Citadel’s letter to the SEC: A desperate plea thinly veiled as concern for investors

CategoriesGamestop_, Issue 2023Q2

As u/ SirMiba writes:

Link to Citadel’s letter:

Let’s just go through the relevant parts of it, shall we?

NYSE Group, Inc., Charles Schwab & Co., and Citadel Securities are pleased to present a consensus position to the Securities and Exchange Commission (the “Commission”) on its recent equity market structure proposals (the “Proposals”). We share a commitment to ensuring that the U.S. equities market remains the most liquid, efficient, and competitive in the world, thereby strengthening our economy, supporting issuers, and helping to secure the retirement futures of everyday Americans.

Citadel et al claims commitment to (of US markets):

  • Liquidity
  • Efficiency
  • Competitiveness

For the benefit of:

  • The economy
  • Issuers
  • retirement of every day Americans

We believe that this more targeted approach will result in significant benefits for U.S. equity market participants, while meaningfully reducing the risk of negative outcomes for markets and investors, including the risk of firms retreating from being liquidity providers – which would be particularly detrimental to retail investors.

Citadel claims the points presented in their letter will:

  • Benefit US equity market participants
  • Reduce negative outcomes for …
    • markets
    • investors
    • firms retreating from being liquidity providers (which would be particularly detrimental to retail investors)

Minimum Pricing Increments, Access Fees, and Round Lots.

… we recommend reducing the minimum quoting increment to a half-penny for symbols trading at or above $1.00 per share that are tick-constrained to significantly narrow the number of symbols covered in the Proposal. We define “tick-constrained” to mean symbols that have an average quoted spread of 1.1 cents or less and a reasonable amount of available liquidity at the NBBO.

Citadel proposes to reduce the $0.01 minimum price increment to $0.005, for

  • Stock with shares above $1.00
  • tick-constrained
    • Citadel definition: symbols that have an average quoted spread of 1.1 cents or less and a reasonable amount of available liquidity at the NBBO [1]
    • SEC definition: Stock that have a time weighted quoted spread of $0.011 or less calculated during regular trading hours.

Citadel wants to narrow down the tickers with $0.005 minimum price increments to liquid stocks with thin spreads. Why? Because Citadel as a Market Maker (in other words, a Market Manipulator) can also make money off the spread of stocks. They can trade at $0.0001 and therefore beat the best bid or ask from participants limited to $0.01 increments. For example, if the market maker buys the stock at $10.005 and sells it at $10.015, they earn a profit of $0.01 per share. If the current best bid for a stock is $10.00 and the best ask is $10.01, a market maker can offer to buy the stock at a slightly higher price, say $10.005, which is still less than the best ask price, then sell it at $10.00. Citadel wants to keep more decimals for themselves, especially in less liquid stock with large spreads, where they can make more money on “””market making”” (see: market manipulation).

Their proposal is fully self-serving and in THEIR own interest. They can only argue that they deliver better prices if they have access to prices that most others don’t. In the end, this is fully self-serving and not in the interest of anyone else but themselves. While this proposal could be argued to not go far enough, Citadel et al wants to keep their special privileges that makes them money, at YOUR expense.

[1] NBBO stands for National Best Bid and Offer. It represents the best available bid and offer prices for a security or stock, which are aggregated from all the major exchanges and displayed to traders and investors. The NBBO is calculated by taking the highest bid and the lowest offer from all of the exchanges that are trading the security.

Separately, we recommend setting a market-wide harmonized trading increment of $.001 for all symbols trading at or above $1.00 per share. In our view, the minimum quoting[2] increment and the minimum trading increment do not need to be the same.

This means nothing to you as an investor and/or trader, because quoting a stock price, bid, or ask at some amount of decimals does nothing for you if you cannot trade at those levels.

[2] A stock quote is the last price at which an asset traded. The bid quote is the most current price and quantity at which a share can be bought. The ask quote shows what a current participant is willing to sell the shares for.

Finally, we recommend accelerating implementation of the revised round lot definition, but not the odd lot dissemination on the securities information processors (“SIP”), as contained in the Commission’s Market Data Infrastructure Rule (“MDIR”). We would encourage the Commission to revisit industry comments on the odd lot dissemination before full implementation of MDIR.

From this excellent post, part 1 out 3, the post links to all other parts at the bottom:

Odd Lots are orders of shares that are less than 100 and…

  1. Do not get calculated into the NBBO, they do not affect the price.
  2. They are short exempt, immune to the uptick rule
  3. Are not required to be reported to the Tape, are visible on proprietary data feeds only. They don’t affect the price but those subscribed to the feed can track volume and price trends.

The SEC asks this question: “Should the implementation of the definition of odd-lot information, which would include odd-lots priced better than the NBBO in NMS[3] data, be accelerated? Why or why not?”

The answer is YES. Odd lot information that would benefit household investors and traders should NOT be hidden from them. Together with the DD linked above, it is clear to me that the reason Citadel proposes to not accelerate odd lot information is because it makes it harder to manipulate the price, short stock (especially in regards to the uptick rule) and gives them an information advantage over household investors.

Again, their proposal is fully self-serving and in THEIR own interest. It does not help you, it does not make your investing or trading better, it doesn’t help pension funds, it helps Citadel.

