Citadel sues SEC to “protect millions of retail investors”
Citadel Securities, the well-known market maker in the Robinhood / GameStop drama, is heading for a collision with the Securities and Exchange Commission (SEC). On October 25, both sides have a hearing date to settle a dispute over the changes the SEC has introduced regarding high-frequency trading and D-Limit orders.
Role of Citadel Securities in the equity market
As we have seen previously, the path between an executed transaction and a settled transaction can be dangerous. This is why the SEC allows FAST agents like Computershare to provide additional reliability. As a market maker, Citadel Securities plays a key role between traders and brokers. Synonymous with liquidity providers, market makers ensure that assets can be traded without too much friction or delay.
This means that Citadel Securities covers both buy and sell orders (ask / bid spreads) for market participants. This makes it possible to quickly trade assets for price quotes that traders want. In return, Citadel Securities, or any other market maker, gets a small share of each trade.
In practice, this means that Citadel Securities receives orders and sells them a little more than it is willing to buy them. Ken Griffin’s company boasts of covering roughly 27% of the entire US stock market, so the bulk of the market maker’s profit comes from trading volume.
What is a D-Limit order?
The D-Limit order, which is short for a discretionary limit order, issued by the SEC and offered by the IEX on August 26, 2020, interferes with this business model.
“A D-Limit order can be a displayed or non-displayed limit order which, upon entry and upon posting to the IEX [Investors Exchange] order book, is priced to be equal and classified at the limit price of the order.
IEX goes into more detail here.
Simply put, if the price of an asset changes unfavorably after traders give the order – constituting latency – the D-Limit order would protect them from the shift. Market makers engaged in high frequency trading (HFT) typically buy or sell orders instantly, preventing other market participants from adjusting their orders.
In short, the D-Limit order is an AI algorithm that prevents players in arbitrage, like Citadel Securities, from recovering LIT orders – Limit-if-Touched (LIT) orders.
A LIT order is a ask / ask order held in the processing system until the specified price is triggered / hit. Because they are no longer available to be picked indiscriminately, the D-Limit order expands the competitive space among market makers.
Citadel Securities disputes D-Limit orders
Ahead of the legal battle with the SEC, a spokeswoman for Citadel Securities presented the issue as one in which the D-Limit order places a burden on retail traders:
“The SEC has failed to properly account for the costs and burdens imposed by this proposal which will undermine the reliability of our markets and harm tens of millions of retail investors,” he added.
Citadel Securities said the proposal would endanger the integrity of the entire US stock market. While it’s still unclear how that would be the case, the company has suggested that it could possibly question the authenticity of a published quote.
Citadel Securities, as a high frequency trader (HFT) and market maker, relies on processing up to 37% of all US listed retail trade volume. Additionally, HFT accounts for around 50% of US equity trading volume.
Without the D-Limit order, latency arbitrage allows you to buy a stock in another market before its price has been adjusted. More so, it allows stocks to be sold short, which has been the subject of an ongoing lawsuit against Citadel Securities for conspiracy with Robinhood.
Additionally, SEC Chairman Gary Gensler named Citadel Securities, without naming it, when he spoke about dark pools:
“Within the space of over-the-counter market makers, we are seeing a concentration. One company has publicly stated that it performs almost half of all retail volume.
Right now, there are hundreds of platforms for executing stock orders – 13 exchanges, 59 dark pools, and over a hundred brokers that internalize order flow like Robinhood. By accepting the IEX D-Limit order, Gensler aims to ease the monopoly of some market makers, having previously noted that:
“… as a large and growing portion of retail orders are channeled to a small, concentrated group of wholesalers, some market makers have more data than others. “
Therefore, when it comes to market integrity, it would appear that more competition and less data concentration would be more conductive, not less, as the spokesperson for Citadel Securities claims. Interestingly, other major market players – Vanguard Group, Allianz Global Investors, the New York State Common Retirement Fund – have already accepted the IEX proposal.
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About the Author
Tim Fries is the co-founder of The Tokenist. He has a BSc in Mechanical Engineering from the University of Michigan and an MBA from the Booth School of Business at the University of Chicago. Tim was a Senior Associate in the investment team of RW Baird’s US Private Equity division and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and protection solutions. control.