Does Citadel Own Robinhood?

On January 28 2021 the popular stock trading app Robinhood controversially halted trading of two viral tickers ($GME and $AMC) following the improbable rally of $GME, leading to whispers that Robinhood was owned by Citadel — a capital firm purportedly adversely affected by the whole mishegas.

There is, of course, a lot to unpack in that sentence, which we’ll try to do concisely.

What Happened with $GME (and $AMC)?

A January 27 2021 Vice.com article did a good job of briefly summarizing the intense focus on GameStop ($GME) stock, and how it became a war of attrition between institutional money and retail investors (i.e., the little guy):

What is going on is that GameStop, a company that sells physical copies of video games next to Auntie Anne’s pretzel shops in dying malls, is the most highly traded asset in the United States, a “meme stock,” and currently the primary front in a micro class war. GameStop’s stock price jumped from $4 last summer to $20 at the end of 2020, to $40 two weeks ago [in early January 2021]. It was worth $100-ish at times on [January 25] and [January 26 2021], and as I write this it is worth close to $300. Essentially, many normal-ish people have made a huge bet against gigantic financial institutions and are currently winning. In practice this means we are seeing one of the largest wealth transfers from the financial ruling class to the middle and middle-upper classes in recent memory, so it is, understandably, the only thing anyone is talking about.

After explaining “shorting” stock as betting any given ticker will drop in value and profiting when correct, the piece continued:

In this case, a company called Melvin Capital Management shorted millions of dollars in GameStop stock. Another company called Citron Research shorted some large amount of GameStop stock and has also spent much of the last several months explaining why GameStop is a dogshit company that is going to fail. These are companies that most (normal) people have not heard of but are a big deal in the financial world.

[…]

As I mentioned earlier, short sellers at some point have to actually buy shares of the company they’ve shorted in order to close their positions and exit their deal. If they do this when a stock’s price is higher than their short, they will lock in their losses. So Citron and Melvin and other short sellers have been playing a fabulously expensive game of chicken. Because for the last few months, GameStop stock has slowly been increasing in price.

On January 27 2021, we discussed some of the discourse surrounding a then-uptrending $GME, namely Elon Musk‘s real and not-real tweets about the short squeeze in progress:

Eventually, as Vice noted, the push to squeeze Melvin Capital via $GME moved off of Reddit’s r/wallstreetbets and on to other platforms, and the story became extremely hot.

What Did Robinhood Do?

As retail investors collectively drove the share price of $GME up, there were constant rumblings that at some point, someone would intervene and put a stop to it.

Perhaps right on schedule, traders were angered when Robinhood halted buying of $GME and another ticker, $AMC on the morning of January 28 2021:

In an appended blog post, Robinhood said:

We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR, and $TRVG. We also raised margin requirements for certain securities.

Amid significant market volatility, it’s important as ever that we help customers stay informed. That’s why we’re committed to providing people with educational resources. We recently revamped and expanded Robinhood Learn to help people take advantage of the hundreds of financial resources we offer and educate themselves, including how to make sense of a volatile market. In 2020, more than 3.2 million people read our articles through Robinhood Learn.

We’re committed to helping our customers navigate this uncertainty. We fundamentally believe that everyone should have access to financial markets. We’re humbled to have helped many people invest in the markets for the first time. And we’re determined to provide new and experienced investors with the tools and resources to help them invest responsibly for their long-term financial futures.

In that context, “position closing only” meant users were unable to purchase the listed tickers — they were restricted to selling them only. That could only and did lead to price drops in $GME and $AMC, and created a stream of traffic to other brokerages so investors could “buy the dip.”

Arguably, markets were always volatile, and the move to allow only selling of the two widely-traded tickers did not go over well. “Ted Cruz and AOC” trended briefly on Twitter, when a minutes-long agreement between the two lawmakers appeared to exist:

A 2016 tweet by Robinhood also circulated for obvious reasons:

The Lead Up to Robinhood’s Decision to Halt Trading

Reddit’s r/wallstreetbets, though not alone in their condemnation of Robinhood’s intervention, was a hub of discourse pertaining to the halt in trading.

A January 28 2021 thread by u/Ninjapeen was titled “Citadel owned Robinhood does the unthinkable… DO NOT SELL, WEATHER THE STORM!” It consisted of a screenshot showing $GME priced at $454.79, alongside the “warning” that users could “close out their positions” (sell $GME), but “cannot purchase additional shares” of $GME.

That thread was one of several blaming “Citadel” for Robinhood’s widely-derided decision to intervene in the $GME rally; another was titled:

Citadel has blocked all trading partners (Such as Robinhood) to trade GME, BB and others. As over 40% of all trades in the US market are via Citadel, they are artificially limiting the supply balance to reduce these stocks in their favour.

