Equities flow market-maker of the year: Citadel Securities

Risk Awards 2020: US giant boosts client-facing European business into second spot by market share

Joe Mecane

Citadel Securities has always been viewed as a powerhouse in the US cash equities market, but in Europe its footprint has traditionally been lighter.

This year, however, the Chicago-based securities house turbocharged its European and UK equities business, grabbing a 24% market share across 15 clients and an average daily volume of €360 million as of October – catapulting it into second spot from fifth in early 2018.

The build-out started in January 2018, when the firm launched its own systematic internaliser (SI) – a legal entity for off-platform trades that market-makers and interdealer brokers need to comply with the European Union’s second Markets in Financial Instruments Directive (Mifid II).

Joe Mecane, head of execution services at Citadel Securities, says the company leveraged the technology and infrastructure that has been in place in the US for its off-exchange dark pool, Citadel Connect, and used that to help propel its SI – Citadel Connect Europe (CCE) – up the rankings.

“There’s still some evolution and adoption that’s happening as people get more comfortable with the SI regime and how to interact with that type of liquidity. But it fits very much into the model we have developed in other asset classes, and we always look for areas where we can take our expertise and leverage it in different markets,” he says.

While some peers launched SIs ahead of the Mifid II mandate, Mecane says it took a bit longer to get CCE up to full speed. “Even though it launched in January 2018, it took a lot of last year to get all the connectivity in place,” he says.

But he puts the success since then down to two things. First, CCE trades more than 1,600 different securities, excluding exchange-traded funds. According to Rosenblatt data, CCE sits in second place by number of European stocks traded, ahead of competitors such as Jane Street and Hudson River Trading.

Furthermore, according to independent broker data, the firm ranks as one of the best performing SIs in terms of breadth, size and quality of liquidity – something Mecane attributes to its ability to warehouse risk.

“We hold inventory for longer periods of time. We’re not just executing with the client and then liquidating the risk in the market right afterwards. We’re often holding inventory for timeframes that are longer than what most of our clients are using to monitor for market impact,” says Mecane.

There’s still some evolution and adoption that’s happening as people get more comfortable with the SI regime and how to interact with that type of liquidity

Joe Mecane, Citadel Securities

The expansion and growth in Europe has not tempered Citadel’s activity in the US. It is consistently ranked as the top market-maker, with a 22% share, while its retail execution business continues to be the top destination for retail order flow from the likes of Fidelity and TD Ameritrade, executing roughly 40% of volume.

“The execution quality they provide is one of the best on the street, and coupled with the percentage of my order flow that is price-improved is what makes them stand out as a solid market-maker,” says a trader at one agency market-maker.

Others like how the firm goes the extra mile: “More than 50% of our flow is sent to Citadel, so they are our best provider. The client service is by far the best there is, and there is always somebody there to help or even meet if we need,” says a trader at one commercial bank.

Citadel Securities has also continued to grow its designated market-maker (DMM) business at the New York Stock Exchange, handling 60% of existing stocks at the exchange – up from 32% two years ago – and capturing 58% of all initial public offerings.

As a DMM, trading in a particular stock can be volatile on the day of the IPO or direct listing. A key aim as a DMM is to minimise the amount of so-called volatility trading pauses, which are triggered when price volatility goes beyond a given threshold. Repeated halts annoy investors and make it hard to trade the stock.

So far in 2019, Citadel Securities has had no volatility pauses on the opening day.

“It’s something we look to in terms of demonstrating that we’ve met our objectives. So for all the IPOs we handled this year, none of the stocks where we’ve been the DMM have a volatility trading pause or a halt on the day that we handled the IPO,” says Mecane.

Citadel also added to its direct listing inventory after its success last year with Spotify, bringing messaging platform Slack direct to market at the NYSE without going through the traditional IPO process.

Expanding its equities franchise further, Citadel launched block size options market-making in early 2019. It has onboarded more than 18 clients to date.

“Options, in general, continue to become more popular,” says Mecane. “It’s become a very significant part of investor interest.”