On October 17, a truck parked in Times Square beamed a digital ad that asked: “Do you believe #Ken Griffin lied?”
The question and the ad are part of an ongoing brawl between meme stock–loving retail investors and Wall Street heavyweight Citadel Securities, which Griffin owns. And the row shows no signs of ending soon — at least not if 40-year-old California bartender Katherine Larsen has any say in the matter.
Larsen began investing in movie theater chain AMC Entertainment in January, around the time it got caught up in the meme trading frenzy. She had been in the stock market for a few years when she learned about AMC from her then 22-year-old son — and Reddit member — who wanted to borrow money from her to buy shares of the movie theater chain. AMC’s stock had been heavily shorted after the business was torpedoed by Covid-19 restrictions, making it a target of retail investors — a so-called meme stock.
Since then, movie theaters have reopened, AMC stock has skyrocketed, and Larsen’s investment has gone from $120,000 to more than $520,000. Despite her newfound wealth, however, Larsen is now wary of Wall Street practices — like payment for order flow — that were revealed during the GameStop trading fracas in January. Many other retail investors felt the same way after the price surge of heavily shorted meme stocks led upstart Robinhood Markets and other brokers to stop processing buy orders through market makers like Citadel Securities. The resulting market plunge was followed by hastily convened congressional hearings on the topic, regulatory investigations into the companies at the center of the storm, and an investor lawsuit against Robinhood, Citadel Securities, and others alleging that they acted in concert to protect themselves at the expense of retail investors. (The Securities and Exchange Commission does not agree with the plaintiffs. Its report on the GameStop trading phenomenon concludes that broker-dealers restricted trading owing to margin calls from clearinghouses, and makes no mention of any role played by Citadel Securities.)
Larsen is not a party to the lawsuit, but she has taken up its cause. She has hired firms to run digital billboards and banners lambasting Citadel and its billionaire founder in the streets — and skies — of New York and elsewhere. Griffin’s lawyers have sent dozens of cease and desist letters.
Two days after running the Times Square ad, Larsen, known on Twitter as Kat Stryker or @katstryker111, tweeted out one of those letters, which targeted an advertising firm she’d used. The letter claims an “online mob” led by Larsen was “disseminating unfounded conspiracy theories and debunked narratives” about Citadel Securities.
“[Larsen] has published a series of tweets containing pictures of these ads, which contained demonstrably false and defamatory statements about Mr. Griffin — including the inflammatory and outrageous claim that he perjured himself by lying under oath,” it continues.
In response, Larsen says Griffin’s lawyers are “bullying companies,” noting that the letters were sent to some 28 firms — some of them no longer in business — that offer mobile billboard ads, but that she herself has not received one. “They’re trying to silence us, and we don’t appreciate it,” she tells Institutional Investor. “We do have freedom of speech, and the right to speak our opinion.”
Investors like Larsen have become convinced the system is stacked against them. And the more they hear about the plumbing of Wall Street — from payment for order flow to dark pools to latency arbitrage — the more skeptical they become.
“A retail investor that is on a Reddit subchannel or the like is pretty sure that something shady is going on, but he just has no idea what,” says Ben Hunt, a former hedge fund manager and chief risk officer who runs Epsilon Theory, a popular online newsletter that is critical of Wall Street. “And by shady, I don’t mean illegal,” he is quick to point out.
The spotlight began shining on Griffin and Citadel Securities (a dominant market maker in securities trading for retail investors) with the events of January and the founder’s subsequent U.S. House Financial Services Committee testimony, during which Griffin denied having anything to do with Robinhood’s decision to stop processing buy orders for meme stocks.
In written testimony before a February 18 House hearing to address the meme stock furor and the trading bans that ensued, Griffin stated: “I want to be perfectly clear: We had no role in Robinhood’s decision to limit trading in GameStop or any other of the ‘meme’ stocks. I first learned of Robinhood’s trading restrictions only after they were publicly announced.”
