Citadel Securities dominates European FX, and is one of the most profitable businesses in the world

Darren Sinden

Non bank market makers are absolutely dominating the growth of FX order flow execution. Citadel Securities is now the largest internalizer in Europe by market share, a battle it is winning against Tier 1 banks alongside global leader XTX Markets. It is good to see the OTC sector holding its own.

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Market maker and high frequency trading (HFT) company Citadel Securities has emerged as one of the most profitable businesses in the world on per capita basis.

 

Citadel Securities are privately owned and closely-held firm and would not normally publish or discuss their earnings or profitability.

However, the group is in the process of raising a loan of $2.50 billion with which it will refinance existing debt and boost its trading capital and it has released some data into the public domain as part of that process.

In terms of earnings in Q4, the business generated $1.0 billion of EBITDA and 4.10 billion for 2020 as a whole. Once again these were record numbers for the group.

Bloomberg report that Citadel Securities paid out $1.90 billion in equity distributions or dividends in 2020. The lion’s share of that going to majority shareholder Ken Griffin the founder of namesake hedge fund Citadel.

Mr Griffin is believed to be worth some $21.40 billion and is in the top 30 wealthiest people in the USA.

Analysing Citadels earnings and assuming a headcount of 1000, eFinancial Careers estimated that Citadel Securities earned $4.10 million per employee, during 2020.

That compares to the $275,000 of earnings per head at Goldman Sachs, often thought of as one of the most profitable and efficient businesses on Wall Street.

Tier 1 FX dealers by market share. Source: Euromoney

Goldman’s has a global headcount of just under 41,000 staff.

Looking at Citadel Securities balance sheet Bloomberg found that it had assets of $84.20 billion, as of the end of Q3 2020. That’s up 61% from the end of 2019. Equity capital in the business has grown by 37% over the same period.

In terms of market share, Citadel Securities believes it has a 27% share of US equity trading volumes and an even more impressive 46% of retail order flow.

Non-bank market makers with this level of expertise have risen to prominence and are increasingly preferred by FX and OTC electronic trading counterparties over traditionally market dominating Tier 1 banks with large FX interbank dealing desks.

The reasons are quite clear.

Until two years ago, global market share in Tier 1 FX interbank dealing was dominated by Citigroup, which for 17 years held the top slot, until it was superseded. However, Citigroup’s long term domination of the entire global top level FX market was not put to an end by one of the other Tier 1 interbank FX dealers such as Barclays, Deutsche Bank or Goldman Sachs. It was knocked off its top position by XTX Markets, which had never been considered a top level Tier 1 dealer at all previously, but it very much is now.

To this day, XTX Markets holds the top place globally for Tier 1 FX order flow by market share, and some of the other well known market makers are now in the top ten, including Citadel Securities which is now in fifth position globally, demonstrating a massive increase in market share since 2018 when it was in eighth place.

Looking at this on a regional basis, however, Citadel Securities is the largest Tier 1 non bank market maker in Europe.

At the end of 2020, figures demonstrated that XTX Markets managed to regain ground as the largest non bank market maker in European markets in May and June 2020 but failed to hold off Citadel Securities in the third quarter and in October.

From June to August 2020, XTX Markets saw its non-bank market making market share decline from 33.6% to 26%, while Citadel Securities’ share grew steadily from 32.6% to 33.3% in the same period. Citadel Securities guarded its position as the largest ELP SI throughout September and October.

Six non bank market makers currently report monthly figures to Rosenblatt Securities, including Citadel Securities, Hudson River Trading, Jane Street, Tower Research Capital Europe, Virtu Financial, and XTX Markets.

“The battle for non bank market making market share intensified this year, with activity starting to concentrate among four of the six venues that report monthly volume data to us,” Anish Puaar, market structure analyst at Rosenblatt Securities, told The TRADE.

As Citadel Securities and XTX Markets battled for the top spot, competition to be the third-largest ELP SI was equally intense as Hudson River Trading managed to narrow the gap and overtake Tower Research.

Added to this, Citadel Securities is one of the best paying organisations to work for, according to research conducted by eFinancial careers.

The online job portal and candidate mentoring site disclosed that Citadel Securities UK employees earned an average of $659,000 US dollars in 2019. That was in a year when profits at the UK business fell almost 79%.

However, in 2020 revenues enjoyed a substantial rebound across the group with Q4 income coming in at $1.70 billion taking the trading revenue total for 2020, to $6.70 billion.

That figure was double the firm’s previous revenue record set in 2018.

Given how much money Citadel Securities is making out its equity business and the substantial share of the retail order flow it accesses. One is forced to ask the question why are online brokers so happy to accept payment for order flow from the market maker?

Citadel Securities isn’t doing anything wrong or illegal in buying in order flow, and all such payments are subject to disclosure in the USA.

Yet it’s hard to escape the feeling that if Citadel Securities can wring hundreds of millions if not billions of dollars out of that retail flow, then it’s being sold far too cheaply, and not just in terms of the price per order either.

Brokers are clearly eschewing the single dealer platform model offered by banks, and perhaps rightly so. It is, after all, a legacy model as is most things with banks, and the obnoxious attitude – started by Citigroup – that all OTC derivatives companies must have a continual balance sheet of between $50 million and $100 million to be able to maintain a prime brokerage agreement is clearly not a popular method.

Banks make most of their money from investment banking and tier 1 FX dealing, yet they treat their own counterparties with disdain, expecting high balance sheets, conducting last look execution and cherry picking. If an OTC broker did any of this, there would be a furore, hence brokers are now voting with their feet.

Citadel Securities being so profitable and efficient is a bright point in the liquidity sector, given that most Tier 1 banks are flagging, being propped up by governments or paying large fines to regulators for manipulating benchmark rates which is hypocritical to say the least.

As large proprietary trading firms such as Optiver go down the non-bank route, and many FX prime of prime brokerages prefer the dedication and effort that has been put in by non-bank market makers to understand our business properly and give quick and reliable execution without the massively prohibitive criteria set out by banks, and without conducting last look practices, as well as using new technology compared to bank systems which are as old as the hills.

It would certainly be a good thing to see our industry providing top level liquidity and finally removing the reliance on the complacent and obsolete banks.

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