Welcome to the most lop-sided playing field in the history of markets.
By Pam Martens and Russ Martens of Wall Street on Parade.
Politico reported yesterday that the House Financial Services Committee plans to call Vlad Tenev to testify on February 18. That’s the CEO of the online trading app known as Robinhood that has played a role in the controversy surrounding the bull raid (now turned bear raid) in the shares of GameStop. If that’s to be the only witness, you might as well call Ken Griffin’s personal shopper to testify.
Griffin is the billionaire founder, CEO and majority owner of Citadel, which has been operating in the GameStop saga like a maestro from an orchestra pit. (For our previous profile of Griffin and Citadel, see here.)
As Melvin Capital, a major short seller in the shares of GameStop was about to collapse as the stock soared, Griffin and Citadel’s hedge fund rode to the rescue, injecting $2 billion in cash into Melvin to save its hide. The first question for the House Financial Services Committee is exactly what was the motivation for Griffin to prop up a competing hedge fund.
Then there is the fact that as all of those millennials and Gen-Zers at Reddit’s WallStreetBets message board were strategizing on their bull raid against the short sellers, Griffin’s Citadel Execution Services had a telescopic view of what was happening because Citadel Execution Services executes a big chunk of both stock and option trades for Robinhood. That unit of Citadel can see both the direction and the dollar volume of money heading to push a stock up or down. And, it gets to see all of that before it executes the trades, raising speculation that it might be tempted to front-run these trades for its own account.
This is known as payment-for-order-flow and it’s probably not a comforting thought that this is what Bernie Madoff’s broker-dealer was doing while Bernie was running the largest Ponzi scheme in history.
According to Robinhood’s 606 form that it filed with the SEC for the final quarter of last year, Citadel Execution Services paid it tens of millions of dollars a quarter for the privilege of executing its stock and option trades. The really big bucks resulted from Robinhood’s option trades, not its stock trades. The 606 form shows that in just the month of December 2020, Citadel Execution Services paid Robinhood $28 million for directing its option trades to Citadel.
Now we have just learned that Citadel Advisors LLC (one of the sprawling tentacles of Citadel) had a large net short position in GameStop but also stood to make money as the stock whipsawed up and down. According to Citadel Advisors LLC’s most recent 13F form filed with the SEC for the quarter ending September 30, 2020, it owned puts on 2.5 million shares of GameStop (which are option bets that the stock price will decline); it owned calls on 2 million shares of GameStop (option bets that the price will rise); and it owned 111,805 shares outright of GameStop. Unfortunately, the 13F does not provide the strike prices or expiration dates of the puts and calls. (That information is missing on all 13F forms and the SEC needs to include that information in the interest of transparency.)
Here is where things get very interesting about Citadel Advisors LLC. Its Form ADV which was filed on January 15 of this year, shows that it has just 19 clients for which it manages a total of $234,679,962,503. That’s $12.35 billion per client. So let’s get this straight: Citadel Execution Services is allowed by the SEC to pay for order flow so that it can trade against the dumb money coming in from Robinhood while another tentacle of Citadel is managing money for 19 clients who can cough up $12.35 billion each. Welcome to the most lop-sided playing field in the history of markets…