“What is to give light must endure burning.” – Viktor Frankl
“The backbone of surprise is fusing speed with secrecy.” – Carl von Clausewitz
UPDATE 11/21/2019 (bottom of post)
Why is it coming out now, apparently months after the talks took place, that Blackstone inquired about buying a stake in Citadel?
There are a few reasons we can think of for monetizing coveted equity – or, at least showing enough leg to solicit an updated “mark” on the assets – but, the most likely one has been the same for years: Ken wants to become an investment bank.
Ok, so what does Citadel need to become an investment bank that it doesn’t already have?
Well, given leadership – and, occasional dominance – in listed equity-linked markets by Citadel, the next beachhead for investment banks-in-training is fixed income. And, Citadel-like prowess in fixed income may require lots of technology and smart folk, but the one thing it definitely needs is balance sheet.
The next question, then, is: Do you build a balance sheet or buy a balance sheet?
Now, the charts below – some of which are making their debut here on the Feed – provide solid evidence (even though Citadel does a damn good job of complicating the act of re-assembly) that Citadel has been consistently quite successful in building their own balance sheet. In the first of these charts, below, Alphacution presents the lineage of Citadel Securities’ total assets for the period beginning 2003 and ending 2018, wherein the latest figure clocks in at a respectable ~$75 billion (when including Citadel Clearing). As a comparison, the broker-dealer arms for Goldman Sachs and JP Morgan each boasted total assets north of $400 billion for 2018, however with only $32.4 billion and $52.4 billion of those larger figures allocated to equities, respectively, Citadel is much closer to being in the league on the equity-linked side.
We can also see, in the next two charts, the shift in product and asset class segmentation for Citadel Securities, LLC and Citadel Securities (Europe) Limited. In the past few years, starting with an out-of-the-blue spike in interest rate derivatives for the European entity (starting in 2015) and a similarly unique spike in debt securities on the balance sheet for the US entity (starting in 2017), Citadel has been positioning as if they were making a strong move into fixed income.
So, if Citadel is doing such a bang up job growing its own balance sheet – and using that to build out their global franchise in fixed income, why deviate from the strategy by flirting with outside money?
The answer to that question is timing.
Chances are – at the time of these talks just a few months ago – Mr. Powell and the Fed were sharing guidance of additional interest rate increases. And, with rising rates (particularly from such still-depressed post-GFC levels) comes beefier opportunities in fixed income and interest rate derivative trading. With that expectation, Ken needed to build balance sheet faster than he could grow it organically. Hence, a little leg and a little dance with Blackstone.
When Mr. Powell got thumped to head the other direction on rates, Ken put his leg back in the holster and ended the flirtations with Blackstone…
All in, it’s a fascinating dynamic to keep an eye on…
UPDATE (10/18/2019): Alphacution was interviewed for a recent story in Crain’s Chicago related to this topic, “Why Ken Griffin Could Be Shopping Around a Piece of His Business” (October 18, 2019). And, I agree with Citadel COO Gerald Beeson. Citadel is doing a very good job growing its own balance sheet.
There are two amendments and one correction that we need to make here to improve the analysis.
The amendments are related to the comments made above about “out-of-the-blue” spikes in interest rate derivatives, in the case of Citadel Securities (Europe) Limited, and debt securities, in the case of Citadel Securities, LLC. According to Zia Ahmed, Managing Director, Corporate Communications for Citadel Securities, both of these moves into fixed income cash and derivatives were well-telegraphed in the media prior to the expansion into those products, and therefore, should not have been perceived as a surprise when those moves showed up in regulatory disclosures.
I have no problem making these amendments. In fact, I encourage the communication if there is data or other evidence that might give reason for more accurate or even other reasonable perspectives. Alphacution will express strong opinion. However, our goal is for those opinions to be based on the most complete and accurate data and evidence.
And, since we are mainly reading the data we model – and not scouring the media landscape to incorporate those narratives into our interpretations of that data – we can occasionally deviate from a more accurate interpretation, simply out of blindness. Mr. Ahmed pointed this out, and I am happy to add these thoughts.
The correction is related to the balance sheet exhibit we included above. Citadel’s position is that Citadel Clearing, LLC should not have been included to arrive at our total assets figure of ~$75 billion for 2018 (when combining total assets of Citadel Clearing and Citadel Securities).
Now, this new structure where the prior combined entities have been separated (as of 2015) is unique among our modeling to date, but appears to be somewhat like that of Merrill Lynch, wherein there are two entities, Merrill Lynch Pierce Fenner & Smith – MLPF&S (which we wrote about recently here) and Merrill Lynch Professional Clearing Corp.
Though these two Merrill entities are not cleaved – like Citadel’s – in the middle of the available dataset, the structure appears to be similar on the surface (see below):
Furthermore, since Alphacution has not modeled the other leading broker-dealers – bulge bracket or otherwise – in such a way as to be able to estimate how much clearing-related assets may be within their balance sheets, we have no way at this time to make “apples-to-apples” comparisons among the various key players in the space – which is our ultimate goal.
So, for now, our readers should appreciate that Citadel Securities’ total assets, as of 2018, are at least $35 billion, but not ~$75 billion, as originally stated above. As for Citadel Securities (Europe) Limited, which we have not fully modeled to this degree, their current assets for 2018 were $2.7 billion.
One more thing:
The initial catalyst for the bank-owned broker dealer modeling was Deutsche Bank, given their announcement to pull back from, if not terminate, their US equities brokerage business. That catalyst resulted in “Remembering Deutsche Bank: A Market Macro-Structure Canary?” – and started us thinking about other sell-side players who might be on this same fence with equities, and therefore, who else might be undergoing similar considerations as DB.
So, we dove deeper into that analysis – all the while wondering, based on our initial ranking of the top 100 players in US listed market structure, when the leaders on the buy-side might grow to the point of having a showdown with some of the players on the sell-side. Here’s an early view of what that showdown looks like, so far:
Until next time…
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