Citadel’s Secret Special Sauce (Updated)

As excerpted from the case study, Deconstructing Citadel Securities

Alphacution believes that Citadel’s core competitive advantage – its secret sauce – can be found on display every day, out in the open, and is not related to a specific product, asset class, region or even a specific trading strategy or temporal wave of theoretical alpha. No, the thing that makes Citadel so unique is its focus on process. You just need to know what to watch for.

Everything this company does has first been disassembled and deconstructed down to its smallest, atomic parts and then reassembled with a maniacal sensitivity to details, best-practices and processing – whether that be a decision-making process or a data management process or a strategy launch process. In all activities front-to-back, this team seeks opportunities for efficiency and to catalog incremental intelligence at every step. And though the company has developed a stellar reputation for the application of technology to its workflows, it is only by virtue of the additional ingredients of culture and excellence in assembling human capital skills that the former can be applied in such impactful fashion.

So, with processing at its heart, Citadel has grown to be active in markets where it can establish persistent competitive advantages by consistently discovering and harvesting the value of information asymmetries, full stop. Secondary to this, Citadel displays a strong preference for markets that exist at the crossroads of high liquidity and high workflow automation. Because it is here, at this crossroad, that one can optimize the asset capacity-performance mix. Hence, we see a strong presence in cash and derivatives products in listed markets, which is essentially the core of their market making operation. Furthermore, Citadel will seek to become active in OTC markets that display strong symbiosis with listed counterparts, and even take a pioneering position in those markets that are in a state of transformation towards greater workflow automation, such as OTC swaps and swap futures.

As a counterfactual, we don’t detect any concerted effort to use the brand to establish positions in less liquid products or strategies with less automated (or automatable) workflows, like real estate or venture capital or perhaps distressed credit. This is not to say that Citadel has set a constitutional boundary to avoid making concentrated or illiquid trades. They do and they will, but not necessarily in the ways that you might expect. Watch who is the most decisive during the aftermath of market dislocations and you will discover which teams excel at data management and the harvesting of information asymmetries. Think about who moved with greatest agility to gather distressed trading books in the aftermaths of Enron and Lehman Brothers. In both cases, Citadel was a first-mover.

Furthermore, if the role of a product or market remains in question or the data flows tend to lack a level of credibility, those opportunities would tend to be avoided by Citadel. To wit, Ken Griffin has been quite vocal about his skepticism for the future of digital assets. And finally, as we will detail later in the report, Alphacution’s analysis even detects an implied level of skepticism about the capacity of exchange-traded fund (ETF) strategies.

Adding to the contextual framing, we now turn to the available data, starting with Citadel Securities’ position and portfolio segmentations. Now, before we get to deep into this, it’s important – as a primer – to understand why positions accumulate on the balance sheet of a firm that possesses the capacity to trade up to the highest native speeds across the broadest spectrum of products, asset classes and regions.

Rebate and payments for order flow (PFOF) schemes notwithstanding, the optimal scenario for a market maker is to capture spreads and go home flat at the end of each day. The next most optimal positioning, which results in the case of option market making books, is to be delta neutral at the end of each day. In this way, the market maker doesn’t need to be concerned one iota about the fundamentals of the underlying security. In a world where trading frequency is extremely high or option positioning results in delta neutrality, each security is simply a different thing to trade and no one cares what the underlying company attached to that ticker symbol does.

But, unless the market maker is trading in a manner that is sufficiently smaller than the available liquidity, being flat or delta neutral is not an accurate depiction of the world they are likely to be living in. In a world where positions are held for hours or overnight or days or longer, fundamentals and gap risks, among others, come into play; a phenomenon that destroys performance (as measured by Sharpe Ratio).

The challenge is related to scaling

We now turn to the available data where the cache of 13F reports – which gives us a glimpse into key parts, but not all, of Citadel’s US trading activities – does allow us to clearly distinguish the long side of the market making book (because of the highest concentration of options positions) from what looks like a convertible bond arbitrage strategy (due to the highest concentration of bond positions) and a long-short equity strategy (due to the highest concentration of equity positions, (see Exhibit A9, below):

Sample Exhibit A9: Citadel Advisors Lineage – 13F Average Portfolio and Strategy Positions Segmentation by Product Class, Q1-2008 – Q4-2018

Download an executive summary of this case study, below.

