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Business

Citadel’s Illegal Trades — The Tip of the Iceberg?

January 27, 2023 tremendousblog 7 Comments

South Korea has fined Citadel Securities for illegal stock trades made with high frequency algorithms. From a report out last night in Reuters:

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South Korea’s financial regulator has imposed a fine of 11.88 billion won ($9.66 million) on U.S.-based Citadel Securities, saying it disturbed the local stock market with high-frequency algorithm trading.

The Financial Services Commission (FSC) said in a statement released on Thursday the firm had distorted stock prices with artificial factors, such as orders on the condition of “immediate or cancel” and by filling gaps in bid prices.

These illegal trades were no isolated incident. Regulators found improper trades in thousands of stocks over a period of nearly a year:

The firm carried out such trading on an average of 1,422 stocks per day from Oct. 2017 to May 2018, totalling more than 500 billion won worth of trades, according to the statement.

Citadel’s illegal trades stand out as some of the most egregious ever in South Korea:

The Commission said it was the first time it had imposed fines on such high-frequency trading on the South Korean stock market, which has a high proportion of retail investors and little competition among algorithmic traders.

Citadel used strategies such as flash orders to gain an illegal advantage over other traders. This practice involves offering to buy or sell and then retracting the order in a fraction of a second.

Flash orders let you see the prices at which other traders are willing to buy or sell. This gives you an illegal edge over your competition.

In Korea, Citadel used these strategies to take advantage of mom and pop retail traders, which I find particularly heinous.

Citadel’s algos don’t stop in Korea.

The firm was recently fined by the US Financial Industry Regulatory Authority (FINRA) for frontrunning its customers. By placing trades ahead of customers, Citadel made money for its own account.

Breaking the law appears to be quite lucrative for Citadel.

Citadel Securities posted record revenues of $7.5 billion last year. Citadel’s hedge fund made even more, approximately $28 billion.

I think Citadel is using these illegal flash orders all over the world. They may also be using other illicit tactics we don’t know about yet.

After all, if you go to the trouble to create a program that can make you money, why not use it in as many places as possible?

The reality is that these speeding tickets will never stop Citadel. Fines in the millions are a cost of doing business for a multi-billion dollar operation.

Securities regulators worldwide should find out what exactly Citadel is doing in their markets. If they find more wrongdoing, they should simply ban the firm from trading for a period of years.

Nothing but a severe penalty will stop them.

Who says crime doesn’t pay?

What do you think is the future for Citadel? Leave a comment at the bottom and let me know!

More on markets:

Major Hedge Fund Down 54% — Survival in Doubt

Tiger Global Losing $185 Million a Day

As Fed Rates Peak, Are Markets Ready to Take Off?

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Business

Citadel Adds Millions to AMC Options Bet

May 17, 2022 tremendousblog 6 Comments

Citadel LLC added tens of millions of dollars to its option bet on AMC Entertainment Holdings, Inc. in the most recent quarter.

Its net bullish position increased from $90 million to $125 million, according to an SEC report released yesterday. It also built a bullish position in GameStop Corp. options during the period.

The hedge fund giant held $245 million in call options and $120 million in puts, versus $191 million and $101 million respectively in February.

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This bullish position is ironic given that Citadel was a major backer of Melvin Capital Management LP. Melvin lost billions shorting AMC, Gamestop Corp., and other meme stocks last year, and may have imploded had Citadel not rescued them.

Perhaps Citadel’s patience with Melvin’s investing style has run out. Citadel has pulled out most of its $2 billion investment in the failing firm, and began adding to its AMC options position around the same time.

The SEC report doesn’t specify the strike prices or duration of the options, so we don’t know exactly what Citadel’s strategy is. It could be expecting lower prices in the short term and higher ones in the long term, or vice versa.

But I find it fascinating that this archvillain of the meme stock saga has capitulated and placed bullish bets on the same companies. It seems Citadel’s losses in Melvin’s hedge fund taught it a lesson.

What do you think Citadel’s strategy is? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Melvin Capital Faces Investor Revolt

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

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Business

Citadel Paying Over $1B a Year for Order Flow

April 14, 2022 tremendousblog 1 Comment

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Citadel Securities LLC paid $2.6 billion in payments for order flow in 2020 and 2021, according to a new report from The Trade, an industry publication.

