Citadel Securities’ Book: Hiding in Plain Sight (Teaser #2)

Image Credit: Liu Bolin

“The problems are solved, not by giving new information, but by arranging what we have known since long.” – Ludwig Wittgenstein

It is said that the best way to eat an elephant is one bite at a time. And, since the aggregated 13F filings of Citadel Securities represent such an elephant-sized trove of delicacies – not to mention the contextual value it brings relative to so many other players – we are only going to chew on a couple new bites for right now.

First, we recently made a splash about the product composition of the US “stock” market, and the fact that it’s mostly made up of derived products, in the post, US Stock Market is Made of These! More specifically, it should come as no surprise that the product class with the highest growth (since we started our indexing in Q1 2010) is ETFs – followed predictably by ETF options (see chart below).

So, one factoid that may be worth further contemplation is the point at which Citadel Securities adds ETFs (and, in their case, ETF options) to its position roster. That timing is curious – and, illuminating.

Consider the comparisons: ETF positions show up in the very first 13F filings for each of GETCO, Virtu and Flow Traders. For GETCO, that’s Q4 2008 wherein there are a total of 23 positions reported (7 call positions, 5 put positions, 6 stocks, and 5 ETFs). For Virtu, that first 13F filing is Q4 2009 wherein there are a total of 88 positions reported, 39 (or 44.3%) of which are ETFs, no options, and the remainder are stocks. Note also that 18 of the 20 largest positions (by value) for this period are ETFs. Lastly, in the case of the Amsterdam-based Flow Traders, that first 13F filing is Q4 2011 wherein a total of 234 positions are reported, including 151 ETFs representing 64.5% of all positions and 89.4% of total reported value. The remainder are stocks (and depository receipts) – and there are no option positions.

[As a critical reminder, 13F reported positions do not represent the full roster of securities being traded by these firms. They only represent the long positions in SEC-designated securities as of the relevant calendar quarter-ending dates.]

By contrast, the first 13F reporting for Citadel Securities that includes ETFs comes in Q1 2014 wherein a total of 7,263 positions are reported, including 232 ETFs, 208 ETF calls, and 204 ETF puts. [Note: For purposes of 13F reporting, option positions are typically reported as an aggregation of specific positions in the underlying option matrix – both strikes and durations – and are valued as if each of those positions are 100 delta.]

See the position segmentation (by position count) for the 43 quarters beginning Q1 2008 and ending Q3 2018 in the chart below.

Notice anything different?

Now, there is a lot that could be said here about what this picture tells us, however let’s remember the elephant and save some appetite for additional exploration later, with the following exception: a few more words about options.

I don’t want to get into it too deeply here, but I do want to emphasize and distinguish the market making engines that are incorporating options trading and those that are not. It turns out, as we peel back the layers of the onion, that this difference will become significant.

Let’s start that bit of exploration by enlarging the previous picture to drill down on a meaningful nuance of Citadel Securities’ option book. In the chart below, Alphacution presents the call and put option position counts for the 43 quarters beginning Q1 2008 and ending Q3 2018.

Note the significant change in strategy in Q2 2016. For the 32 quarterly reports before Q2 2016, the correlation between the put and call position counts is 0.998 – which is about as high as you’re ever likely to find. By contrast, the correlation for the 11 quarters beginning Q2 2016 is 0.939.




What has changed in the strategy as of Q2 2016?

If you are a firm trading anywhere near Citadel’s market making operations, did you already know about this?

And, if not, should you care?

When you are managing a high-turnover quantitative strategy (like market making)  – and more of you will be exposed to the inevitability of trade workflow automation along the road ahead – you don’t care about fundamentals, or trade ideas, or any of the factors that make up the tasks in a traditional trading decision. No, quant shops mainly care about liquidity, volatility, and capacity of the “things” they trade – and they mainly do so agnostically.

One of Alphacution’s core working hypotheses right now is that capacity needs to be monitored much more closely in the current market environment – and likely, perpetually from now on.

Not position capacity, strategy capacity.

You need to pay much closer attention to who is trading in your backyard…

And, for those of you big guys who believe you are sufficiently downfield from these high-speed quant shenanigans to be immune from their impacts, you need to wake the f∞k up… This wave is heading your way – and some of you are likely to be extinct after all is said and done. Don’t be the elephant…

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By | 2019-02-12T15:36:21-05:00 January 9th, 2019|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact:; Follow: @alphacution.