Less than a week after Reuters broke the story that the Department of Justice is probing HFT powerhouse Citadel, which admits it executes 35% of all trades by retail investors in U.S.-listed stocks, whether it is also frontrunning those orders (an allegation that many are convinced is a rock-solid fact) we find that billionaire Ken Griffin is not at all concerned about the outcome of the investigation on his core business model and is instead expanding.
According to Bloomberg, moments ago Citadel agreed to buy a stock-trading business from Citigroup Inc., the latest bank to retreat from equity market making. Citadel is acquiring the equity-trading operations of Citigroup’s Automated Trading Desk division, one of the pioneers of high-frequency trading. Terms of the deal weren’t disclosed in a statement released Monday. Bloomberg first reported last week that Citadel was in negotiations for ATD, which Citigroup bought for about $680 million in 2007.
Here is a quick read of ATD's fascinating history of self-described on its website:
Automated Trading Desk did what Wall Street said could not be done. We taught computers to trade like humans, at unprecedented speeds, with no coffee breaks. As the true pioneer in automated trading, we did so back in 1988. Since then we have propelled ourselves further into the future. Our unique "pricing engine" technology allows us to better analyze the markets, manage risk, and capitalize on razor thin margins. Creating success stories for our client partners, offering amazing reliability, while delivering a high quality of execution. Backing up our triumphs with outstanding 11Ac1-5 reports.
From our 17-acre technology campus in Mt. Pleasant, South Carolina, we trade in milliseconds, regularly seeing 200-million share days. Maintaining high-speed connectivity to the best market, whether ECNs, the Nasdaq Market Center System, the NYSE SuperDOT system and others, we are there in sub one second. In 2006, ATD accounted for approximately 6% of all NYSE volume and 6% of all NASDAQ volume.
Our rapidly expanding roster of client partners are greatly benefiting from our technological foresight and accomplishments. Each client represents a unique relationship. Our technology is tailored to their needs, as well as their ways of doing business. Providing an alternative from the status quo. Giving them the tools necessary to sweeten their product offerings and increase their business. All backed by exceptional customer service. Working together we are defining the future of securities trading. Join us and you too can thrive in tomorrow's market.
We capitalized on what others saw as chaos.
In 1987, as the stock market was reeling from Black Monday, a finance professor at Rutgers University saw opportunity where others saw only chaos and blamed computers. David Whitcomb, a pioneer in "market microstructure" research realized that it was fundamental market structure flaws, a characteristic lack of liquidity in the market, and poorly-conceived "portfolio insurance" programs that led to the Dow's stunning 22 percent drop on that memorable Monday in October. Whitcomb believed that automation could improve the efficiency of trading without adversely affecting the markets. So he set out to create a system that would bear out that belief, despite the common Wall Street paradigm that computers could not be programmed to trade as well as humans.
Starting in 1988 with two young computer programmers, Steve Swanson (1989) and Jonathan Butler (1987), Whitcomb and his partners pioneered the development of automated limit-order trading systems that brought new efficiency and profitability to limit-order trading and market making. This work signaled the beginning of a whole new era in securities trading. ATD's vision would revolutionize trading.
Since its founding, ATD has continued to improve the technology that enables it and its customers-- proprietary trading companies, buy-side and sell-side firms-to trade efficiently and fast, and in a manner that minimizes market impact.
ATD has continually focused on building and using innovative trading models, pricing engines and expert systems to offer customers a competitive business advantage. In fact, in 2002 we recognized the industry's need for a fully automated market maker. So we built one. And we did it in 6 months. Automated Trading Desk Financial Services, LLC (AUTO) has grown quickly, and currently boasts over 115 customers, and averages more than 200 million shares a day. Over 99% of these trades are done in a completely automated fashion, through the use of our price prediction algorithm.
Today, the company's objectives are to deliver tomorrow today by:
- Superior trading capabilities that are fast, highly efficient and leave very small footprints
- Custom-tailored execution services needed to deliver superior results and allowing customers to discover price by constant interaction with the vibrant volumes our systems can process
- Expanding connectivity beyond the major trading venues to pools of liquidity others can't tap
- High-quality trades measured against the volume weighted average price (VWAP)
ATD grew out of its founders' abilities to recognize opportunity and anticipate market evolution, and the company has never forgotten its roots. ATD is obsessed with staying at the forefront of trading-technology development, and harnesses its unique R&D culture to stay ahead of the market and the competition. In short, we defined the future of automated trading so we can thrive in it. This is what we do, and we continue to do it better.
As Bloomberg adds, banks once ruled wholesale market making, the business of carrying out stock orders for retail customers. Under increased regulatory pressure, Goldman Sachs Group Inc., Bank of America Corp., Credit Suisse Group AG and Wells Fargo & Co. have all squashed U.S. equity market-making businesses in recent years.
"Many banks just can’t compete," said Jamil Nazarali, president of execution services at Citadel. “Competitive pressure has been strong over the past few years."
This is the same Nazarali who in the days after Michael Lewis released Flash Boys defending the scandalous practice of HFT frontrunning of retail and institutional orderflow by claiming that "small investors have never been so fortunate" and added that "the most important thing that the market can do is stop... pointing fingers at everyone else."
By everyone else he meant Citadel of course, which has fast become the dominant market maker in retail order flow.
We leave it up to readers to decide where in the following layout of HFT strategies, from benign and neutral to parasitic and predatory, Citadel falls.
Incidentally, last week when we noted that we expect nothing at all to come out of the DOJ probe we said that "we wonder how much it will cost Ken Griffin to sweep this latest scandal under the table." We would accept an answer in terms of hours of retail flow frontrunning.