This amounts to over $1 billion a year and dwarfs its nearest competitors:

Citadel Securities takes the top spot when it comes to payment for order flow (PFOF), forking out $2.6 billion in 2020 and 2021 according to 606 reports gathered by the US’ Securities and Exchanges Commission (SEC).

The market maker due to its dominant market share accounted for around a third of the total market spend on PFOF in 2020 and 2021, followed by Susquehanna (G1X global execution brokers), which spent a $1.5 billion and Virtu which spent $654 million in the same period.

Payment for order flow involves a market maker like Citadel paying brokers, such as Robinhood Markets Inc., for the right to process their trades. The market maker then earns a small spread on each trade they complete.

The practice has proven controversial:

It’s proved a contentious subject globally, with regulators in Europe and the US exploring the possibility of limiting the practice as some claim it does not channel flow – much of it coming from the mushrooming retail segment – based on best execution.

Payments to brokers for order flow can allow brokers to offer free trades. And at least one study found payment for order flow saves customers money.

But both Citadel and Robinhood have been fined for providing worse prices than public exchanges.

With billions at stake and an opaque market, I find payment for order flow suspect. I’d like to see published data from Citadel, Robinhood and others proving their prices are better than the public markets.

Until then, remember the words of Andrew Lewis:

“If you are not paying for it, you’re not the customer; you’re the product being sold.”
Andrew Lewis

This is the last post for this week. Tomorrow, Tremendous will be off for Good Friday.

Have a great holiday everyone! 👋

More on markets:

AMC Now #4 Most Shorted Stock

Melvin Capital Down 21% in Q1

NYSE Investigating Shopify Stock Plunge; Citadel Involved

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Business, Politics

Citadel Loans Supported Chinese Surveillance

April 7, 2022 tremendousblog Leave a comment

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Citadel made a major loan to a Chinese surveillance company in 2006. This shadowy company, which doesn’t even appear to have a website, has sold surveillance equipment to China’s Communist government.

From a new report from Crain’s Chicago Business:

…in 2006, Citadel loaned $110 million to China Security & Surveillance Technology. The company used the funds to acquire “10 of the 50 biggest surveillance companies in China.” That has opened it to charges that it “provid(ed) much of the surveillance infrastructure for the ruling Chinese Communist Party, including technology used to alert police of possible unsanctioned protests and internet cafes to track down democracy advocates and dissidents.”

Citadel CEO Ken Griffin doesn’t seem to find the loan problematic, according to a statement he released:

“In 2006, China Security & Surveillance Technology—a company listed on the New York Stock Exchange—was raising further capital to pursue growth opportunities. CS&ST was hoping to be selected as a key partner in providing security capabilities for the 2008 Beijing Summer Olympics and the 2010 Shanghai World’s Fair to ensure those events would be safe for everyone.

So what does this company do? It appears to have gone private since Citadel’s loan, but here’s how the company described itself in an SEC annual report it filed while a public company:

We are primarily engaged, through our indirect Chinese subsidiaries, in the manufacturing, distributing, installing and servicing of surveillance and safety products, systems and services, and developing surveillance and safety related software primarily for governmental entities and their affiliates, non-profit organizations, and commercial entities in China.

In other words, the company sells surveillance gear to the Chinese government, among others. Citadel’s involvement with this business is concerning, given China’s oppressive surveillance of its population.

Ethnic and religious minorities such as Uyghur Muslims are particularly hard hit. From The Guardian:

The US has accused China of committing genocide and crimes against humanity for running a mass detention, repression and sterilization campaign against Uyghurs and other mostly Muslim ethnic minorities. Countless reports have detailed detainees enduring torture, coerced abortions as well as re-education in what former secretary of state Mike Pompeo described as the “forced assimilation and eventual erasure” of Uyghurs by the Chinese government.

The surveillance system propped up by these often global companies serves to facilitate that genocide, argues Dolkun Isaa, president of the World Uyghur Congress advocacy group.

“The goal of these surveillance tactics is not only to instill fear in Uyghurs’ minds that every aspect of their behavior is monitored, but most importantly to single out Uyghurs for detention in the internment camp system,” Isaa said.

Griffin may be right that China Security & Surveillance Technology bid on an Olympic contract. But it appears that he and his company didn’t ask any questions about what else the company does.

Citadel’s “make money now, ask questions later” attitude has also made it a target of a federal investigation here in the US.

I only hope someone holds this company accountable.

