Citadel Set To Control 97.5% Of E-Trade's Order Flow

Tyler Durden's picture

Ken Griffin's recent announcement that he is divesting a major portion of his E-Trade holdings presumably demonstrates a divergence of the paths of the two firms, while in fact Citadel is getting ever more intertwined with the online broker's operations, in fact giving the Chicago firm almost exclusive control over E-Trade's customer trade flow. Matt Goldstein at Reuters reports:

With little fanfare, Citadel and E*Trade struck a tentative deal in June that would require the online broker to begin routing 97.5 percent of its customers’ Nasdaq stock and stock option trades to the hedge fund’s market-making operation.

Right now, E*Trade sends about 40 percent of its customer trades to Citadel’s market-maker division under a nearly two-year-old agreement that dates back to the hedge fund’s initial $2.5 billion investment in the broker.

This new exclusive six-year arrangement would mean even bigger bucks for Citadel’s already highly-profitable high-frequency trading business, given that E*Trade customers make more than 4 million trades a month.

Is this merely a way for Citadel's other divisions to have advance notice on the intent of a significant number of daytraders? Citadel claims no:

Citadel says it’s wrong then for anyone to accuse the hedge fund’s proprietary high-frequency traders of taking unfair advantage of E*Trade customers or those of any other broker that routes trades to Citadel Derivatives Group.

Yet is it as black and white as all that? In order to get access to nearly double the order flow from E-Trade it currently sees, Citadel is willing to make an upfront $100 million payment to the brokerage the until 2 years ago was selling mortgages, whose resultant implosion left it on the verge of bankruptcy.

One would hope the OTS is carefully examining the implications of this transaction, for several very valid reasons:

There’s been a lot of justified concern about whether high-frequency traders are getting an unfair price advantage by buying and selling stocks a split second ahead of the rest of the pack.

Others worry about the potential for a so-called “rogue algo” sparking an out of control computer-driven sell-off that could rival the 1987 market crash.

Another real concern is that just a small select group of Wall Street investment firms and hedge funds — Citadel, Goldman Sachs, UBS, GETCO, Interactive Brokers and Wolverine Trading, to name a few–dominate the market for high-frequency trading.

In the options world, Citadel’s market-making division, Citadel Derivatives Group, is the big kahuna. Its high-frequency trading-powered desk controls some 30 percent of the daily trading activity. So if this exclusive pact with E*Trade goes through, Citadel’s stranglehold on the options market will simply get a bit tighter.

And as Matt concludes, "the more trades these sophisticated machines get to see, the better they become at predicting price trends and making money for their creators. And often the same top secret algos that drive Citadel’s market-making business also help drive its prop trading too."

Let's not forget that Citadel (along with Goldman Sachs) is a minority owner of Direct Edge, which is at the heart of the Flash trading scandal, and is the one firm that to date has refused to voluntarily ebolish Flash trades. Perhaps the OTS should figure out what informational advantage (if any) Citadel gleans from Direct Edge either directly or indirectly, and then decide on whether the proposed transaction is truly for the benefit of E-Trade's numerous customers.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Anonymous's picture

all your trades are belong to me

Anonymous's picture

Nice :)

I was going to open an E-trade account. Can anyone recommend a good Intl online broker?

peterpeter's picture

If E*Trade was to your liking, then you will probably feel a bit overwhelmed at first by Interactive Brokers, but should give it a try none the less.

Much cheaper commissions and once you sort it out, you will come to appreciate the added complexity.

I personally hate IB because their order execution gets routed through their smart-order routing - which often delays things for hundreds of milliseconds, but unless you are trying to do automated trades in fractions of a second, it is a good product.


Anonymous's picture

I Can Haz Trades?

Anonymous's picture

Market Ramp looks to have started 10 minutes ago

dnarby's picture

It will be sold into.  Hopefully hard enough to bloody AWESOM-O's nose.

Ducky's picture

first 100pt down day for the Dow since 7/7 if they can't ramp it up.

ghostfaceinvestah's picture

As a hedge fund, what regulations prevent them from front running E-Trade's customers?  Are there any?  Serious question.

Anonymous's picture

In this case it's not about front-running. Citadel market makers want to trade with customers. Customers are harmless. This just allows them to know that they are harmless orders, and trade as much of them as possible. If they got routed some other way, the orders would be anonymous, and could be anyone (i.e. goldman prop desk)

So it's not really bad for customers, just a way to ensure that Citadel gets most of the trades, instead of splitting them among all market participants. Bad for Citadel competitors.

TheDreadPirateRoberts's picture

You are missing the bigger picture. This sort of arrangement is an end-run around illegal front-running. If they can get enough scale in order flow, they can see aggregate behavior and get in front of market-wide moves and/or specific stocks, while not technically front-running any specific order. It's funny everyone is running around screaming about this now. It's been going on a loooooong time! ever wonder how a broker could offer guaranteed VWAP at negative implied cost? they were making it up somewhere else... Guess the pigs didn't know when to lay off and now people have caught on. Go back a few years and the blame for enabling the present situation, of which HFT is a part, can be laid at the feet of those buy side institutions (big mutual fund complexes) who lobbied so hard for expanded electronic trading and the death of the floor specialist, arguing it would provide more efficient execution. Now they long for the days of the crooked floor specialists, who look rather modest compared to the giant vampire squid... bunch of morons! They got what you wished for. expanded volatility. everyone making the same decisions with the same models on the same data at the same time. they would have been better off with the retail-oriented execution system. liquidity is not improved when everyone is on the same side of the market. ha ha ha ha. what a joke!