[3] The National Market System (NMS) regulates how all major exchanges disclose and execute trades. It is the system for equity trading and order fulfillment in the U.S. that consists of trading, clearing, depository, and quote distribution functions. The NMS governs the activities of all formal U.S. stock exchanges and the NASDAQ market.

Order Execution Information (Rule 605).

We strongly support enhancing execution quality disclosure, and thus recommend implementing this proposal while taking into account technical feedback from market participants*. We note that comprehensive and accurate data is critical to enabling both regulators and market participants to assess the impact of any other changes made to current market structure.*

Short on rule 605: SEC Rule 605 is a regulation that requires market centers to provide execution quality statistics to the public on a monthly basis. This transparency is intended to help investors make informed decisions about where to place their orders and promote competition among market centers. Market centers subject to the rule include exchanges, associations, and ATSs. The rule is one of several regulations aimed at promoting fair and transparent trading practices in the US equity markets.

Note here the “market centers” is, from the SEC’s proposal: “Regulation NMS defines the term “market center” to mean any exchange market maker,27 OTC market maker,28 ATS, 29 national securities exchange,30 or national securities association.31 This definition was intended to cover entities that hold themselves out as willing to accept and execute orders in NMS securities”

The new proposed update to rule 605 is about broadening its scope of affected companies to, for example, broker-dealers. It is sorely needed, but its effect on Citadel is probably limited (although this rule proposal is highly technical, and I might miss something here). BUT, Citadel agreeing with this rule is IMO most likely due to it posing no real change / threat to them. Either way, it’s an opportunity for them to pretend to care about transparency and they took it.

Although, I am sure that they will provide a lot of feedback on the changes to try walk the SEC back on some of it.

Retail Auctions & Best Execution

Retail Auctions. We recommend withdrawing this proposal for a number of reasons, including the unprecedented nature of requiring certain market participants to utilize a specific trading protocol. At a minimum, the proposal should be indefinitely paused until the execution quality impacts of the narrower quoting increments and modernized round lot definitions above can be fully assessed, and a more credible economic analysis of the potential harms and benefits of any proposed significant changes to order execution can be conducted.

This is the anti-PFOF and internalization rule, and you can guess why Citadel is against it. The rule makes “wholesalers” like Citadel obligated to post orders for an “execution auction”, where participants can bid and win the orders. Brokers would also be able to send orders ´directly to auction. While this is not the “place an order, it goes to the exchange, match with a seller / buyer, done deal” that household investors want, it is much better than the PFOF and internalization scheme that Citadel runs. This would most likely make their life MUCH more difficult, and it reflects as much in their reasoning for going against it.

unprecedented nature of requiring certain market participants to utilize a specific trading protocol

As opposed to what, Citadel? Banning market makers altogether? Letting market makers have brokers route orders and never letting the orders see the light of day until it is convenient for you? Citadel tries to make it sound scary that they should be forced to use a trading protocol as market makers, that protocol being a simply auctioning protocol. When they say “certain market participants” they mean people like themselves with special privileges and advantages that household investors do not have.

At a minimum, the proposal should be indefinitely paused until the execution quality impacts of the narrower quoting increments and modernized round lot definitions above can be fully assessed, and a more credible economic analysis of the potential harms and benefits of any proposed significant changes to order execution can be conducted.

And this is their argument for pausing the proposal: Give us time to whine about how the minimum price increments hurts our ability to “””provide the best execution””” for household investors and pay some economic think tank or whoever wants our money to conduct “””research””” (see: lie with statistics) on how retail auction rules would hurt pension funds :'(

Again, this is as blatant as it gets. The SEC proposes to take away their ability to route orders and internalize them, giving household orders a much better chance at hitting exchanges and at the very least eating into their control of the market, and they propose to delay that forever. I wonder how, I wonder why.

The same goes for this bile:

Best Execution. We all strongly support the principle of Best Execution, but similarly recommend withdrawing this proposal. FINRA and MSRB’s best execution rules, and related notices and guidance, have served to protect investors for many decades. We would support further clarification and refinement to existing best execution obligations that would take into account the effects of the tick size, access fee and order execution disclosure adjustments called for above. We are concerned that the current best execution proposal, with overly prescriptive and impractical requirements for managing a new category of so-called “conflicted transactions” may unnecessarily disrupt decades of market progress for investors.

“may unnecessarily disrupt decades of market progress for investors” Market progress how? How does a market progress? Reminder: A market is when many sellers and buyers meet up in one place to trade with each other. THAT IS ALL IT IS. If trying to promote orders in a market actually get to the market disrupts “market progress for investors” then something in the market is entirely broken and needs to be reworked from the ground up. ALL this is, is a complaint that their business is under attack from regulators, even with bought and paid for commissioners, and they could lose everything they have been spending billions of dollars on building.

Citadel is not FOR markets.

Citadel is not capitalist.

Citadel is not for trading.

Citadel is for consolidating power.

Citadel is for hiding information.

Citadel is for having special privileges over others.

Citadel is for market manipulation.

Citadel is for taking your money.

Fuck Citadel. Go comment on SEC’s proposals.

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