Ken Griffin Talks Crypto, Politics, And PFOF
Plus: XIV returns, 24 hour trading, benchmark manipulation, and more
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News
Full Interview - Citadel CEO Ken Griffin at Economic Club of Chicago: Ken Griffin may be the most influential CEO in all of global market structure. I don’t think I’m exaggerating when I make that claim. Citadel Securities is one of if not the largest market makers in the world with a massive presence in ETFs, interest rate swaps, US Treasuries, cash equities & equity options. Citadel the hedge fund manages nearly $40 billion for its clients and has a long & distinguished track record of success.
When the leader of this firm speaks his mind, we’d be wise to listen.
On October 4 Griffin gave an hour-long interview at the Economic Club of Chicago where he answered questions on a wide variety of topics, including Biden’s economic agenda, Federal Reserve policies & the state of US/China relations. I highly recommend listening to the interview in its entirety.
There were two opinions Griffin voiced during the Q&A that I wanted to focus on in particular. The first was in response to a question around payment for order flow - what does Griffin think will happen to Citadel Securities if PFOF is banned?
“PFOF is a cost to me… if you're going to tell me that by regulatory fiat one of my major items of expense disappears, I'm okay with that.”
Interesting. The head of the largest net user of payment for order flow says ending the practice won’t really affect his firm?
Griffin went on to say that brokers are held to best execution standards that affect where their order flow goes. As long as brokers will still be required to provide best execution for their clients, he thinks Citadel Securities will still be able to compete & win order flow by providing the best prices to these brokers, PFOF or no PFOF. You can be sure Gary Gensler was listening to this discussion with intense interest.
The second comment came when answering a question about crypto - why aren’t Citadel & Citadel Securities active in crypto today despite numerous competitors making major investments in the space?
“Let's face it - it's a jihadist call that we don't believe in the dollar. What a crazy concept this is that we as a country embrace so many bright, young, talented people to come up with a replacement for our reserve currency which helps to make our standard of living a reality and accrues incredible benefits back to our country. 'Let's replace the dollar as the reserve currency with Bitcoin' - that's a brilliant idea. By the way, let's go ahead and build several hundred new power plants that produce an unbelievable amount of carbon to make that dream a reality… I think I maybe just told you how I feel about crypto.”
Griffin did go on to say that his firms will start to become active in the crypto markets when the industry’s regulatory outlook becomes more certain.
Other interesting comments from Griffin during the interview:
If Chicago’s crime and - in his words - “public corruption” problem doesn’t reverse itself soon, Citadel & Citadel Securities may begin to think about moving out of the city.
Citadel is planning to open a Miami office in the coming months.
Ken Griffin is currently quite active in local & national politics behind the scenes, and he didn’t completely deny the possibility of becoming more overtly active at some point down the road.
‘Volmageddon’ Is History as SEC Greenlights Leveraged VIX ETFs: The boys are back in town! Two ETFs were approved by the SEC this week that give investors a way to place short & 2x leveraged bets on volatility. They do so by channeling AUM into either long or short CBOE VIX futures products that roll on a continuous basis. These ETFs mirror the infamous volatility ETPs that blew up in February 2018, an event now known as “Volmageddon”. ETF sponsor Volatility Shares LLC says the new products are structured in a way that help prevent future meltdowns, but it remains to be seen how retail & institutional customers will respond to the offering.
I have two takeaways from the news - the first is a bullish catalyst for CBOE, home of the VIX futures market. Ever since Volmageddon CBOE’s VIX open interest has never recovered to pre-2018 levels, largely in part because of the blowup of short-vol strategies that haven’t returned to popularity. If people do start using these instruments to try their hand at trading volatility once again, we could see VIX futures volume & OI grow substantially with downstream impacts on the exchange’s revenue.
These ETF approvals should also turn our attention back towards the SEC and their framework for approving complex financial products. On the back of their sign-off on these two VIX ETFs, the SEC & Chairman Gensler had this to say:
“Though the listing and trading of these products, including the listing and trading of the two ETPs that the Commission voted to approve last Friday, can be consistent with the Exchange Act, that doesn’t mean the products are right for every investor. I encourage all investors to consider these risks carefully before investing in these products”
The SEC voted to approve two products that had serious negative market structure impacts just three years ago, citing compliance with the Exchange Act.
