than $22 million to settle a case with the SEC, which alleged the firm misled customers about whether they were getting the best price on trades. Last year, it was fined $700,000 by the Financial Industry Regulatory Authority over allegations the firm traded ahead of some orders. The firm didn’t admit wrongdoing.
A frequent talking point for Citadel Securities executives is that the firm has been good for retail investors. The company said it improved the price of more than $3 billion in retail stock and options trades last year, adding that the benefits it provides to markets were clear during the GameStop tumult.
“When others were unable or unwilling to manage the heavy volumes, large brokers firms depended upon our capabilities to handle the deluge of orders,” Citadel’s Kosygina said in the statement.
Isaac Boltansky, an analyst at Compass Point Research & Trading, said he doesn’t expect a major policy response from Congress, given the market-structure intricacies underlying the GameStop controversy.
“As long as Ken Griffin sticks to his talking points and doesn’t take the bait,” he said, “Citadel will be fine.”
This article originally appeared on Bloomberg.
