Citadel Securities forms an unlikely partnership for its next big move

January 12, 2022, 4:53 PM UTC

Yesterday Sequoia Capital and Paradigm shared they had invested nearly $1.2 billion into Citadel Securities, the market maker that came under attack during the GameStop saga that revealed some of the inner complexities of trade execution—and just how few people really understand how it works.

This deal was arguably a little surprising. For one, it was Citadel Securities’ first outside investment. Now add that one of those investors was Paradigm, a crypto fund founded by Coinbase co-founder Fred Ehrsam and Matt Huang, a former Sequoia Capital partner. Paradigm is one of the most active investors in the blockchain sphere, and it holds the second largest fund investing in crypto and blockchain at nearly $2.5 billion, according to Pitchbook data.

Enter Citadel Securities, which, well, hasn’t historically been in crypto. In fact, CEO Ken Griffin has been pretty openly critical of them, although he did say only a few months ago that his firm would trade them, pending they were “properly regulated.” 

Has there been a change of heart? Paradigm’s Huang noted in the investment press release that the VC firm is investing in Citadel Securities “as they extend their technology and expertise to even more markets and asset classes, including crypto.” A Citadel Securities spokesman declined to provide further comment. 

It seems to be rather inconvenient timing that Citadel Securities just lost its Chief Technology Officer in Europe to a crypto market maker. John MacDonald, who had joined Citadel Securities to build out its options trading business, is now the CTO at GSR, a digital asset market maker, where he will be improving the company’s existing infrastructure and helping it expand.

“I look forward to working with my new colleagues in combining the best of traditional trading and investment solutions with the very creative and rapidly evolving digital assets space,” MacDonald said in a statement issued this morning about his new gig. 

One more thing: I can’t help but wonder whether Citadel Securities’ interest in crypto has anything to do with the growing interest among customers of brokerages like Robinhood. Citadel Securities, as one of the largest market makers in the U.S., has long executed many of Robinhood customers’ stock trades. It’s a model known as retail wholesaling that sometimes includes what is known as payment for order flow (which you can read more about here.) For market makers like Citadel Securities, it’s a critical business that allows them to capture a tiny sliver of each trade they execute. And when you do gobs and gobs of those a day, those slivers add up. 

In the second quarter of 2021, something weird happened. Robinhood saw a flood of crypto transactions on its platform (largely thanks to Doge…). And suddenly, a Jump Trading Group affiliate known as Tai Mo Shan Limited, which has been reported to be behind Robinhood’s free crypto trading capabilities for years now, became a key player. Tai Mo Shan was behind 29% of Robinhood’s transaction-based revenues, up from only 1% during the second quarter of 2020. Citadel Securities, meanwhile, saw its share fall from 36% to 14%, as a result. Here’s a look:

Jump Trading hadn’t gotten into retail equity wholesaling at this point, but it was active in the crypto markets, and later that year formalized its efforts in the space by opening a specific crypto market making arm. Meanwhile, Citadel Securities was less the revenue-driver at Robinhood than it had been. However, with equity trading surging, it’s still the source of most of the payment for order flow at Robinhood:

Crypto aside, this deal may help position Citadel Securities for an IPO—and it looks like it added some plump to Ken Griffin’s net worth.

A reminder: Term Sheet is partnering with Semaphore for its 14th annual confidence survey of private equity, venture capital, hedge fund and other professionals. Will 2022 afford an end to our public health burden? Has it influenced business interests and personal income? Fifty-six percent of respondents expressed confidence in then-new president Biden last year. Is the honeymoon over? Weigh in, if you like, and share your level of confidence in yourself, the economy, and your business; it’s anonymous and should take you 3-4 minutes. You can take the survey here. Have a look at last year’s results here.

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews

My colleague Declan Harty contributed to the reporting of this essay.


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