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Case Study: Deconstructing Citadel Securities

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  • 57 Pages
  • April 2019
  • Region: Global
  • Alphacution Research Conservatory, LLC
  • ID: 4774136

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.

Table of Contents

  • Legend In The Making
  • Nested Strategy Architecture
  • Asset Management Ecosystem Map
  • The Privatization Of Alpha?
  • Case Study Data Sample
Table of ContentsTable of Exhibits
  • Secret Sauce
  • Scaling The Book
  • Statistical Arbitrage Overlay?
  • Strategy Attribution
  • A Measure Of Market Resiliency
  • Evidence Of Strategy Capacity
  • Predictions And Closing Thoughts
  • Payments For Order Flow
  • Entering The Etf Market
  • Citadel Securities (Europe) Ltd
About the Publisher
  • About the Author
  • Contact
Table of Exhibits
Exhibit 1: Citadel Securities, LLC – Estimated Market Share, US Equities Market Making Business, 2003 / 2018
Exhibit 2: Theoretical Nested Strategy Architecture
Exhibit 3: Asset Management Ecosystem Map – Focus On Structural Alpha Zone (V1.1)
Exhibit 4: Top 100 Players In US Listed Market Structure Schematic (V1.0)
Exhibit 5: Asset Management Ecosystem Map – Expanding Schematic Into Active And Passive Management Zones
Exhibit 6: Asset Management Ecosystem Map (V1) W/ Sample Mgrs., Est. Intraday Threshold Highlighted, 2017
Exhibit 7: Citadel Securities, LLC – Portfolio Value Segmentation By Product / Asset Class, % Of Gross Value, 2009 / 2018
Exhibit 8: Citadel Securities, LLC – Cash Product Segmentation, % Of Net Value, 2009 / 2018
Exhibit 9: Citadel Securities, LLC – Net Portfolio Fair Value By Key Cash And Derivatives Segments, 2003 / 2018
Exhibit 10: Citadel Securities, LLC – Net (Cash, Derivatives) Equity Portfolio Value W/ Vix Overlay, 2003 / 2018
Exhibit 11: Citadel Securities, LLC – Net Portfolio Value (% Of Gross) W/ Vix Overlay, 2003 / 2018
Exhibit 12: Spot Trading, LLC - Net Portfolio Value (% Of Gross) W/ Vix Overlay, 2001 / 2016
Exhibit 13: Citadel Securities, LLC – Avg, Range Of Net Cash Equities Value By Industry Sector (% Of Gross), 2009 / 2016
Exhibit 14: Citadel Securities, LLC – Net Cash Equities Value Range By Industry Sector (% Of Gross), 2009 /
Exhibit 15: Citadel Securities, LLC – Equity Dollar Neutrality Ranges – All Sectors (% Gross Exp.), 2009 / 2016
Exhibit 16: Citadel Advisors Lineage – Top 10 13F Position Value By Strategy (% Total Strategy Value), Q1-2008 / Q4-2018
Exhibit 17: Citadel Lineage– US 13F Position Reporting Entities And Strategy Lineages, 1998 / 2018
Exhibit 18: Citadel Advisors Lineage – Total, Market Making And Hedge Funds Long Position Count, Q1-1998 / Q4-2018
Exhibit 19: Citadel Advisors Lineage – 13F Position Count Segmentation By Strategy (% Of Total), Q1-2008 / Q4-2018
Exhibit 20: Citadel Advisors Lineage – 13F Avg Total, Strategy Positions Segmentation By Product Class, Q1-2008 / Q4-2018
Exhibit 21: Citadel Advisors Lineage – 13F Gross Notional Long Market Values By Strategy, Q1-1998 / Q4-2018
Exhibit 22: Citadel Securities, LLC –Comparison Of Fair, Notional Market Values W/ Implied Leverage Ratio, Q4-2008 / Q4-2018
