Exchanging Places
Citadel Tries to Make a Market in Berlin | Clock is Ticking on London Exchange
Citadel Tries to Make a Market in Berlin
December 14, 2009
Citadel Securities, the market-making unit of Chicago's Citadel Investment Group, took a majority stake this July in the European trading platform Equiduct-a system built and operated under the aegis of the Berlin Börse.
Located on the boutique-filled Fasanenstrasse in west Berlin, the Börse can, with a little creativity, claim a 300-year history as an exchange. But its more recent past consists of thin trading, repeated makeovers and operating for decades in the shadows of Frankfurt finance.
For its part, Citadel is best known as a hedge fund institution with $14 billion under management as of Nov. 25-though that may decrease as the firm allows client withdrawals after a 10-month lockdown following disastrous losses in value in 2008. The Börse's bet is that putting Citadel's heft and expertise behind Equiduct's pricing technology can turn it into a top European venue.
So what exactly did Citadel get its hands on?
The Chicago investment firm is in the midst of a broad effort to diversify its businesses and cement its bona fides as a market-making power.
Citadel already owns 19.9 percent of Direct Edge, a Jersey City-based trading network which matched 11.8 percent of US trades in September.
Citadel now also acts as a market maker for several trading institutions. Two years ago, the firm invested $2.5 billion in E*Trade, became its largest shareholder and began handling 40 percent of trades for the online broker's customers. In August, Citadel cut a deal which routes nearly all of E*Trade's Nasdaq and stock option trades through Citadel's market-making operation.
Citadel has about 175 retail brokerage clients, including Charles Schwab and TD Ameritrade; and now handles an estimated 9 percent of daily US stock trades and 30 percent of trades in US equity options. In addition, Citadel a year ago launched an investment banking unit.
The firm's looking in Europe to broaden its activity in electronic markets. There is an ongoing competitive rush here to establish everyday "pan-European" pricing. More than a dozen established venues across the continent and several new players, both dark and lit, are vying for market share in the wake of the 2007 European Union Markets in Financial Instruments Directive.
A central attraction in Berlin: Equiduct's pricing technology. Its system allocates any member transaction, by volume, in order of best price across a set of exchanges. Traders can therefore take advantage of minute fluctuations and price differences among a variety of venues, at once.
The Berlin house monitors pricing for 860 stocks on its board across seven big European and international exchanges, including the LSE, Euronext, Xetra (Deutsche Börse), Chi-X, Turquoise, BATS Europe and Nasdaq OMX Europe. The board has clearing relationships in the UK, France and Germany.
Citadel officials say gaining a recognized and regulated exchange such as the Börse as a partner allows the firm to match its order flow more transparently. Citadel had planned to set up in Europe as a "systematic internaliser," that is, to use a price engine to trade off its own account as a virtual exchange.
But going into business with the Börse allows Citadel to "reduce risk by using a central counterparty clearer and eliminate issues around price quality," Matteo Cassina, the firm's president of European execution services, said as the deal closed.
