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When it comes to the world of trading & market structure, one company clearly stands out as both the most talked-about and the most enigmatic & mysterious in the industry. Flip to any financial news channel, frequent any corner of social media that deals with the markets, and you’ll likely find them. A hedge fund giant with thirty years of experience at the top of Wall Street. The world’s largest market making firm. The subject of numerous Congressional investigations & conspiracy theories. The boogey man of retail investors the world over. Citadel & Citadel Securities, lead by billionaire founder & CEO Ken Griffin.
Today the two firms are synonymous with unimaginable success & wealth, the kind of market participant who has benefitted from almost every tectonic shift markets have been through over the last decade. Energy volatility. Quantitative easing. Electronic trading. Retail meme stonk madness. Record options volumes. You name it, and Ken Griffin’s companies have likely profited from it. Performance at Citadel’s main fund has crushed the S&P over a twenty year time-period. Former Fed chairs & regulatory heads grace its payroll. Its firm receives tens of thousands of resumes from top universities & Wall Street firms every year. Citadel seems unstoppable, even immortal in today’s market.
Amid Citadel’s raging success, it becomes easy to forget just how close the firm was to failing in the 2008 financial crisis. There was a period of time in the depths of the crisis, after Lehman Brothers collapsed in the fall of 2008, that Citadel found itself days away from death.
“It was the only moment in the history of Citadel where our actual existence was in question.” Ken Griffin later recounts in an interview. “I would go home on a Friday, and if Morgan Stanley did not open for business on Monday, I would be done by Wednesday.”
My research into Citadel & Citadel Securities leads me to view the firms in two distinct acts: the periods before & after the 2008 financial crisis. As investors & students of market structure, understanding the story & role of the world’s largest hedge fund/market maker combo is imperative. To understand the Citadel we hear & argue about today, we need to first learn how the firm nearly failed, and what caused it to rise from the depths of 2008 to dominate global market structure. This post, the first of a two part series, seeks to accurately recount Citadel’s birth, early years & near-death experience.
The Harvard Hedge Fund Hero
A 1986 article in the Sun Sentinel Florida newspaper interviewed three young high school students vying to win a state programming competition. Of the trio, one wanted to study pre-med & become a doctor. Another wanted to work for IBM like his parents.
The third student looked cut from a different cloth entirely. Described as a “lanky, bespectacled youth”, this 17 year old student was president of the school’s math club, ran a software distribution company out of his parent’s home, and created his own educational programs which were approved for use in school curriculums. His name? Ken Griffin.
Griffin’s entrance into the hedge fund world reads like a classic feel-good success story - it’s almost too perfect to be real. After high school Griffin studied economics at Harvard, where in his sophomore year he had his first run-in with the financial markets. Forbes had published a bearish article on Home Shopping Network arguing that its meteoric rise in the preceding months was overdone; Griffin agreed, and bought put options on the stock shortly thereafter. A few days later, the stock collapsed. Making a few thousand dollars in the span of a week helped spark Griffin’s interest in derivatives; realizing how much his broker & options market maker charged for the trade sealed it for good. Within weeks Griffin was spending most of his time in the library studying fixed income & derivatives pricing, and got approval from the school to install a satellite dish on the roof of his dorm to get real-time stock quotes. His obsession with the markets had officially begun.