Citadel Securities, the electronic-trading firm owned by hedge-fund billionaire Ken Griffin, has played a quiet but critical role in the frenzy of the last two weeks.
The firm—an affiliate of Mr. Griffin’s hedge fund, Citadel—executes orders placed by customers of Robinhood Markets Inc., TD Ameritrade and other online brokerages that have enjoyed surging volumes during the coronavirus pandemic.
Citadel Securities makes money by selling stocks or options for slightly more than it’s willing to buy them. The difference is often just a fraction of a penny per share. But repeated millions of times a day, it adds up to serious money.
Last year, net trading revenue at Citadel Securities was $6.7 billion, almost double the previous high in 2018, a person familiar with the matter said.
Among the forces propelling that growth was an influx of newbie traders, many stuck at home due to Covid-19 lockdowns. Lured by easy-to-use trading apps and an industry shift toward zero-commission trades, individual investors opened more than 10 million new brokerage accounts in 2020, JMP Securities estimates.
Meanwhile, a thriving subculture of day traders grew in corners of the internet like Reddit’s WallStreetBets forum, setting the stage for last week’s manic trading in GameStop, AMC Entertainment Holdings Inc. and several other popular stocks.
“This is the market that Ken Griffin and Citadel Securities have been waiting for,” said Christopher Nagy, a former TD Ameritrade executive who is now a director of Healthy Markets Association, an investor group. “The last time the environment was this good for retail market-makers was back in the dot-com bubble.”
The firm drew scrutiny last week when its majority owner, Mr. Griffin, participated in a $2.75 billion emergency cash infusion into Melvin Capital Management, a short seller that was facing steep losses due to the huge rally in GameStop’s stock.
Announced Monday, the deal meant Citadel, the hedge-fund firm, was propping up a fund that had bet against GameStop stock, while Citadel Securities had been profiting from the order flow of small investors placing bullish bets on GameStop.
Citadel Securities says it’s separately managed from the hedge-fund side of Mr. Griffin’s business. The firm also released data showing that during the past week, retail orders pouring into its systems for GameStop were roughly balanced between buyers and sellers, casting doubt on the popular narrative that small investors drove the stock to its record close of $347.51 on Wednesday.
The data showed that 29% of GameStop trading volume Monday through Thursday was handled by Citadel Securities, underlining its huge role in the market for stocks popular with individual investors. Overall, about 41% of U.S. retail stock-trading volume goes through Citadel Securities, while the next-biggest player in the business, Virtu Financial Inc., has a market…