Premium subscribers receive automatic access to this report.

Basic subscribers receive one-time rebates of subscription payments to date against individual report purchases or conversions to enterprise subscription packages.

Inquire about Alphacution subscription options and report purchases at

If you find value here or elsewhere on the Feed, please perform at least one action item to support it. Nothing new or innovative can survive without support. In this case, it’s not time consuming nor is it expensive to show your appreciation. Ideas below…

Support the Feed!

Individual Subscription Options

Note: Business credit cards and bank accounts can be used via our PayPal payment portal.

Alphacution is in the intelligence business.

We are uniquely focused on harvesting, packaging and distributing intelligence about the impacts of technology in financial markets and on the businesses of trading, asset management and banking. Our growing model library is our intelligence asset. Today, this intelligence asset primarily supports written research content, which can be accessed via standardized subscriptions and customized engagements. Occasionally, this core asset also supports video, audio and live presentation content. In time, Alphacution’s intelligence asset will support a broader platform of products and services, like data feeds and software.

For the past year or so, Alphacution has been publishing most of its research content on its Feed for free, and promoting that content via periodic newsletter. The purpose of this strategy has been to assess the interest in and demand for a unique perspective and a new level of intelligence on the financial markets ecosystem.

And, based on the growth in network and activity around that research, it seems that we have struck a cord with many of you – a network of senior executives representing some of the most advanced players in the global financial markets arena and their stakeholders.

The recent trajectory of pageview metrics on our site is symbolic of this claim, as shown below:

Now it’s time to take that level of engagement and direct it towards a more viable long term economic support model that ultimately allows us to scale our team and enhance the quantity and quality of our intelligence.

So, here’s what we are going to do about that:

For those of you who are eager to derive greater value from this work and apply that intelligence to your own business interests, Alphacution is offering individual introductory subscription options priced at $275 per year or $25 per month, cancellable at any time. Both of these options include a rebate on purchases of deeper, more substantive reports and case studies.

In other words, the entire value of an individual subscription paid up to the point of purchasing a single report will be deducted from the purchase of that report. (Rebates not to exceed the maximum value of an annual subscription.)

Examples of upcoming reports – that fall within our 2019 research strategy, outlined in the post Alphacution’s Book: Not Hiding, In Plain Sight – that will be available via the aforementioned subscription rebate mechanism include:

  1. Case Study: Citadel, LLC (~ Q1-2019)
  2. Case Study: All-Time Top 10 Hedge Fund Managers, Ranked by Profits (~ Q2-2019)
  3. Case Study: Top Proprietary Trading Firms (~ Q3-2019)
  4. Case Study: Goldman Sachs Group, Inc. (~ Q4-2019)

Enterprise subscription packages and custom content/service engagement options are available upon request at

Individual Subscription Options

Note: Business credit cards and bank accounts can be used via our PayPal payment portal.

Now, for those of you who don’t expect to take advantage of the offers outlined above but want to continue to enjoy the insights, intelligence and occassional entertainment that remain openly available on the Feed, I want to make this specific plea:

Free doesn’t mean there are no costs. In fact, in this case, there have been extraordinary costs in the accumulation of experience and sight, meticulous curation and assembly of data, and creative visualization of and storytelling around our findings.

So, if you value quality content – here or anywhere else – then you need to find a way to support that content at some level simply because you want it to continue to exist. Our post, In Support of Digital Content – which was adapted from other notable digital era content developers – makes a more expansive case for this perspective.

Bottom line: Your efforts to support via one-time or recurring contributions will help guard against this content needing to move from the currently preferred audience-driven model (for its level of independence) to a sponsorship-driven model (which can be found on most other industry media outlets).

So, if none of the subscription options suit you, one-time and recurring support contributions can be made at any level here:

Of course, as always: If you value this work, please continue to “like it,” share it, comment on it – or discuss amongst your colleagues – and then send us

As our “feedback loop” becomes more vibrant – given input from clients and other members of our network, especially around new questions to be answered – the value of this work will accelerate.

Don’t be shy…

Unsubscribe from prior subscriptions without further obligation, at any time, here:

By | 2019-04-04T00:27:04-04:00 March 30th, 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.