Citadel Securities issued its own statement at the time, asserting that it “has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business. Citadel Securities remains focused on continuously providing liquidity to our clients across all market conditions.”
However, an amended complaint filed this fall on behalf of GameStop retail investors restoked the flames. The complaint further illuminates the close ties between the firm and Robinhood. Specifically, it alleges that private messages obtained by the plaintiffs’ lawyers from regulators show that Robinhood’s decision to halt buy trades was designed to protect Citadel, which had taken the other side of those orders, resulting in big short positions in both GameStop and AMC that were underwater.
Senior executives at Citadel Securities and Robinhood had “numerous communications with each other that indicate that Citadel applied pressure on Robinhood,” according to the complaint, which was filed in a Miami federal court on September 22. It alleges that the defendants “hatched an anticompetitive scheme . . . to protect each other and to stop the hemorrhaging losses incurred by the market maker defendants.”
Citadel is trying to get the lawsuit dismissed.
Both companies have issued repeated denials and asserted they did nothing wrong, but the newly disclosed Robinhood messages led the retail crowd to speculate that Griffin had lied during his earlier testimony. That, in turn, caused Citadel Securities to reiterate its position via Twitter on September 27: “When asked whether Citadel Securities requested that Robinhood restrict trading, Ken Griffin truthfully told Congress, ‘Let me be perfectly clear. Absolutely not.’” Another tweet added that Robinhood CEO Vlad Tenev and Griffin “have NEVER met or spoken.”
The Robinhood messages do not show that Citadel Securities forced Robinhood to quit trading the stocks in question. What they do appear to indicate, however, is that the night before the trading curbs were instituted, one Robinhood executive thought the market maker’s execs were about to inform her firm that Citadel Securities might stop paying for order flow for the meme stocks. They also reveal that Tenev thought perhaps he should speak to Griffin personally, although there is no evidence that such a conversation took place.
In one of the disclosed internal Slack messages, Robinhood chief operating officer Gretchen Howard says that Citadel executives “wanted to speak this evening and we believe they will be making demands on limiting payment for order flow.” Then Tenev chimes in, saying, “Maybe this would be a good time for me to chat with Ken Griffin. You guys can mention that.”
Epsilon Theory’s Hunt says he doesn’t believe Griffin lied. Rather, he says, he thinks the messages imply that “Citadel was saying, ‘We are not going to pay for order flow on GameStop,’ at which point Robinhood then did things. Do I suspect that [Citadel] understood there would be significant consequences for that? Yes. Is that the same thing as saying, ‘You need to stop trading in GameStop’? No, it’s not.”
But it was enough to make retail investors go nuts on Twitter, Reddit, and elsewhere.
Before trying mobile truck ads, Larsen had wanted to fly a huge banner above New York City that accused Griffin of lying. That plan was canceled after Griffin’s lawyers sent their first cease and desist letter.
Larsen, who lives in Oceanside, California, and works as a bartender for The Kraken bar in Cardiff, is no doubt stirring the pot. “We’re just looking for answers,” she says. “They took the Buy button away and said it was a trade halt. If it’s a trade halt, they should take the Sell button away as well.”
The trading halt led to another revelation in Larsen’s short course in high finance: payment for order flow. The lawsuit against Robinhood and Citadel alleges that investors paid a “hidden price” in the form of higher transaction costs because of the “rebates, kickbacks and other payments from market makers like Citadel Securities who compensate Robinhood for preferential access to Robinhood’s order flow.”
The trading app doesn’t charge investors commissions because its revenues are almost entirely derived from steering its trades to Citadel and a few other firms, which either take or find the opposite side of the trade.
Market makers pay Robinhood handsomely for getting the first peek at orders. When the broker went public earlier this year, it said in its registration filing that revenue from Citadel Securities alone amounted to 34 percent of its revenues in 2020 — the largest single chunk of the 75 percent of revenues that came from market makers that year.
