A Citadel Securities IPO Could Shed Light on Modern Markets

Paul J. Davies

12 Jan 2022, 02:35 PM IST

(Bloomberg Opinion) -- The mechanization of markets continues, and Citadel Securities, a leader among modern technology-driven market makers, has just won $1.15 billion of fresh equity to fund growth in a deal that could herald a future public listing.

This investment is the first outside money Citadel Securities has taken since being founded by hedge fund billionaire Ken Griffin about two decades ago. The new backers are cryptocurrency investor Paradigm and Sequoia Capital, which has a decades-long history of picking technology winners that go public — hence the ideas about a potential listing. An initial public offering would bring greater transparency to a fast-growing business that dominates some sections of stock market trading. Citadel Securities and other high-speed market makers have run into controversy for their model of paying retail brokers for their buy and sell orders.

The investment values the trading company at about $22 billion, which is equivalent to potentially more than 5 times earnings before interest, tax, depreciation and amortization depending on how much Citadel Securities’ business grew in 2021. That compares favorably with Virtu Financial Inc., a smaller similar business that trades at about 4.5 times forecast 2021 Ebitda, according to Bloomberg data.

Citadel Securities makes markets in everything from shares, options and ETFs, to government bonds, interest rate swaps, currencies and commodities. Revenue growth leaped in 2018 and 2020, doubling from the previous year both times, according to Bloomberg News. It is expected to report another record year for 2021. With only incremental growth in 2021, it should still achieve Ebitda of $3.9 billion to $4.6 billion if its Ebitda margin remains similar to those in recent years.

The company declined to say what it would do with the fresh equity from its investors. Alfred Lin, the Sequoia partner who will take a seat on Citadel Securities’ board, said the business aimed to be the leading market maker in existing and emerging asset classes.

Griffin, who is chairman at Citadel Securities, has been notably skeptical about cryptocurrencies in the past, but the company looks likely to explore these markets, especially when regulation of digital assets becomes clearer.

Many investment banks and investors are keeping tabs on developments and looking into the possibility of innovations such as creating tradable tokens for illiquid assets such as art, commercial real estate or private equity.

But Citadel Securities is best known for making markets in equities, where it uses quantitative modeling techniques to rapidly price thousands of stocks and has grown to take a large share of all U.S. trading, including nearly 40% of trades by individual investors, according to its website.

It is this business and how players like Citadel Securities pay the brokers to get it that has attracted the attention of Gary Gensler, the chairman of the Securities and Exchange Commission, although he has yet to propose any rule changes. If a big player like Citadel Securities could bring more transparency to this area — with or without a listing — that could only be a good thing.

More From Other Writers at Bloomberg Opinion:

Matt Levine’s Money Stuff: Who Can Resist the Crypto Boom?
What Gensler Really Meant by His Order Flow Remarks: Aaron Brown

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.