A Shadowy however Highly effective Wall St. Agency Has Its Second in Washington

The GameStop saga was a David versus Goliath story, in which little traders competed against large hedge funds, and a cautionary story about what happens when fast-moving Silicon Valley collides with the highly regulated world of Wall Street.

Cast members include one of the most influential – and perhaps the least visible – personalities in the financial world, Chicago billionaire Kenneth C. Griffin.

And when the House Financial Services Committee meets on Thursday to interview key players in the GameStop madness, Mr Griffin will be asked about the two distinct roles his companies played in a two-week trading frenzy that created billions of dollars in wealth and destroyed.

The first company, Citadel, is a hedge fund firm that placed a small bet that GameStop stock would fall. It suffered as stocks rose as millions of small investors started buying up the stock, but not nearly as badly as another hedge fund, Melvin Capital, the Citadel, and some of its employees made a $ 2 billion investment in support of his finances.

The second company, Citadel Securities, is a wholesale broker that it claims does more than a quarter of all stock trading in the United States. It pays Robinhood and other retail brokers the right to do their customers’ business and makes money by pocketing tiny price differences between buy and sell orders that can quickly add up. And with retail investors furiously buying and selling GameStop stock – much of it through trading apps like Robinhood – Citadel Securities did brisk business.

“Citadel is one of the many truly gigantic financial companies that are incredibly important and woven throughout the financial system, but never visible to the public,” said Dennis M. Kelleher, president and CEO of Better Markets, a nonprofit group that supports this additional Financial regulation. “They operate in the shadows and they want to stay in the shadows and they don’t want anyone to pay attention to how they run their business.”

On Thursday, lawmakers will put Mr Griffin in the spotlight. He is – together with the directors of Robinhood and Reddit, the social media site – to testify before the House committee about the GameStop rally. Also on the list of witnesses are Keith Gill, a Reddit user and YouTube poster who made millions on his popular GameStop deal, and Gabe Plotkin, the founder and CEO of Melvin, who was bruised so badly that he became Citadels Help accepted.

In particular, Mr. Griffin has to deal with speculation that he used his companies’ stakes to manipulate the situation for his own benefit. Retail investors, irritated that Robinhood was restricting GameStop trading, suggested Citadel lag behind the boundaries, and put pressure on Robinhood to protect its own bet against the video game dealer – claims that both Citadel and Robinhood have denied to have.

“There’s a huge pachyderm walking around and that’s the crazy theory that we got Robinhood or some other company to impose trade restrictions on GameStop,” Griffin said in an interview on Wednesday. “Never in my life have I seen such a completely absurd theory.”

Representative Maxine Waters, the California Democrat who heads the committee, said the hearing – the first of three she has planned – was an information trip.

“They will tell their story,” she said of Citadel and the other witnesses. “We hope the hearing gives us some facts and a very clear understanding of who did what.”

For Mr. Griffin, who started trading at Harvard in his sophomore year, the answer to such questions depends precisely on which arm of his financial empire officials ask about.

Citadel – the hedge fund – had limited holdings of GameStop and other meme stocks, which have soared over the past month. On January 22, the Friday before GameStop went through the roof, Citadel’s bet against GameStop was limited to just 92 shares, said a person familiar with the company’s position at the time. However, after GameStop shot up, Mr. Griffin – one of the most accomplished operators in the financial world – discovered an opening in beleaguered Melvin.

One of Mr. Griffin’s lieutenants called Mr. Plotkin to show interest in an investment, Mr. Griffin said. At the end of the day, Citadel and Melvin had a handshake. Citadel and some of its executives would buy less than 10 percent of Melvin for $ 2 billion in cash, said a person who was familiar with the details of the transaction and had no authority to disclose confidential details about it. That money, along with $ 750 million from hedge fund Point72, allowed Melvin to weather heavy losses when GameStop – a stock he’d bet on – rose more than 600 percent.

Melvin’s losses were staggering: 53 percent in January. Citadel, which at the time had little risk for Melvin’s loss and a loss on its own GameStop investment, was down 3 percent. (The S&P 500 was down 1.1 percent over the month.)

However, the opportunity that GameStop’s rise offers for Mr. Griffin’s hedge funds has to do with the other role his companies play, particularly Citadel Securities. And here damaged investors smelled a conspiracy.

On the morning of January 28, Robinhood, the Silicon Valley start-up that had become a target for small investors, put a brake on buying GameStop and a few other stocks. The reasons were not fully explained and had the immediate effect of reversing the rally.

Users were angry – first with Robinhood and then with Citadel.

Some amateur traders, knowing that Citadel had already invested in Melvin and that Citadel Securities ran a huge trading operation of which Robinhood was a customer, jumped online to conspiracy theories. (The agreement, known as “Paying for Order Flow,” allows Robinhood and other app users to trade for free.)

“Little did I know Citadel had its hands in so many pockets !!” One commenter wrote on Reddit’s Wall Street Bets forum on Jan. 31, “Remember, they own some of Melvin’s capital! They tried to manipulate the market against us. “

Mr. Griffin said he and his team paid little attention to the online chatter because they were busy with the huge flood of trades. For example, on January 28, Citadel Securities traded 7.4 billion shares in total – roughly the same amount as the total volume of the exchange on any given day in 2019.

But when Mr. Griffin recognized the reputational risk of the rumor mill, he issued statements from both companies denying any role in Robinhood’s decision to restrict trade.

Citadel Securities had no commercial reason to slow or stop trading because of its business model, Griffin and other company officials said. The company bridges the tiny gap between a buy and sell price for a single stock order as a fee and slower trading that limits Citadel Securities’ ability to make money.

But the anti-Citadel vitriol hasn’t waned even after Robinhood’s chief executive Vlad Tenev presented the reason for the slowdown: The heavy trading of a wildly volatile stock by Robinhood’s users meant a large safety net payment was required to the industry-run clearinghouse who makes the deal.

Thursday’s hearing could provide more details on what was going on in the companies so closely linked to the GameStop rally, but it’s also likely that both parties are showing populist anger against both Robinhood and the Targets short sellers targeting GameStop.

Alexandria Ocasio-Cortez, a New York Democrat and member of the Financial Services Committee, said Robinhood’s decision to shut down some business for GameStop in January was “unacceptable.” And Representative Rashida Tlaib, a Michigan Democrat on the committee, called the decision “utterly absurd” and accused the app of “blocking the ability to trade to protect hedge funds.”

David McCabe contributed to the coverage.

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