Over the weekend, when we discussed the various details behind the Robinhood "free brokerage" scam, we pointed the finger squarely at Citadel, which not only paid more than half of Robinhood's total payment for orderflow revenues in 2020, accounting for $362.5MM, or 53% of the company total revenues of $687.1MM...
... but profited tremendously from said purchases, which allowed Citadel to trade ahead and/or against this orderflow, generating record revenues of $6.7 billion.
We urge all readers to reread our views on all the potential conflicts of interest between Robinhood, Citadel (which included threats to sue Zero Hedge for accusing Citadel of frontrunning retail orders) and retail investors, if only for Citadel's own 2004 condemnation of Payment for Orderflow (PFOF).
As a reminder, back in April 2004, long before Citadel became the dominant market maker - and buyer - of retail orderflow controlling a whopping 27% of total US equity volume market share in 2020 according to Bloomberg and a staggering 46% of retail orderflow, it was Citadel's own General Counsel, Adam Cooper, who urged the SEC to ban payment for orderflow because it "distorts order routing decisions, is anti-competitive, and creates an obvious and substantial conflict of interest between broker-dealers and their customers."
As Cooper also revealed...
"broker-dealers accepting payment for order flow have a strong incentive to route orders based on the amount of order flow payments, which benefit these broker-dealers, rather than on the basis of execution quality, which benefits their customers. Furthermore, the parties making such payments (either voluntarily or through an exchange-mandated program) are forced to find other ways to recoup the amounts of such payments, whether through wider spreads or a reduction in other benefits that otherwise could, and should, be provided to customers."
And the punchline:
Payment for order flow is a practice that on its face is at odds with a broker-dealer’s obligations to its customers. A broker-dealer has a fiduciary obligation to obtain the best execution reasonably available for its customers’ orders under prevailing market conditions. We do not believe that a broker-dealer that accepts payment for order flow and does not pass such payments on to its customers (either directly or through reduced execution fees or commissions) can consistently fulfill its best execution obligations.
Which leads us to the one time Citadel was actually telling the truth:
Because payment for order flow creates fundamental conflicts of interest that cannot be cured by disclosure, the Commission should ban payment for order flow altogether. It is crucial that this ban include not only exchange-sponsored programs, but also payment for order flow arrangements entered into privately between order flow providers and market centers.
Little did Citadel know that just 15 years later it would be the single biggest beneficiary of paying for orderflow, a practice which has allowed Citadel founder to amass a trophy collection of some of the most expensive real estate in the world.
We bring all of this up minutes before the long-awaited Congressional hearing on the Reddit selective trading halts among last month's marketwide short-squeezes which will hear testimony from the likes of Reddit CEO Steve Huffman, Melvin Capital boss Gave Plotkin, Robinhood CEO Vlad Tenev, the Reddit trader who sparked the entire Gamestop squeeze phenomenon, Keith Gill and of course, Citadel CEO Ken Griffin, a new conflict of interest has emerged and it involves none other than market structure expert Larry Tabb.
Some background: in order to explain why payment for order flow (PFOF) is valuable to the market and the retail investor (contrary to its 2004 position that it is harfmul, and "creates fundamental conflicts of interest that cannot be cured by disclosure" and should be barred) Citadel will rely on data from Larry Tabb, currently head of market structure at Bloomberg Intelligence, and until recently head of his own research firm, Tabb Group.
While Tabb is certainly entitled to his opinions, and as he told Axios earlier today, "what went wrong depends on where you sit," what Tabb may have forgotten to disclose is that he was hired by Citadel for $200K in 2015 to help clear Citadel’s name after the publication of Flash Boys, Michael Lewis' scathing condemnation of high frequency trading, and in which Citadel Securities was featured extensively and very negatively.
The question then emerges: if Citadel plans to rely on Larry Tabb’s calculations of price improvement during today's Congressional hearings, shouldn’t Tabb disclose that he was once paid by the firm to help defend them and their business practices? To our knowledge, Tabb hasn’t disclosed this in the past.
To that point, Larry Tabb was contracted by Citadel (see contract) to write a letter to former US Senator Carl Levin on payment for order flow back in 2014. And here the conflict of interest emerges: nowhere does Larry say that he was paid hundreds of thousands of dollars by Citadel to specifically write that letter and other things while posing a "neutral" researcher. Instead, he wrote: "In my position as a market structure expert and the CEO of a financial markets research firm, banning this practice would be a serious mistake."
One can see why Citadel would be interested in contracting "independent" experts to make its case for it: after all it was Citadel itself which just one decade earlier argued the exact opposite: that PFOF should be banned!
Perhaps Citadel itself wrote Tabb's letter and just had him sign it? It certainly wouldn't be the first time.
Back in 2016, ValueWalk published an article describing a Hamilton Place Strategies document that was being circulated broadly on Wall Street and in DC “on background” and intended not to be attributed to Citadel, in which an "independent consultant" based the 350 microsecond trading delay adopted by IEX (profiled extensively in Flash Boys). ValueWalk received the document from a source not related to Citadel. The problem is that as Nanex head Eric Scott Hunsader pointed out at the time, the Senior Associate at Hamilton Place Strategies, Mac O’Brien didn’t clear the file properties, thereby exposing the “Citadel Ghost Deck.”
The result of this snafu is that the final version of the HPS hitpiece had to explicitly state that its work had been tainted "with the support of Citadel", an entity that stood to directly benefit from the failure of IEX.
The bottom line here is simple: leading up to today's hearing, Citadel is again doling out a tremendous amount of money to influence a decision where they make billions of dollars in profits. And in order to make it seem that it's views are impartial, Citadel is "buying" statisticians who are paid for (silently) and are as conflicted as the practice of PFOF.
And that's why the US equity market is and will remain broken: not because a group of Reddit traders had the smart idea of ramping a handful of massively shorted stocks to spark a squeeze, but because of the backdoor collusion between "market makers" who frontrun orderflow, between "impartial" academics who are supposed to weigh in objectively yet are conflicted "experts for hire", and ultimately because despite all the sound and fury of today's Congressional hearing, where Elizabeth Warren sent a letter to Ken Griffin raising questions about the relationship between Citadel and Robinhood and also asked FINRA to conduct a review “to determine whether Robinhood’s practices were in compliance with existing laws and regulations governing broker-dealers” and to generally crack down on conflicts of interest between Citadel and Robinhood... absolutely nothing will happen.
Tabb's contract with Citadel is below