Breakingviews: Citadel Securities is a double bet on volatility

Citadel Securities’ new investors are taking a bet on inefficient markets and ineffective government. Ken Griffin’s giant market-maker has opened itself up to outside investment, with $1.2 billion in new money from Sequoia Capital and cryptocurrency firm Paradigm. The investment will look wise if market activity continues to soar, and politicians’ attacks on big financial firms continue to flop.

Citadel Securities, which buys and sells everything from stocks and options to Treasuries and exchange-traded funds to meet market demand, made a record $6.7 billion of trading revenue in 2020, according to Bloomberg, as pockets of the market swung wildly around. Whether Covid-19 fades or persists, it’s easy to see how trends like the increasing electronification of markets, and investors’ demand for short-term liquidity, would help a business that makes money exploiting microscopic gaps between buy and sell orders.

But Citadel Securities’ future also hangs on some things going wrong – specifically, politicians being unable to get their talons into its trading volumes. For example, a financial transaction tax, which the White House in March said was an idea that merits more investigation, would throw plenty of grit into Griffin’s wheels. It’s a move that the Congressional Budget Office reckons would net more than $100 billion a year, but would severely impair the economics of high-frequency trading. It’s also unlikely in a finely-balanced Congress.

Other risks include a U.S. Securities and Exchange Commission investigation launched by chief watchdog Gary Gensler into so-called payment for order flow, where market-makers like Citadel Securities pay brokers like Robinhood Markets to route customers’ orders their way. That too would trim the volume of trades pouring into Griffin’s machine if investors cut back on their activity.

Assuming the money goes to Citadel Securities itself, the $1.2 billion investment isn’t likely to be transformational financially. It equates to just over a quarter of the company’s EBITDA in 2020, according to Bloomberg. Still, the investment is a signal that some big-name investors have picked up one signal very clearly: if the future consists of bumpy markets and even bumpier politics, Citadel Securities’ defensive walls should remain sturdy.

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BREAKINGVIEWS