The practice of paying for order flow, banned in several countries, is controversial even as proponents say it has helped bring more retail investors into the stock market. A recent study by BestEx Research founder and CEO Hitesh Mittal, former global head of trading at quantitative hedge fund AQR Capital, calculates that if all retail trades were moved from market makers to exchanges, spreads between trades would drop by more than 25 percent.
SEC chair Gary Gensler, who has considered banning payment for order flow, put the issue succinctly in a recent Senate Banking Committee hearing: “Zero commission does not mean it’s free.” Some brokers, he added, don’t accept payment for order flow but still offer free commissions.
These concerns are not new. In a 2000 study on the subject, the SEC found that “payment for order flow and internalization create conflicts of interest for brokers because of the tension between the firms’ interests in maximizing payment for order flow or trading profits generated from internalizing their customers’ orders, and their fiduciary obligation to route their customers’ orders to the best markets.”
Although the SEC GameStop report did not make policy recommendations, Gensler has indicated that the regulator may still propose new rules on payment for order flow and address the impact of the market dominance of firms like Citadel Securities. Whatever the upshot, the controversy has brought mainstream attention to the power Citadel Securities wields in the market.
“It’s a really simple conflict of interest,” says Tyler Gellasch, executive director of the Healthy Markets Association, which represents U.S. and Canadian institutional investors including such big pensions as CalPERS, the Arizona State Retirement System, and the State of Wisconsin Investment Board. “Is your broker routing your order to someone who makes the broker the most money or to the place that gets you, the investor, the best price? That’s the conflict. That happens in retail trading. It happens in institutional trading. Is the broker looking out for you to get the best prices or for their own pocketbook? That’s it.”
Gellasch says it’s important to change the current way of doing things because “the existing payment for order flow practices hurt investors and the market overall.” But, he points out, “you don’t need a new rule from the SEC to end the abuses of payment for order flow. You could just enforce best execution in a way that ends the current practices.”
In a recent talk before the Economic Club of Chicago, however, Griffin downplayed the benefits that payment for order flow has for his firm.
“Payment for order flow is a cost to me,” he said, adding that he’d be “quite fine” if there were a legislative ban on the practice. “If you’re going to tell me that by regulatory fiat one of my major expenses disappears, I’m okay with that.” He went on to talk about how commission-free trading has democratized finance, which he asserted has been largely good for everybody.
At a recent New York Times DealBook online summit, Griffin said what he called “the GameStop conspiracy theory” was something akin to “a bad comedy joke.” The Citadel Securities founder declined to comment further to II.
Yet some observers are skeptical of Griffin’s claims of disinterest. Payment for order flow is “a cash cow” for companies like Citadel Securities, says Dave Lauer, formerly an analyst in Citadel Securities’ high-frequency, algorithmic trading department. “They’re paying billions of dollars a year, so they must be making far more than that — and there’s no doubt that they are.”
To understand why it’s so profitable, he says, it’s important to understand that high-frequency traders like Citadel and competing market maker Virtu Financial want that retail order flow because those trades don’t “know what the next tick is about to be. [They don’t] know where that stock is going to trade in 50 milliseconds, and Citadel and Virtu feel that they do. They’ve got a really good perspective on that.”
Market makers that are high-frequency traders are able to profit by moving a millisecond faster than others, creating something called “latency arbitrage,” which a firm called IEX Group is trying to help eliminate. (IEX was launched by Brad Katsuyama, the main protagonist in Flash Boys, a 2014 book by Michael Lewis that details the market disruption that high-frequency trading can cause.)
Last year, Citadel Securities sued the SEC after it approved an order type on IEX called a D-Limit Order, which the SEC and IEX argued can help reduce latency arbitrage.
At a recent hearing in the case before a Washington, D.C. federal appeals court, IEX attorney Catherine Stetson said IEX was founded to “level the playing field” so that the everyday investors, including people putting money into their retirement funds, “have a shot.” High-frequency traders such as Citadel Securities profit by exploiting microsecond differences, she said.
