The Citadel Settlement, Off-Exchange Market Makers, and Giant Brokerages

The recent settlement between the U.S. Securities and Exchange Commission (“SEC”) and Citadel Securities[1] is a landmark in the market structure enforcement program. In a nutshell, the regulators targeted high-speed algorithms that opportunistically used different market data benchmarks and involved undisclosed order handling mechanics. Importantly, this settlement may have revealed more than just the SEC’s skillful exposure of yet another hidden wrinkle in the modern electronic marketplace or a description of discontinued practices at one firm. This settlement could shed light on the opaque overlap between high-frequency trading (“HFT”) and off-exchange market making, thus subjecting to scrutiny—whether regulatory, legal, … Read more

Regulation of Market Makers: An Evolutionary Persistence

Given concerns over “a ‘Houdini’ disappearance of market makers in general”[1] and demands “to increase obligated liquidity in our markets,”[2] one may ponder on the state of the market for liquidity. The market making crisis covering different strata of securities—for instance, high-volume stocks traded on leading exchanges and elsewhere via sophisticated algorithms, smaller-cap stocks representing emerging companies, or corporate bonds traded over the phone and on new electronic platforms alike—also highlights a much broader market structure crisis in the securities industry.[3] The observed multitude of trends and phenomena, such as a further redistribution of liquidity from have-nots … Read more