Deconstructing Citadel and Why It Matters

Image Credit: Fabian Oefner

“The voyage of discovery is not in seeking new landscapes but in having new eyes.” – Marcel Proust

“Learn how to see. Realize that everything connects to everything else.” – Leonardo DaVinci

In my mind, memories of the childhood home are dominated by those of vast spaces. A colossal stairway, a living room like a grand ballroom, the front and back yards both like baseball stadiums. My father is there – like a giant sitting at the head of the kitchen table – savoring his freshly unscrolled newspaper. And yet, upon visiting this place as an adult, it presents itself as your basic 3-bedroom layout – barely 2,000 square feet – with postage stamp yards. It turns out, my memories are somehow locked in when I was the size of a toddler. Perhaps, you share the experience of this illusionary twist of perspective…

Recently, listed markets have started to mimic this duality of perspective for me. There was a time when the totality of stocks and options and all other listed securities in between seemed endlessly vast, much like the horizon of an ocean. There was a time when it seemed that one could never run out of choices for things to trade. However, given an assembly of data – all of which was easily plucked in raw form from a website here and a website there – I can see now that this initial perspective was also an illusion.

Alphacution has discovered that, for some players, listed markets are not endlessly vast…

For the first time, I am now imagining that some players have started to ask themselves:

What if we run out of things to trade?

This idea is the launchpad for today’s lesson: In the exhibit below, Alphacution presents its assembly of total 13F securities for the fully available period starting Q1 1996 and ending Q4 2018. Here we can see that this list – which is comprised primarily of stocks, options, and the fastest growing component, exchange-traded funds (ETFs) – has hovered near all-time high territory between 16,000 and 16,500 securities since about Q3 2015, see below:

Upon closer review using the chart below, we can see the evidence of stagnation in the total stocks count against the significant growth in the total ETFs count, a phenomenon we showcased in the article, The US Stock Market Is Made Of These:

Drilling down one additional step further, we can also see that the stocks count has settled between 5,000 and 5,100 since Q1 2016, a period of 3 years:

Now, when we turn to take an early peek at some findings from Alphacution’s forthcoming case study on Citadel, an unusual observation shows up (over and above the profound fact that no one outside of a few at Citadel has likely ever set eyes on this particular line). In the exhibit below, we present an assembly of total 13F positions for Citadel Advisors (and the lineage of predecessor entities) – which is the legal entity within the entire complex Citadel, LLC organizational structure that files the 13F reports – for the full sample of 84 quarterly 13F reports beginning Q1 1998 and ending Q4 2018. Of particular note is the fact that total 13F position count seems to have been hitting a ceiling of sorts near ~12,500.

Now, just using a quick swag, we can surmise that Citadel is trading roughly 75-85% of the total available 13F securities list when considering that they assembled a max of ~12,500 positions drawn from a total 13F list of 14,500 – 16,500 names over the period since 2008.  And, even then, they are likely to be dipping fairly deeply into the low-liquidity names. Moreover, we haven’t begun to factor the positions on the short side of this book.

Admittedly, there are opportunities in this reporting for duplicate positions, which could distort the idea that a manager has reached some kind of position capacity level. In cases when there are multiple sub-managers reporting positions along with the main manager, any number of positions can theoretically be duplicated.

In the case of Citadel, Alphacution was able to distinguish positions related to market making (Citadel Securities, LLC), a book resembling a convertible arbitrage strategy (Citadel Advisors, LLC), and a book resembling a long/short equity strategy (Citadel Advisors II, LLC) within the overall 13F reporting. Isolating sub-managers like this eliminates the potential for position duplication.

In the chart below, Alphacution presents the full sample of total and segmented stock positions for Citadel’s market making operation, Citadel Securities, LLC, which is the component of the overall operation that holds the most positions. Over the 44 quarters beginning Q1 2008 and ending Q4 2018, Citadel’s market making book is currently hovering near all-time high positions of ~8,700, however, its 13F stock position count has tended to oscillate in a tighter range around ~2,000 (currently at ~2,600):

So, here’s the kicker: We have established that there are a maximum of ~5,000 stocks within the total 13F securities list. In the latest 13F reporting, Citadel Securities is long ~2,600 – or roughly 50% – of those names. Knowing a bit about how Citadel assembles and finances its overall market making book somewhere in the neighborhood of dollar neutrality – a portfolio construction strategy that we will detail in the forthcoming case study leveraging FOCUS (X17A5) report data along with the 13F data – we can confidently assume that Citadel is also short the other ~50% of stocks on the 13F list.

In other words, Citadel may have a position in all US stocks.

So, if you are a firm who is taking a position in all of the available inventory, what factor(s) drive an expansion of capacity in this kind of strategy? In other words, if you have exhausted the list of names, your strategy is capped unless you can somehow trade more in that list of names…

In the exhibit below, Alphacution presents the annual average daily dollar volumes for the US stock market for the period 2009 thru 2018. Here we can demonstrate that 2018 yielded an increase in this analytic of 31.6% over 2017, which was also a year-over-year improvement greater than any other year in the sample.

Now, maybe 30+% uptick in daily average dollar volume is no big deal if we were to expand this analysis significantly beyond the 10-year limits of the SIFMA dataset. But, it does make me wonder if one of the smartest and most powerful players in the ecosystem is feeling a tad constrained by the current level of inventory if perhaps they have figured a way to goose the volumes given their proximity to the sources of US listed liquidity which we recently illustrated in the Top 100 Players in US Listed Market Structure.

If this were possible, I’d at least have to consider bellying up to a plate of my own claims that there is no such thing as generating alpha

Bottom line: The world seems to be getting smaller, some of the players are definitely getting bigger, and the friction caused by those two facts is likely to have an impact on strategies employed by the rest of us.

Alphacution is here to help figure those moves out…

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By | 2019-04-03T21:04:19-04:00 March 21st, 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.