Global firm Citadel Securities has long played a big role in the US stock market – in terms of dollar value, it acts as principal to around $35 billion of equity trades a day – but in 2016, the Chicago-based company used its heft to push changes it hopes will make the entire equity market more robust, from cash through to options and exchange-traded funds (ETFs).
Since May, the firm has been a designated market-maker (DMM) at the New York Stock Exchange (NYSE) – a business it purchased from New York-based rival KCG – giving it additional trading responsibilities for around 1,500 stocks, including global brands such as Coca-Cola, Johnson & Johnson and Sony.
"On any given day, any market-maker can provide liquidity on NYSE. But the DMM has the responsibility and the obligation to provide liquidity, even during volatile days. If you are not a DMM, you can turn off your machines and step away from the market, but we have to be there all the time and make sure every stock we manage is trading in a fair and orderly way," says Jamil Nazarali, head of execution services at Citadel in New York.
The obligations might be the same for all DMMs, but Citadel is discharging them differently. Under KCG, 76% of the stocks in the portfolio were open for trading at 9.30am eastern time. Under Citadel, that figure has been 96%.
Opening those stocks for trading earlier might sound like a change that benefits Citadel more than anyone else – it's open for business on more stocks, for longer – but NYSE open times became a point of controversy after the US stock market crash of August 24, 2015.
Almost half of NYSE-listed equities were not open for trading at 9.40am that morning, while those that did open were trading well below the previous day's close. This affected price discovery for the entire market, causing dislocations and disruption for ETFs as well as cash, according to New York-based BlackRock, which published a white paper on the lessons of the episode in October 2015.
The asset management giant called for more "transparency and timeliness" at the primary market open, and Citadel is trying to follow through.
If there was an award for liquidity provider of the year – for bank or non-bank – they would win them both. They have raised the bar
A Citadel customer
"On NYSE, we have advocated for a number of changes that would strengthen the markets, such as for more stocks to open at exactly 9.30am eastern time. When more stocks open at 9.30 the market is more efficient because ETFs and derivative instruments can be priced more accurately," says Nazarali, who also sits on the US Securities and Exchange Commission Equity Market Structure Advisory Committee.
It's the kind of move clients have welcomed. "If there was an award for liquidity provider of the year – for bank or non-bank – they would win them both," says a Citadel customer. "They have raised the bar on their competitors, have excellent customer service and offer good price improvement for clients."
The 2015 crash also taught Citadel that it needed to make continuous improvements to its technology and infrastructure so it can brace for similar types of events in the future. One such outlier was the day the UK voted to leave the European Union. While market participants knew it was a date to watch, market activity and volatility remained an unknown quantity.
"It was a non-event for us," says Nazarali, who saw the firm trade $65 billion on the day – double the firm's typical volume. "We spent weeks preparing for it, making sure our capacity was expanded, which included adding new machines and upgrading our databases. We had to be prepared for volume and the possibility competitors might go down, too."
Identifying best talent
The firm had a strong year during more normal trading conditions, too. Thanks to the SEC's National Best Bid and Offer (NBBO) requirement in the US, brokers must execute client orders at the best bid or offer. That suits Citadel's model to a tee.
"We provide better, tighter prices than anyone else. We can do that because of our strengths in quantitative analytics, technology and risk management. We're also better at identifying the best talent and hiring them – our culture of performance and results speak for themselves. It's a virtuous cycle," says Nazarali.
The numbers are impressive. In terms of dollar value, the firm acts as principal to around $35 billion shares a day. In the retail market, Citadel has a 37% market share, which has grown from 34% since the beginning of 2015, consolidating its lead ahead of the likes of KCG. It is also principal to 30% of all retail listed options.
"We execute 17% of total consolidated volume in the US. More than one in six shares that trades involves Citadel," says Nazarali.
Correction, January 26, 2017: Citadel acts as principal to around $35 billion of equity trades a day – not $1 billion as previously stated. An inaccurate reference to the percentage of the time Citadel provides the best price for stock trades was also removed. Citadel traded $65 billion on the day of the Brexit vote, not $30 billion as previously stated.
The week on Risk.net, March 10-16 2018Receive this by email