Ken Griffin, the founder of hedge fund Citadel and market maker Citadel Securities, had an insight into what to expect from the rest of a five-hour Congressional hearing on February 18 when Maxine Waters, chairwoman of the House of Representatives financial services committee, demanded that he answer some questions with ‘yes’ or ‘no’ answers.
After a query about market share, Waters asked whether Griffin could confirm that on January 27, the peak of the frenzy in GameStop trading, Citadel Securities had executed 7.4 billion shares for retail investors and whether that was more than the average daily volume of the entire US equities market in 2019.
Griffin seemed taken aback – understandably. The nugget of information about volumes was one that he had just read out himself.
“Chairwoman Waters, that was my written and oral testimony,” Griffin began to reply, in the slowed-down delivery that indicated extensive coaching by communications specialists before his day on the Congressional stage.
Griffin would later in the testimony admit that he had four people in the room for back-up, though only two potted plants could be seen flanking him as he spoke on a remote link. (Who were the mystery off-camera advisers? Citadel declined to comment.)
But Waters had already moved on and passed the online spotlight to Patrick McHenry, the ranking Republican member of the financial services committee.
Disjointed approach
Many of the procession of politicians who followed Waters took a similarly disjointed approach.
The politicians were aware that the hearing entitled, ‘Game stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide,’ had a far wider viewership than most committee meetings due to interest in the recent market volatility.
Some of the representatives almost filled their five minutes with political posturing and only left themselves time for a couple of questions, which in turn gave the witnesses little room to deliver cogent replies. And a surprising number of the politicians – who are members of the financial services committee after all – seemed to have a fairly rudimentary grasp of how markets function.
The episode underscored the opaque nature of decision making at a clearing firm that is central to the functioning of the US capital markets
Witnesses such as Griffin and Vlad Tenev, chief executive of online trading platform Robinhood, would nevertheless be unwise to celebrate the lack of forensic inquiry.
Waters may not have achieved much with her staccato questioning, but she made a concise summary of her views in prepared remarks before she addressed Griffin, saying that Citadel’s role in the recent market volatility raised significant concerns for policy makers.
“We don’t really know how central Citadel has become to the US capital markets,” Waters said.
The same point was almost inadvertently made by one of the more bumbling later inquisitors.
Vicente Gonzalez, one of 30 Democrats on the 54-strong financial services committee, took his turn questioning Griffin about Citadel, which he pronounced “Sight-A-Dell,” despite frequent use of the firm’s name by other politicians and witnesses.
DTCC questions
Gonzalez asked Griffin about his supposed role controlling the main US clearing house, the Depository Trust and Clearing Corporation (DTCC).
Griffin allowed his mask of pained politeness to slip. “We do not own DTCC, we do not control DTCC. We have literally nothing to do with DTCC other than being a member,” he said.
Gonzalez had stumbled across two key questions for Citadel, however. One is the broad issue of ‘sight’ and what value it can extract from its role seeing more of the flow of US retail investor orders than any other market maker.
Griffin acknowledged that Citadel Securities handles over 40% of the US retail equity order flow that is passed on by brokers such as Robinhood and longer established firms like Charles Schwab.
The second theme is how Citadel and other market participants interact with the custodians of clearing and settlement services.
Gary Gensler has shown in the past that he has the energy to force unwelcome change on Wall Street
Griffin has been unequivocal in his denial that he or any of his employees contacted the DTCC or its subsidiary for US equity clearing, the National Securities Clearing Corporation (NSCC), to prompt the demand for extra collateral that led Robinhood and other brokers temporarily to suspend buying of GameStop and other stocks.
The DTCC has also been keen to stress that the margin requests made on the morning of January 28 simply reflected the automated risk management processes it uses for members.
A letter from DTCC chief executive Michael Bodson that was admitted as evidence in the GameStop hearing nevertheless acknowledged that there is a qualitative aspect to decisions on margin collection by the clearer.
“NSCC examined the market activity and clearing member margin requirements to consider whether it would be appropriate to adjust or waive the capital premium charge, as permitted under the applicable rule. NSCC determined that the spike in market volatility, particularly in the so-called meme stocks, was a material contributor to elevated VaR [value at risk] charges for several clearing members, including most of those subject to capital premium charges. NSCC determined that it would be appropriate to waive the capital premium charge for all clearing members, using the discretion provided in the rule to reduce or waive this charge,” Bodson said in his letter.
The decision to cut the margin requirement effectively averted a potential shutdown or forced sale by Robinhood that could certainly have exacerbated short-term market volatility.
Opaque nature
Contrary to social media speculation that Wall Street insiders prompted the clearer to limit Robinhood’s trading ability, the NSCC arguably gave the online broker and some of its rivals a crucial helping hand at a time of stress.
But the episode underscored the opaque nature of decision making at a clearing firm that is central to the functioning of the US capital markets.
Bodson pointed out that risk at NSCC, as measured by its aggregate clearing fund requirement, increased substantially on January 28 to $33.5 billion, which was higher than the total during the worst of the Covid-19 related market volatility in March 2020. It was not quite as high as the historic peak of $34. 6 billion in December last year when Tesla entered the S&P 500 index, however.
The controversy over the timing and mechanics of the S&P admission for Tesla – another popular stock with retail investors – was a reminder that index providers, like clearers, are currently seeing a significant increase in their systemic importance without necessarily having detailed scrutiny of their decision-making processes.
Politicians may struggle to identify the weak points in the system, but a new head of the Securities and Exchange Commission is now a Senate confirmation hearing away from taking up his role as top markets cop.
Gary Gensler has shown in the past that he has the energy to force unwelcome change on Wall Street and will no doubt be keen to probe current market dynamics.