Yet the SEC is also dragging its feet on approving a Bitcoin ETF, a product that seems less complex & has more broad investor interest than most other recently launched ETFs. Why the double standard?
Is the Stock Market Open at 3 a.m.? This Startup Says It Should Be: Yet another stock exchange is trying to launch in the United States, which if approved would become the 17th national securities exchange to hit the market. That seems like a few exchanges too many to me. I’m all for competition & innovation, but there’s a point where new entrants to the US equities market hurts liquidity & market function rather than helps it.
Bermuda-based FX & crypto venue 24 Exchange is applying to launch a US equities venue that would allow for 24/7 stock trading. The company says the move will give retail investors more flexibility by allowing overnight, weekend & holiday trading, and will also help open up US equity markets to foreign investors.
The argument sounds convincing, but I’m not a fan of the proposal. Market liquidity is helped & hindered by a variety of factors including participants, volatility, number of venues, and time. The more time markets are open, the less chance there is that buyers & sellers will appear in the market at the same time to execute a trade. Does this mean shortening trading sessions would lead to more liquid markets? Some say this could be the case. Regardless, I would argue most people agree expanding trading sessions to 24/7 would hurt liquidity rather than help it. Most trading activity happens in the first and last 30 minutes of the day anyways, which to me signals trading hours are already more than long enough.
There’s also securities fraud to consider. If markets never closed US companies would be forced to report earnings, M&A and other material events while their stock is actively trading. Not only would this exacerbate headline volatility, it would open more opportunities for manipulation & illicit trading around these headlines. Keeping trading sessions generally aligned with normal US business hours helps markets to fairly digest new information before trading a stock.
But enough about 24/7 markets. There’s another reason I suspect the firm is looking to launch a licensed exchange - the Order Protection Rule. The Order Protection Rule includes the requirement that brokers route trades to the exchange with the best price for a stock at any point in time. Because of the off-chance that 24 Exchange will quote the best bid or offer for a stock at any moment, all brokers & market participants are required to pay for 24 Exchange’s data feeds & connectivity services to stay compliant, regardless of liquidity or volume. This makes the game simple - getting approved by the SEC is a ticket to guaranteed customers & revenue with the upside of attracting meaningful trading volume. Not a bad risk/reward at all.
I’ll be watching the progression of 24 Exchange’s application closely as it tries to launch sometime next year.
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Other Stories I’m Reading
Inside the battle to be Europe’s Robinhood
BlackRock to give clients the right to vote
The Surge in Natural Gas Prices Is Equal to a $190 Oil Shock
Citadel-Backed Exchange That Shook Up Treasuries Takes On Crypto
Twitter thread by FTX US President Brett Harrison on LedgerX licenses
U.S. Justice Department probes suspected manipulation of Platts benchmarks
MEMX becomes first equities exchange to feed pricing data into DeFi Pyth Network
Flow Traders Joins The Pyth Network
Chart of the Week
The price of natural gas in the UK is spiking faster than any altcoin or Reddit stock I’ve ever seen:
(Source)
Chronic under-production of gas in Europe combined with expectations for a cold winter & higher Asian LNG demand have all played into the price spike, which is set to cause major upheaval to consumer prices & local politics for at least the next few months.
Amid the chaos, which exchange is collecting their fees like any other day & is in a position to benefit most from the volatility? ICE, the top futures market for UK, European & Asian natural gas futures. The exchange’s energy ADV clocked one of its best quarters in many years in Q3; Q4 is setting up to look even better. Although ICE has become quite diversified with the addition of fixed income data & mortgage units to the business, energy trading still makes up a sizable portion of the company with over $1 billion in annual revenue. The stock is starting to react to the strong volumes - shares are +10% this week & caught an upgrade from Goldman Sachs.
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, NDAQ, COIN and VIRT. I am also long Solana.