And another:

DON’T LET ROBINHOOD BECOME THE SCAPEGOAT. This goes deeper — CITADEL fulfills most of Robinhoods orders. THEY ARE THE ONES CANCELLING WSB.

A tweet by @CopingMAGA provided a longer version of what was occurring in discourse:

In the two tweets, @CopingMAGA wrote:

Brokers like @RobinhoodApp are blocking their customers from buying $GME and $AMC.

This should be considered illegal market manipulation on their part, hoping Robinhood get sued into oblivion for this.

Robinhood uses Citadel to handle their order flow.

Citadel contributed to that $2.75B bailout for Melvin after retail traders started buying $GME.

Now $GME is blocked on Robinhood [emoji]

In the second tweet, another major thread of the $GME rally was mentioned — Melvin Capital. As noted in the Vice.com report excerpted above, “Melvin, Citron, and short sellers have been waiting for a price crash to cover their positions that has never come.” As long as retail investors applied pressure, short sellers at big funds were in the primary crosshairs of the squeeze.

That claim was not uncommon on Twitter:

On January 27 2021, CNBC and other financial outlets reported that Melvin Capital “succumbed” to the short squeeze, closing out their positions at a loss and “ending” what was described as a “raid” on GameStop short sellers:

Melvin Capital, hedge fund targeted by Reddit board, closes out of GameStop short position

Melvin Capital closed out its short position in GameStop on Tuesday afternoon [January 26 2021] after taking a huge loss, the hedge fund’s manager told CNBC’s Andrew Ross Sorkin.

[…]

CNBC could not confirm the amount of losses Melvin Capital took on the short position. Citadel and Point72 have infused close to $3 billion into Gabe Plotkin’s hedge fund to shore up its finances. On Wednesday [January 26 2021]’s “Squawk Box,” Sorkin said Plotkin told him that speculation about a bankruptcy filing is false.

CNBC’s article was shared to YCombinator’s Hacker News forum, where the top-level commenters disputed Melvin Capital’s claims to CNBC:

“So, from what I understand (I did not do the maths myself), despite Gamestop being the most traded stock right now, not enough has moved in the premarket for Melvin Capital to actually close their position when they claimed they did. It seems a very dubious claim.”

“There is no evidence that is true, and short interest is still above 130% so it sounds like a lie to discourage additional buying of gme[.]”

“they most likely sold the position from melvin capital to another entity to hold the risk. that way melvin capital can say “oh yeah we caved in haha reddit wins” to try and calm the market, but I would wager that some private citadel fund is now about to be forced to fellate the reddit call pump[.]”

That sentiment was echoed on threads on r/wallstreetbets, where users speculated that Melvin Capital could not have “have closed entirely in premarket, theyre using scare tactics (ILLEGALLY) to drive the price down.”

A @business tweet published at 9:15 AM (15 minutes before markets opened) reiterated the claim, and comments on the tweet almost entirely disputed the assertion as mathematically unsupported:

A thread on r/investing (since removed but archived) addressed the claim as if Melvin Capital was necessarily lying about having closed their short position:

Originally, it read:

Apparently Melvin Capital has lied about their announcement today [Wednesday January 27 2021] about closing their shorts yesterday (Tuesday [January 26 2021]). People have said they were lying because of the lack of change of volume in shares.

Obviously pre market prices are changing due to the news… but what would actually happen if they are actually caught lying? They’re still f’ed as they want the share price below $60… but it is way above that right now. Is this a last ditch effort?

Reddit’s r/wallstreetbets long-debated Robinhood in general, and a December 2019 thread pertained to how the app made money — quoting a contemporaneous CNBC item:

Robinhood has faced criticism over its reliance on high-frequency traders, especially considering a founding ethos that some have categorized as “anti-Wall Street.” The company sends customers’ orders to high-frequency trading firms like Virtu or Citadel Securities instead of a stock exchange like the NYSE. These trades are executed in what’s known as a dark pool, which as the name suggests, lacks some transparency.

Critics of high-frequency trading say the practice, which takes milliseconds, can result in big market swings and also allow institutional investors to gain an upper hand over smaller retail investors.

Regarding institutional traders affected (such as Melvin and Citadel), the Wall Street Journal reported on January 25 2021:

Citadel LLC and Point72 Asset Management are investing $2.75 billion in hedge fund Melvin Capital Management, an emergency influx of cash that is expected to stabilize what has been one of the top performing funds on Wall Street.

Melvin has been hard-hit by a series of short bets, starting the year with $12.5 billion in assets and losing almost 30% through [January 22 2021], people familiar with the firm said. Among other short positions, Melvin bet against the surging stock of videogame retailer GameStop Corp.

