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Keeping Citadel’s E*Trade Gambit a Secret
Who really knows what Ken Griffin has up his sleeve for E*Trade Financial.
Last month, Griffin indicated that his Citadel Investment Group hedge fund gradually would sell-off about 10% of of its E*Trade stock. Then yesterday, Griffin and Citadel said, “never mind.”
Citadel offered no explanation for its sudden change of heart beyond pointing to the press release it issued on the matter.
The Citadel about face also comes a few weeks after E*Trade’s regulator put the kibosh on an application by the hedge fund’s big high-frequency powered market making unit to get its hands on most of the online broker’s customer order flow. The Office of Thrift Supervision, on Aug. 14, put the application on ice and asked Citadel and E*Trade for more information.
Did the OTS decision impact Griffin’s decision to put off the stock sale? It’s hard to know since neither Citadel nor E*Trade are talking. And the OTS is not helping matters much, either.
The OTS, the regulator the Obama administration would like to merge out of existence, recently denied my request for a copy of the letter it sent E*Trade and Citadel about its decision to “suspend consideration” of the order flow application.
I’ve attached a copy of the letter denying my Freedom of Information Act below. The regulator’s FOIA officer says the request was denied because it might impinge on “trade secrets and commercial financial information,” as well as reveal “information contained in or related to examination, operating, or condition reports.”
Citadel’s E*Trade Bonanza
Citadel Investment Group’s move to aggressively sell off its substantial stake in E*Trade Financial looks like hedge fund magnate Ken Griffin is throwing in the towel on his big gamble on the online broker.
But Citadel isn’t bailing on E*Trade. In fact, if Griffin gets his way, the Chicago hedge fund will have its fingers dug deeper into E*Trade, getting daily access to virtually all of the online broker’s stock and option trades.
With little fanfare, Citadel and E*Trade struck a tentative deal in June that would require the online broker to begin routing 97.5 percent of its customers’ Nasdaq stock and stock option trades to the hedge fund’s market-making operation.
Right now, E*Trade sends about 40 percent of its customer trades to Citadel’s market-maker division under a nearly two-year-old agreement that dates back to the hedge fund’s initial $2.5 billion investment in the broker.
This new exclusive six-year arrangement would mean even bigger bucks for Citadel’s already highly-profitable high-frequency trading business, given that E*Trade customers make more than 4 million trades a month.
Indeed, the deal is so potentially lucrative for Citadel that the hedge fund is willing to make an upfront $100 million cash payment to the financially-strapped online broker.
E*Trade’s regulator, the Office of Thrift Supervision, must approve the deal before it can take effect. And there are indications the OTS is about ready to give the deal the green light — possibly as soon as today.
Why isn’t the regulator the SEC here? I know that E-Trade is also a depositary institution, but questions on order flow should go to the SEC. Or is this a case of dual regulation?
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The Wall