“Citadel pays hundreds of millions of dollars to brokers in order to get those retail orders so it can batch them, route them as it sees fit, internalize them if it sees necessary, and profit off them. That’s Citadel’s model,” she explained.
In its defense, Citadel Securities claims it operates on behalf of retail investors and represents 40 percent of all retail trades in the market. In a statement to II, a spokesman for the firm says, “We believe that the D-Limit order type will ultimately detract from the integrity of our markets and undermine the ability of investors to trade at the prices they see on the screen.” Citadel Securities says the order would allow IEX to change the price of a security.
“Retail investors today can trade instantaneously and at better prices than they would receive on exchanges,” the spokesman adds. “This is because of the role that Citadel Securities and other wholesalers have played in contributing to a market structure that benefits retail investors enormously by allowing them to save more, including for retirement.”
He claims that the firm “provides retail investors with an average of approximately $7 of price improvement per market order and notes that “during the extraordinary market activity in the last week of January, Citadel Securities was the only major market maker to provide continuous liquidity every minute of every trading day, even when others were unable or unwilling to handle the heavy volumes. Our commitment to providing retail investors with the best execution has saved them billions of dollars over the last year alone, money that has gone directly into their pockets.”
But for all the talk about democratizing the stock market, Stetson argues that Citadel’s retail investor argument is “a red herring.”
Others agree. BestEx Research’s Mittal says Citadel Securities’ narrative of trading for retail investors is just spin. “While it is making markets to 40 percent of retail, when it’s at the exchange it’s trading for its own book.”
Meanwhile, investors representing trillions of dollars of assets — including Healthy Markets members and even other high-frequency trading firms like Virtu, as well as Goldman Sachs and Jefferies — have supported the SEC and IEX in this case. Nasdaq and a couple of trading firms have lined up beside Citadel.
If firms like Citadel Securities weren’t in the mix, brokers would send retail orders to a stock exchange instead, explains Lauer, now the CEO of Urvin.Finance, which is building a platform to provide professional data and tools to retail investors. “Citadel wants to trade against those orders because those orders are extremely profitable. So does every other market maker in the world. Now if those orders were sent to a stock exchange, thousands of companies could compete against each other to offer the best price to that retail investor.”
Taking those orders away from the traditional stock exchanges — called “lit markets,” in contrast to dark pools where trades are done in secret — means those exchanges become “toxic,” Lauer says. “It means that the orders that get to the stock exchange are the orders that nobody wants to trade against.”
In turn, “market makers on the exchanges cannot make tight markets, so the spreads widen for everyone, especially for pension plans and mutual funds [that] trade on stock exchanges,” Lauer notes. Referring to the study by BestEx Research, he says that “the entire market is paying 25 percent more, at least, just from the spread cost, let alone the lack of liquidity and the extra fragility of markets.”
In a rebuttal provided to II, Citadel Securities said that BestEx Research’s report “relies on incomplete, oversimplified, inaccurate, and misleading analysis.”
On October 25, the Washington, D.C. hearing in the lawsuit between Citadel Securities and the SEC was watched by almost 100,000 people online. Outside the district courthouse and the SEC offices, a truck circled from 8:00 a.m. until 4:00 p.m with a digital sign that read: “#Citadelisnotretail.”
Larsen later retweeted a photo of the sign and added, “Today was a good day. Where should we go next?”
Earning money for directing its trades to Citadel Securities may allow Robinhood to offer commission-free trading to retail investors, but, Larsen says, “I know people who will pay for it just to see what the right price action would be.” The bartender, who uses Fidelity and Charles Schwab, is one of them.
Larsen says she is considering trading on the lit markets and possibly even buying her own truck to mount her digital ads blasting Griffin and Citadel. “We’re just trying to spread awareness,” she says. “I’m not going to back down.”