More on markets:

Mass Firings at Citadel Right Before Federal Probe

NYSE Investigating Shopify Stock Plunge; Citadel Involved

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Business

Melvin Capital Down 21% in Q1

April 6, 2022 tremendousblog 3 Comments

The bleeding never seems to stop at Melvin Capital Management LP. Gabe Plotkin’s beleaguered fund lost 21% in the first quarter of 2022, according to a report just out from Bloomberg.

Melvin famously lost billions in 2021 with disastrous bets against meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc. It ended 2021 down 39%. Meanwhile, the S&P 500 gained 29%

Its losses this year may total over $1.5 billion, since it began 2021 with $12.5 billion.*

And if seas of red ink weren’t bad enough, Melvin has also been caught up in a federal investigation of illegal activity by short sellers.

Melvin’s backers seem to be finally losing their patience. Major hedge funds Citadel LLC and Point72 Asset Management LP have pulled out over $1 billion from Melvin after backing the firm during its near death experience in January 2021.

When you invest in a fund, you are hiring someone: a manager to grow your capital. So how is employee Plotkin doing?

Well, he lost a fortune, “changed strategy,” then lost another fortune. His firm could be under federal indictment any day.

In the words of a very controversial man:

More on markets:

Melvin Capital Under Federal Investigation

Melvin Capital Loses $1 Billion in 3 Weeks to Start 2022

Mass Firings at Citadel Right Before Federal Probe

*A 39% loss in 2021 would leave them with around $7.6 billion. A further loss of 21% this year would total about $1.6 billion. This may be conservative since Citadel and Point72 put more money into the fund in 2021, leaving Plotkin with more money to lose.

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Business

NYSE Investigating Shopify Stock Plunge; Citadel Involved

March 29, 2022 tremendousblog 14 Comments

Update, April 1 2022:

Shortly after publishing this post on March 29, I received an e-mail from an analyst at TrailRunner International. The firm handles “media, law, finance, and regulatory affairs,” according to its homepage.

The analyst informed me that the article from New York Magazine on which I’m commenting in this post had had a correction after I published my post. New York Magazine had incorrectly stated that the NYSE was investigating Citadel itself.

In fact, the NYSE investigation is of the price activity in Shopify shares, rather than of Citadel itself.

Since the analyst’s request seemed well-founded, I updated the post below to reflect this change to the underlying article.

I asked the analyst if his firm had been retained by Citadel and, if so, if I could speak to someone there.

He neither confirmed nor denied that his firm had been retained by Citadel, but said he’d pass the request on to them.

I can only assume the firm is working for Citadel.

Whatever any of us may think of Citadel’s business practices, I try to be fair on this blog. Hence the update to this post! 🙂

The New York Stock Exchange (NYSE) is investigating a sudden spike and crash in Shopify Inc. shares. The unusual price action may be due to trading by Citadel Securities.

From a new report by New York Magazine:

On March 18, a weird thing happened at the New York Stock Exchange. It was near the end of trading for the day, one minute before the closing bell had rung, when the price of Shopify’s stock went haywire, shooting up about $100 per share to $780 before immediately crashing down again in post-market trading. There was no sudden revelation about the business that would have caused it to jump.

Citadel seems to be behind this unusual activity. The firm had bought large blocks of the shares for a client that afternoon, resulting in an imbalance between buy and sell orders.

Next, rather than trying to bring more sellers into the market to balance it, Citadel appears to have taken advantage of the situation:

Because the amount of buy orders was so out of whack, Citadel was able to sell into the market — a move that’s allowed by the exchange. Other Wall Street players have said that Citadel could have done more to bring more sellers into the market. Either way, the price of the shares rocketed up about 13 percent in the final minute of trading, before immediately tumbling down in after-hours trading.

What exactly happened is murky, but early reports suggest Citadel dumped shares to other market participants right before the close. These bag holders quickly took a substantial loss.

There is no indication that what Citadel did was illegal or even necessarily against NYSE rules. But the function of a market maker like Citadel Securities is to ensure a liquid, functional market, not engineer giant swings in a stock for its own benefit.

I find it telling that Citadel is finding itself under scrutiny from many directions at once.

Its Surveyor Capital unit is caught up in a federal probe of short sellers. Citadel Securities faced a lawsuit after its partner, Robinhood Markets Inc, halted trades in meme stocks. (That suit was later dismissed.)

Now the NYSE is probing Citadel’s trades. If I were Ken Griffin, I’d be concerned that my company is getting too close to the regulatory and legal line.