Citadel and its partners are investing $2 billion and Point72, which already had more than $1 billion invested in Melvin as of 2019, is investing an additional $750 million, the funds said [on January 25 2021] … On [January 25 2021], several investors said they retained faith in [Melvin Capital founder Gabe] Plotkin and his team and said they couldn’t make sense of the retail activity in some heavily-shorted stocks that has sent their prices surging. One cited Melvin’s return of more than 50% last year after fees and said Mr. Plotkin had a significant reservoir of goodwill remaining with his clients.

Melvin had been down about 15% for the year through late last week [ending January 22 2021], but heavily shorted stocks soared on Friday [January 22 2021].

Does Citadel Own Robinhood?

While social media followed the $GME story on Reddit, Twitter, and Discord, a different version made its way through financial news outlets and cable business news shows.

That excerpted article from the Wall Street Journal on January 25 2021 — two days before Melvin Capital told CNBC it closed out its short position — indicated that Citadel LLC and Point72 Asset Management provided an “emergency influx of cash” to prop up the “hard-hit” firm (which the paper maintained “had a significant reservoir of goodwill remaining.”)

The Verge clarified at least part of the business relationship between Robinhood and Citadel:

What does Robinhood have to do with this? Well, it makes options trading much more accessible to retail investors — but there’s something else. Trades on Robinhood are free! But Robinhood isn’t offering free trades to be nice; the company gets paid by some big-time investors such as Citadel Securities to see what retail investors are doing. This phenomenon, which other brokerages are engaged in as well, is called payment for order flow. Citadel Securities makes its money on these orders by “automatically taking the other side of the order, then returning to the market to flip the trade. It pockets the difference between the price to buy and sell, known as the spread,” according to the Financial Times.

A relatively new Wikipedia page (“GameStop Short Squeeze”) included a section titled “Market Manipulation Allegations,” touching upon Robinhood’s relationship with Citadel Securities:

Bloomberg previously reported that 40% of Robinhood’s revenues were derived from selling customer orders to firms such as Citadel Securities and Two Sigma Securities. Citadel Securities was fined $700,000 in July 2020 for trading ahead of customer orders. They delayed certain equity orders from clients to buy or sell shares while continuing to trade the same stocks in its own account, as part of its market-making activities, according to FINRA. Over a two-year period until September 2014, hundreds of thousands of large OTC orders were removed from its automated trading processes, rendering the orders “inactive” and so they had to be handled manually by human traders. Citadel Securities then “traded for its own account on the same side of the market at prices that would have satisfied the orders,” without immediately filling the inactive orders at the same or better prices as required by FINRA rules. In September 2020, Robinhood was probed by the SEC into whether they properly informed clients that they sold stock orders to high-frequency trader and other Wall Street firms.

A linked entry for Citadel LLC (mentioned by name in the WSJ piece) did not mention any ownership of Robinhood (nor even the company’s business with the app), and explained the structure of Citadel LLC:

Citadel LLC (formerly known as Citadel Investment Group, LLC) is an American multinational hedge fund and financial services company. Founded in 1990 by Kenneth Griffin, the company operates two primary businesses: Citadel, one of the world’s largest alternative asset managers with more than US$35 billion in assets under management (as of October 1, 2020); and Citadel Securities, one of the leading market makers in the world, whose trading products include equities, equity options, and interest rate swaps for retail and institutional clients.

Assertions Citadel LLC “owned” Robinhood were untrue, but rooted in a more complicated question of on which side Robinhood’s bread was buttered.

How Robinhood Makes Money

A short Investing.com item about how Robinhood made money explained:

Robinhood Markets is a discount brokerage that offers commission-free trading through its website and mobile app. The company generates significant income from payments for order flow, a common although controversial practice whereby a broker receives compensation and other benefits for directing orders to different parties for trade execution. Robinhood refers to this revenue as “rebates from market makers and trading venues.” While the payments are negligible for small retail trades, a company that directs billions of dollars in trades to market makers can earn substantial amounts.

Independent analysis suggests that payments for order flow generated an estimated $69 million in revenue for Robinhood in 2018, up 227% from the previous year, and accounted for more than 40 percent of its overall revenue. In Q2 2020, Robinhood generated approximately $180 million from payments for order flow.

As Robinhood’s decision to halt trading on January 28 2021 was dissected, lawmakers and others commenting accused the app of protecting capital firms at the expense of retail traders:

Summary

After Robinhood restricted $GME, $AMC and other tickers to “closing positions” (selling) only on January 28 2021, assertions that Citadel owned Robinhood were common in discourse about the controversial decision. A progression of financial news stories before the GameStop short squeeze went viral detailed both difficulties faced by short seller Melvin Capital (which received an influx of cash from Citadel LLC on January 25 2021) as well as the relationships between large firms like Citadel and Robinhood. Citadel did not “own” Robinhood, but underlying questions about Robinhood’s motivation for intervening remained unanswered as of January 28 2021.