Retail investors flocked to markets during coronavirus volatility. Many were lured to trading by platforms like Robinhood, offering “free” trades. It turns out that trading still comes at a cost. Richard Henderson reports for the Financial Times:
Citadel Securities and its majority owner Ken Griffin are among the big winners from a boom in retail investing, cashing in on the zero-fee trading that has lured huge numbers of first-time investors to the US stock market.
Chicago-based Citadel Securities accounts for 40 of every 100 shares traded by individual investors in the US, making it the number one retail market maker, according to Piper Sandler. The company is a big buyer of customer trades from the leading US retail brokerages such as Charles Schwab and TD Ameritrade, which have slashed commissions to zero to keep up with fast-growing challengers such as Robinhood.
Citadel Securities pays tens of millions of dollars for this order flow but makes money by automatically taking the other side of the order, then returning to the market to flip the trade. It pockets the difference between the price to buy and sell, known as the spread.
Easy access to the market against the backdrop of wild swings in prices have led to higher trading volumes for stocks and options this year — increasing the raw material Citadel Securities uses to turn a profit. At the same time, the rise in volatility has forced spreads wider, increasing the potential income for market makers.
“In the stay-at-home environment people don’t have anything to do and are locked in front of a computer,” said Rich Repetto, an analyst at Piper Sandler.
Citadel Securities, a sister firm to Citadel, Mr Griffin’s Chicago-based hedge fund, is privately held and does not share financial data. But Virtu Financial, the closest rival to Citadel in retail market making with about a one-third share, acknowledged a sharp upturn during its first-quarter earnings presentation last month. It called the higher volumes and wider spreads a “powerful combination” that “drove outsized returns for market makers”.
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