Exhibit 23: Citadel Securities, LLC – Member's Capital, 2003 / 2018
Exhibit 24: Citadel Advisors Lineage – 13F Avg Strategy Value Segmentation By Product, Q1-2008 / Q4-2018
Exhibit 25: Citadel Advisors Lineage – 13F Strategy Value Segmentation (%), Q1-2008 / Q4-2018
Exhibit 26: Citadel Securities Lineage – 13F Gross Notional Long Market Values By Product Class, Q1-2008 / Q4-2018
Exhibit 27: Citadel Securities, LLC – Net Derivative Exposure Before And After Netting (% Gross Derivatives), 2009 / 2018
Exhibit 28: Citadel Securities Lineage – Avg. Position Size In Shares By Cash Product Class, Q1-2008 / Q4-2018
Exhibit 29: Citadel Securities Lineage – Ranking Of Stock And Etf Positions In Shares, Log Scale, Q4-2018
Exhibit 30: Comparison Of Average Position Size In Shares By Strategy, Q1-2008 / Q4-2018
Exhibit 31: Citadel Advisors Lineage – 13F Position Value Analysis, % Of Segment Values, Q1-2008 / Q4-2018
Exhibit 32: Citadel Advisors Lineage – 13F Position Values By Strategy (% Of Strategy Val.), Q1-2008 / Q4-2018
Exhibit 33: Citadel Securities Lineage – Max. 13F Position Value (% Total Strategy Value), Q1-2008 – Q4-2018
Exhibit 34: Citadel Securities Lineage – Average 13F Market Making Position In Shares, Q1-2008 / Q4-2018
Exhibit 35: Citadel Securities Lineage – Average 13F Market Making Position In Shares By Product Class, Q1-2008 / Q4-2018
Exhibit 36: Citadel Securities Lineage Vs. Citadel Advisors Lineage – Average 13F Position In Shares By Product Class, Q1-2008 / Q4-2018
Exhibit 37: Citadel Securities Lineage – Average Position Value By Product Class, ($000's), Q1-2008 / Q4-2018
Exhibit 38: Citadel Securities Lineage – Average Position Value By Product Class Including Etf Options, ($000's), Q1-2008 / Q4-2018
Exhibit 39: Citadel Advisors Lineage – Total Gross Notional Long Market Value (Q1-1998 / Q4-2018) W/ Product Class Segmentation (Q4-2007 / Q4-2018)
Exhibit 40: Buyside Leaderboard – 13F Gross Notional Long Market Values ($000's), Q4-2000 / Q3-2018
Exhibit 41: US Equity Markets – Order Routing Revenue, 2013 / 2018
Exhibit 42: US Equity Markets – Estimated Order Routing Payments, 2013 / 2018
Exhibit 43: Citadel Securities, LLC – Payments For Order Flow, 2007 /
Exhibit 44: Citadel Securities Lineage – Comparative Analysis, Etf Position Count, Q1-2003 / Q4-2018
Exhibit 45: Citadel Securities (Europe) Ltd – Net Trading Income, 2006 / 2017
Exhibit 46: Citadel Securities (Europe) Ltd – Product Segmentation (% Gross Exposure), 2006 /



Companies Mentioned

  • AQR Capital Management
  • Baupost Group
  • BlackRock
  • BNP CooperNeff
  • Bridgewater Associates
  • Charles Schwab
  • Citadel Securities
  • Citadel Securities (Europe) Ltd
  • E*Trade
  • Flow Traders
  • G1 Execution Services
  • Goldman Sachs
  • GTS Securities
  • Hudson River Trading
  • Interactive Brokers
  • Jane Street Group
  • Knight Capital Group
  • Millennium Management
  • Morgan Stanley
  • Point72 Asset Management
  • Renaissance Technologies
  • Robinhood Financial
  • Soros Fund Management
  • Sun Trading
  • Susquehanna International Group (SIG)
  • TD Ameritrade
  • Timber Hill
  • Tower Research Capital
  • Two Sigma Investments
  • UBS
  • Vanguard
  • Virtu Financial
  • Wolverine Trading