What do you think the NYSE will find in its investigation? Leave a comment at the bottom and let me know!

More on markets:

Mass Firings at Citadel Right Before Federal Probe

Short Squeezes Could Get Much Easier Under This New Rule

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Business

Mass Firings at Citadel Right Before Federal Probe

March 18, 2022 tremendousblog 17 Comments

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Last October, Citadel LLC’s Surveyor Capital unit suddenly fired several portfolio managers at once.

In the preceding five months, half of Surveyor’s portfolio managers had either been fired or resigned. In May, Todd Barker, the head of Surveyor Capital himself, departed after 16 years at the firm.

His timing was good. All hell was about to break loose.

In November, just after the mass firings at Surveyor, Morgan Stanley’s head of block trading suddenly stopped showing up for work. The trader, Pawan Passi, had been put on leave due to a federal investigation of his conduct, Bloomberg later reported.

Passi and Morgan Stanley are under investigation for allowing hedge funds to front run large block trades of stock. A tip-off from Passi could let a hedge fund buy or sell right before a big institution, locking in profits and giving the institution a worse price.

Also ensnared in the probe: Andrew Liebeskind, Surveyor’s top trader. Passi may have fed him tips on big trades to front run.

So Surveyor suddenly fired a large group of traders right before the federal probe came to light in November. Were they either part of the alleged scheme or, worse, fall guys for top executives like Liebeskind?

We will have to wait for more information to surface in the federal investigation before we know for sure. But I find the timing….convenient.

What do you think is behind the sudden Citadel firings? Leave a comment below and let me know.

Have a great weekend everyone!

More on markets:

Melvin Capital Under Federal Investigation

FBI Raids Short Sellers

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Business

Ken Griffin Makes $2.5 Billion in 2021 as Investigation Looms

March 11, 2022 tremendousblog 1 Comment

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Citadel LLC CEO Kenneth Griffin made $2.5 billion in 2021. That was enough to give him third place among hedge fund managers in the list just released by Institutional Investor.

For Griffin, its unclear how long the good times will last. His firm is under federal investigation.

Investigators are examining the communications of Andrew Liebeskind, one of his top traders, among others. And if that weren’t bad enough, other investigators are looking into Melvin Capital, in which Citadel invested billions.

That probe too could lead to Citadel.

I found it interesting that Griffin was bested by Jim Simons of Renaissance Technologies LLC, who earned $3.4 billion, putting him in first place. Simons’ firm has been a buyer of meme stocks including AMC Entertainment Holdings Inc.

Perhaps it’s easier to swim with the current than against it.

Not being under federal investigation probably helps too.

Have a great weekend everyone!👋

More on markets:

Melvin Capital Under Federal Investigation

FBI Raids Short Sellers

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Business, Politics

Ken Griffin Making Hundreds of Millions in Campaign Contributions

January 31, 2022 tremendousblog Leave a comment

Hi everyone! I got a late call time on the movie I’m shooting today, so I wound up having time to chat with you guys after all!

And I’ve got an interesting one for you today.

Billionaire hedge fund manager Kenneth Griffin has given hundreds of millions of dollars to political campaigns in recent years, Crain’s Chicago Business reports this morning. That includes $86 million in federal races in just the last 3 years.

$63 million of that came in 2020 alone. And if that weren’t enough, the Citadel LLC founder put $122 million into elections just in Illinois!

The money appears to be opening doors for Griffin and Citadel:

“When you’re making very large political contributions, it increases your access to sitting officeholders if they win,” says Peter Quist, deputy research director at OpenSecrets, the nonpartisan research group that tracks political spending nationally. Griffin’s increased spending “seems to indicate that he is being successful at being able to set up those meetings.”

In the last year, Citadel has gone from a large but under-the-radar fund to one of the most controversial companies in America. It is the subject of lawsuits, parodies, and lawsuits about parodies.

Perhaps Griffin is aiming his firehose of cash at politicians in order to protect his business from regulation.

Some call in influence peddling. The Russians call it “krysha,” or roof.

Either way, any professional investor like Griffin is going to want to see a return on that investment. The question is, why should anyone, especially a highly controversial billionaire, be allowed such disproportionate influence on our elections?

More on markets:

Citadel Can’t Beat the S&P 500, Despite High Fees

Melvin Capital Loses $1 Billion in 3 Weeks to Start 2022

Engineering an AMC Short Squeeze in Dark Pools

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