Flow market-maker of the year: Citadel Securities

There is no easy time to start a new job. It is even harder to take over responsibility for an entire markets division in the middle of a once-in-a-century pandemic that was plaguing financial centres across the globe.

But that was the situation Joe Corcoran found himself in when joining Citadel Securities on March 16, 2020. He stepped into his new role as the US Treasuries market was going through its darkest hour, and the Monday after the Federal Reserve Bank of New York had just announced $500 billion of support for the marketplace.

Dealing with crises was not new to Corcoran – he had been at Lehman Brothers the day the bank failed, as Americas head of trading for equity and equity derivatives – but this one was different.

“It was significantly more disruptive from an operational perspective,” he says. “The severity of the impact and lack of clarity around the duration added an extra layer of complexity to our decision-making process. We had to quickly and efficiently adapt so that we could continue to fulfil the significant obligations that we have to our clients and the markets, while also keeping our employees safe.”

The risk was twofold for Citadel. On the one hand, it market-makes more than one-quarter of all institutional US equities and exchange-traded fund (ETF) volumes, 41% of all volume in retail equities and options, and is the top-ranked designated market-maker (DMM) on the New York Stock Exchange (NYSE), making it an essential market cog that needs to keep functioning even during the toughest of times.

And, on the other, it needed to maintain the growing reputation of its more fledgling businesses in US Treasuries, interest rate swaps and foreign exchange.

“We recognise that we play a significant role in price discovery and liquidity provision across many asset classes, and we take that responsibility very seriously,” says Corcoran.

Many business continuity plans, including ones at Citadel, largely envision a scenario where a building or data centre is unavailable to access and backup locations are established. None – before March, anyway – contemplated a scenario where staff could not be in an office anywhere in the world.

Once [the traders] were in [the Four Seasons Hotel in Palm Beach], nobody went in and nobody went out. From a Covid perspective, it was the safest place in America that spring

Matt Culek, Citadel Securities

This forced the broker-dealer’s chief operating officer, Matt Culek, to think on his feet. As the pandemic began to surge in March, Culek’s team made the call within days to build a brand new trading floor – akin to ones in New York and Chicago – at the Four Seasons Hotel in Palm Beach, Florida. It was up and running five days later.

“The Palm Beach idea is something that we came up with at the time,” says Culek. “No-one was sure whether work-from-home for a set of traders on a trading desk would actually be effective or not. I think it’s reasonably effective, but it’s certainly nowhere near as effective as having the team actually sitting on the desk working together.”

Around 50 traders made the move along with their families, and were unable to leave the hotel in order to keep intact the Covid-free bubble the business had set up.

“Once they were in, nobody went in and nobody went out,” says Culek. “From a Covid perspective, it was the safest place in America that spring.”

Maintaining productivity levels during one of the most volatile periods in financial market history was seen as critical to maintaining performance across all the markets in which the business operates – including equities, options, foreign exchange and US Treasuries.

This ranged from setting up the bubble trading floor in Florida, but also making sure those members of staff at home could also plug in and be effective. As well as frequent Zoom meetings, some trading teams set up permanent conference lines to keep colleagues connected. For those at home, Citadel provided staff with updated internet and personal computers.

Judging by the statistics, at least, the monumental operational change that occurred in just a matter of days seemed to bear fruit. In US equities, Citadel was able to process on average 3.3 billion shares a day in March – higher than the busiest day in 2019 (2 billion), which remained a consistent theme for the rest of the year.

Fast, firm and reliable pricing

The firm’s electronically executed US Treasuries volume increased by 90%, and voice trades rose by 44% as it gained market share during the period. On dealer-to-client trading platform Tradeweb, the business had a risk-hit ratio of 34% during March, measuring the number of quotes to execution. This resulted in a top-five ranking by risk executed and a top-three ranking by notional at the peak of the volatility.

Citadel also managed to price more trades than any other dealer on Tradeweb – 97%, compared with the platform average of 64%. On Bloomberg, the business ranked number one for the highest number of trades priced. Electronic interest rate swap volumes in general were up 45%.

In ETFs, the firm grew market share. Tradeweb’s overall ETF trading volumes almost doubled in March versus February, but Citadel’s volume was up three times on the platform. In spot FX, the broader market volume increased 50%, while Citadel’s more than doubled, with client volume increasing 84% in March compared with the fourth quarter in 2019.

Corcoran puts this down to the ability to maintain a higher speed advantage over many of its competitors. In US Treasuries, it continued to quote at sub-one-second speed during March, while other dealers took on average 5.5 seconds. That speed means clients are less likely to be trading on stale prices in moving markets, and Citadel estimates it saved its clients $50 million in trading costs for US Treasuries this way when measured against competitor pricing.

“There was significant inconsistency. Some market participants were quoting erratically and at much wider spreads, while others didn’t show up at all. We were able to stand out and provide confidence to our clients by offering fast, firm and reliable pricing throughout,” he says.

Clients also appreciated the steadiness that Citadel provided to key markets during the peak of the volatility. Across equities, fixed income and FX, feedback was consistent – the market-maker was there when they needed to trade.

“Like all dealers, they were very cautious with their market-making, and reduced their sizes due to the volatility, but they were still open for business and they were making markets. It was challenging for everyone, including Citadel. However, they were still there,” says a trading head at one large US asset manager.

The ability to handle the increased business was not just a result of mirroring a trading floor in Palm Beach, but thanks to continued, meticulous planning. Citadel has been continuously adding new computer servers to its network – 1,000 in the past 12 months, an increase of 20%, across 30 different locations – as it takes on more volume and prepares to grow further still.

Memory has been doubled in those servers, too, which enables the market-making business to handle more client flow. These enhancements were ramped up in February as the business had predicted a surge in volatility and market volume the following month.

To calculate maximum capacity, Culek says the business works backwards from the maximum amount of orders ever received in a day, and ensures the business can handle five times that amount without a reduction in service.

“That’s one metric that we look at. Those ratios vary business by business, but we are committed to being prepared, so that we’re always there for our clients,” he says.

The increased number of client orders did not start and end in March, either. Citadel has managed more orders in the months after March in equities than it did during the height of coronavirus-induced volatility. An inability to process that volume left other important nodes of the US equities market in a bind in 2020 – such as retail brokers Robinhood and Interactive Brokers, which saw outages during that period.

In all the mayhem of 2020, there was still time for some innovation. The firm is the number-one ranked DMM at the NYSE, which means it is a go-to firm to lead price discovery ahead of a new listing to ensure it hits the market at the correct price.

Given the Covid-19 restrictions, this had to be done with no-one on the floor of the exchange – something that had never been done before at the NYSE. The first ever ‘remote initial public offering [IPO]’ for Citadel and the NYSE was completed on May 1 by Fortress Value Acquisition Corp.

Culek says that, operationally, Citadel had to work out how to remotely deliver the traditional IPO experience – involving measuring supply and demand, figuring out the right opening price, balancing liquidity, and mitigating swings in volatility.

Normally, in the traditional model, that would involve having a team from Citadel on the floor getting feedback from brokers and clients. Instead, the lead DMM was in his home on his home computer connected to the NYSE’s system, with backups available, in case there was a network connection failure.

“The transaction went smoothly,” says Culek. “There was low volatility, and we ended up managing 12 of the 14 listings during the NYSE closure, including nine that were fully remote.”