Exchanges
Wall Street’s best frenemy
Wall Street underestimates Ken Griffin at its peril
News that Ken Griffin’s trading behemoth Citadel Securities — along with asset management giant BlackRock — are part of a group backing a new national stock exchange based in Dallas was largely shrugged off on Wednesday.
After all, other recent efforts to uproot lower Manhattan from its century-long position as the key chokepoint of global capitalism haven’t moved the needle much. Remember IEX? The Long-Term Stock Exchange? Both failed to make much of a dent in the dominant position of the New York Stock Exchange, Nasdaq, and CBOE.
And the $120 million in funding the new exchange, TXSE, was touting is — let’s face it — peanuts when it comes to the expense of building and maintaining the type of trading technology that would be needed to establish a reliable electronic exchange.
But this is missing something important: It’s called Ken Griffin.
The billionaire financier — a hedge-fund manager and market-making and trading technology entrepreneur — poses a unique competitive problem that Wall Street has repeatedly failed to solve in recent years, as his ever-expanding trading empire has been able to lop off larger chunks of business Wall Street once owned. (This is a big part of the reason Griffin is personally now worth more than $40 billion.)
(Disclosure: Sherwood News is an editorially independent subsidiary of Robinhood Markets, Inc. Citadel Securities has a business relationship with Robinhood.)
Making a market
Since Griffin established his market-making unit, Citadel Securities, in 2002, it has grown into a significant — and in some instances, dominant — player in businesses long controlled by Wall Street institutions.
Most of these businesses involve Wall Street’s core competency: matching buyers and sellers for a range of investments, including options, foreign exchange, and corporate and government bonds. Citadel Securities has also kicked in the door of the incredibly profitable interest rate swaps trading business that was long a cherished, and closely guarded, profit center for major Wall Street banks like J.P. Morgan, Goldman Sachs and Bank of America.
How has Griffin and his hand-picked executives been able to do it? Well, over the years, I’ve spoken privately with Wall Street traders and executives who say it has to do with the unique positioning Griffin’s empire has as Wall Street’s best frenemy.
Here’s what they say: While his trading division — he is the founder and largest shareholder in Citadel Securities, though no longer runs it day-to-day — is perhaps Wall Street’s biggest competitor, he is also the CEO of a $60 billion-plus hedge fund known as Citadel Advisors — legally distinct from the Citadel Securities trading arm — which is one of Wall Street’s biggest clients.
Essentially, Wall Street is terminally conflicted about how to respond to Griffin’s competitive incursions.
Executives are reluctant to declare an all-out competitive war with Griffin, for fear of A) losing and B) jeopardizing the lucrative trading commissions and prime brokerage business that his hedge fund throws their way. There’s also a C) wild card, in that in their heart of hearts, many of Wall Street’s elite executives could envision themselves occupying a well-compensated chair at Citadel some day.
Wall Street’s best frenemy
By the way, Citadel Securities could be said to have a similar frenemy position toward stock exchanges. While the company’s principal trading business — which uses its own capital to execute trades off exchanges — is a major competitor with exchanges, Citadel is also a major business partner of the NYSE and has been for a long time.
Citadel Securities is the DMM with the largest footprint on the NYSE, responsible for trading in ~1,500 issuers pic.twitter.com/n5Ogz00PXW
— NYSE 🏛 (@NYSE) July 7, 2016
Today, Citadel remains the NYSE’s top designated market maker. It has responsibility for managing trading in some 2,000 stocks, or about 65% of listings. That effectively makes Citadel Securities one of the one of the biggest business partners of the venerable stock exchange, which is owned by IntercontinentalExchange.
Political power
The Griffin-related risks don’t stop there for stock exchanges.
While the heavily regulated nature of public stock trading has long served as something of a competitive moat for exchanges, Griffin’s political muscle could help cut through the protective cocoon and red tape of exchanges.
Bottom line? Citadel Securities is already one of the most important nodes of the stock trading business, executing — that is, matching buyers and sellers — 23% of all publicly reported US trades last year.
It’s unclear how serious Citadel Securities is about putting financial or trading firepower behind any upstart stock exchange. (It has backed other exchanges in the past, perhaps most notably the Members Exchange or MEMX, in 2019.)
But by definition, any exchange, even an as-yet nonexistent one like the TXSE, seriously backed by Citadel Securities could be a threat. Wall Street, consider yourself warned.