Missing_Link's picture

Holy crap.  Glad I'm using Ameritrade and not E-Trade.

Rex Crotch's picture

Been a Tradeking user for about 9 months and really like it... just sayin'.

Anonymous's picture

Hahahaha... and you think the other retail brokers aren't selling their flow to market makers and sell-side pools? Everyone does it.

Rex Crotch's picture

No shit. I was just saying I like Tradeking. Thank you for jumping to conclusions for me.

topshelfstuff's picture

re: TD Ameritrade, i'm in the process of leaving them, since i noticed a $100 fee being added, both In and Out [buy & sell] on what they label as a "Foreign Security Fee", and i use many stocks based in China. if you do too, check your Histoy.

Anonymous's picture

Guess again, Ameritrade has similar deal with Knight (NITE). Knight pays Ameritrade for a first look at your orders, and if they don't find your orders to their liking, they ship 'em to Citadel, GETCO, or Direct Edge.

Ducky's picture

do etrade customers get hurt as long as citdel is matching best bid? i can see where citadel benefits just trying to figure out if etrade customers are getting the shaft

Anonymous's picture

not a problem for etrade customers, just forcing the smaller market makers out of the way so citadel can take over

only problem is that once the market becomes dependent on citadel to trade 97% of customer orders, and other market makers get forced out, then citadel has the monopoly on derivatives pricing

FerdeLance's picture

These people want and need another side to their proprietary trading, or that is, to trade against.  My observation of the past few years concludes that however their non-transparent methodologies are done, it is chipping money out of the other side of their trading transactions. It also raises the question of why does E-trade and other discount brokers raise maintenance requirements that force debit balance reducion at times, and at the same time Citadel is trading in the same securities.  That's room for a lot of conflict, especially when its not transparent.  If the regulations don't get into this stuff a lot deeper, the  end result, imo, is that the individual investor is going to leave the market.

Anonymous's picture

This is a very Goldmanesque move. Captive order flow. Wake up SEC ! Forget about Pequot and look at how stocks are trading in 2009.

Anonymous's picture

A large pool of E-Trade orders is in general, low-risk and high profit for market makers. There is generally a lot of buy/sell, two-way sentiment, and all kinds of different price levels/limits/contingencies. The chance of getting run-over by a large order is very low. This is the 'good stuff' if you're a market maker, and you want it all.

The disturbing trend is the dwindling number of market making firms, even as volume increases. Markets are less efficient with fewer participants, regardless of volume traded by those participants.

Anonymous's picture

When are we going to have stock prices that has some relationship to the value of the underlying asset?

Anonymous's picture

Does Citidel also clear for ETrade? If so then they know how ETrade customers are positioned, Know where the money is and how it's positioned and then use your massive leverage/market making to pin your customers into a loss. Separate all customer info, from the brokerages, and the "Front Running Services" industry will end.

Anonymous's picture

Oh good grief. Ever wonder why and how your discount broker seems to pull the internet plug when the markIt turns. This whole casino has turned into one big game of frontrunning your customer.

peterr's picture
peterr (not verified) Aug 14, 2009 5:49 PM

only problem is that once the market becomes dependent on citadel to trade 97% of customer orders, and other

stock market blog

Until we have guys like Black back as regulators nothing will change. We just

good articles;

target="_blank">good articles 4 slow news day ..http://www..

hat tip:

href="" target="_blank">finance news & finance opinions

Anonymous's picture

This thing stunk from the you had the stock in an uptrend looking to push resistance in $1.50 area. Then, bam, Citadel comes out saying they are going to liquidate. If that isn't blatant manipulation, I don't know what is. Why wouldn't they want the stock to go up? There is a bigger game being played and it involves keep ETFC at lower prices. I wonder what the failure to delivers are this month. I saw one day in June 09 on the SEC site that they were over 2M. This is a battleground stock. Beware.

Anonymous's picture

Citadel gets a lot of Fidelity's orders also. What are these discounters doing to help stop the flogging of their own customers? Isn't Citadel essentially saying to ETrade, "Hey, we'll pay you 100 million up front if you let us steal 500 million from your customers under the guise of 'efficient markets'"???? Are all these arrangements as such?

Anonymous's picture

Do you guys remember circa 1997 when some of the new web/discount brokers offered "price improvement" on your limit orders?

I always thought this was just a way for them to get you to sign up for them to legally front-run you and then split the difference (probably not equally) against another of theor own limit orders that otherwise would have given you a 5c (say) higher price per share.

Anonymous's picture

This gets even more complicated by Citadel Advisors LLC and Citadel LP holding about $300 million, or 30% of outstanding ETFC stock. Why would Citadel want ETFC traders to have less profitable trades (by front running), potentially loosing customers in a (loosing money) company that Citadel holds a large interest? Obviously there is more here than meets the eye and the SEC should begin an inquiry. Its akin to the fox owning the henhouse.