Citadel’s Ken Griffin calls for shorter settlement times in trades following GameStop debacle
US hedge fund titan Kenneth Griffin (pictured), founder, CEO and co-CIO of Citadel, says the recent GameStop trading frenzy demonstrates the need to overhaul the settlement process in markets, and wants a shorter timeframe for settling trades, along with more transparent capital models.
Griffin – who also leads Citadel’s trading unit Citadel Securities, the major US equities market maker caught up in last month’s retail trading surge – said settlement cycles should be shortened from two days to one.
In written testimony submitted to Congress on Thursday, Griffin warned that longer settlement windows “expose firms to more risk in the time between execution and settlement” and require increased levels of capital to help stem such risks.
The US House of Representatives’ Committee on Financial Services is probing last month’s GameStop saga, which saw amateur investors drive up the price of several stocks shorted by hedge funds.
Online platforms such as WallStreetBets, a Reddit sub-forum, and digital trading app Robinhood are said to have provided key outlets for retail investors’ co-ordinated billion-dollar raid on short positions, which dealt hefty losses to several managers.
Griffin was quizzed by US lawmakers at the Congressional hearing on Thursday. He told the committee it is “critical” that markets remain a “force for fairness and integrity worthy of investor confidence and participation.”
Along with shorter settlement times, he suggested transparent clearing house capital requirements would “enable brokers and market makers to better prepare for potential capital demands” and help reduce further associated market disruptions.
“Both of these enhancements are well within reach today,” he wrote.
Several hedge fund managers told Hedgeweek earlier this month that the short squeeze raised major questions over financial regulation, market functioning, position sizing and crowding, as well as the growing role of online trading platforms in the price discovery process.
During the frenzied few days of retail equities trading in late January, Citadel Securities “was the only major market maker to provide continuous liquidity every minute of every trading day”, Griffin told the Committee in his written submission ahead of Thursday’s appearance.
Citadel is one of the biggest market-makers in US equities, reportedly handling more than a quarter of all daily trades in 2020 and executing more trades on behalf of retail investors than any other firm. He said that on January 27, his firm executed some 7.4 billion shares on behalf of retail investors.
“When others were unable or unwilling to handle the heavy volumes, Citadel Securities stepped up,” Griffin added.
“To put this into perspective, on that day Citadel Securities executed more shares for retail investors than the average daily volume of the entire US equities market in 2019.”
Online app Robinhood hires firms such as Citadel to execute its users’ trades commission-free. Griffin said Citadel is committed to the orderly functioning of US capital markets, adding the firm had no role in Robinhood’s decision to limit trading in GameStop or any other of the ‘meme’ stocks, only learning of the trading restrictions after they were publicly announced.
“Recent events have highlighted clear opportunities to improve our markets,” Griffin said.
The committee is also hearing from Gabe Plotkin, head of Melvin Capital, which registered huge losses as a result of the saga, as well as Reddit CEO Steve Huffman, among others.