Bloomberg reports that Ken Griffin’s Citadel Securities revenue has plunged 35% from last year’s gains as the market maker sets to compete with big banks.
“Citadel Securities generated $2.73 billion in revenue in the first six months of this year after a record $4.2 billion haul in the first half of 2022, according to people with knowledge of the matter.
The figure has exceeded $1 billion for 14 straight quarters, the people said, asking not to be identified disclosing private information.”
Trading revenue in both equities and fixed income is down compared to last year, says Katherine Doherty.
“We’re talking about the first half results, so it still remains to be seen if the second half will see a pickup in volatility.
These kinds of firms, these trading firms, these market makers they’re going to generate more profit when there’s more uncertainty.
And so last year we saw a lot of reaction from market participants based on fears of recession, we had some questions around inflation and in the war in Ukraine.
All of that was really boosting Citadel Securities profit.
Virtu Financial is reporting this week, I’m sure they’re going to be talking about the same volume decline and they had even started to report that in the first quarter of this year.
So, I’m sure the first half is going to be similar. Whether or not they’re dealing with a worst decline that remains to be seen.
Citadel Draws Fresh Scrutiny from SEC
Citadel amongst other hedge funds is under fresh scrutiny from the SEC due to risky bets that are heightening systemic risk in an already shaky economy.
Officials at the Securities and Exchange Commission and the Federal Reserve have questioned prime brokers about leveraged trading as “the dangers have been heightened due to political brinkmanship around the debt ceiling that has threatened to sink the US into default and unleash chaos in financial markets”, per Bloomberg.
“Several of the hedge funds that have recently pursued the so-called basis trade were also active in 2020, when the outbreak of the pandemic upended the Treasury market and caught them wrong-footed until Fed officials intervened to restore normalcy.”
Basis trading is a trading strategy that seeks to profit from perceived mispricing of securities, capitalizing on small basis point changes in value.
The list includes Citadel, Millennium Management, ExodusPoint Capital Management and Capula Investment Management, according to people familiar with the matter.
“Opaque and risky, the strategy has long spooked watchdogs. It involves borrowing heavily in the repurchase market and using that leverage to exploit the price gap between Treasury futures and the underlying cash market.
The trades, in some cases, have been levered 50-to-1, according to two of the people,” says Bloomberg.
The strategy’s popularity is alarming to SEC Chair Gary Gensler, who is on a mission to subject large speculators to more regulations.
“There’s a risk in our capital markets today about the availability of relatively low margin — or even zero margin — funding to large, macro hedge funds,” said Gensler, in response to a Bloomberg News inquiry about the rise of the investing style.
Even the Fed Has Expressed Concerns
“Financial watchdogs are under pressure after having been blindsided repeatedly by instability in the bond market since the pandemic erupted”, says Bloomberg.
Fed officials at the policy meeting earlier this month expressed concerns about the risks lurking outside the banking system in light of recent financial stresses.
Minutes released Wednesday singled out “hedge funds, which tend to use substantial leverage and may hold concentrated positions in some assets with low or zero margin.”
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