It acquired a division of KCG Holdings Inc. in 2016, gaining a presence on the floor of the New York Stock Exchange, where it’s now the largest market-maker, winning mandates from Uber Technologies Inc., Spotify Technology SA and Virgin Galactic Holdings Inc. The firm could be in line for more lucrative assignments as startups bypass traditional public offerings for so-called direct listings.

Tech Focus

Citadel Securities grew out of Griffin’s hedge fund business. That pedigree helped it expand and adapt as markets changed, said Larry Tabb, founder of Tabb Group LLC, a capital markets research firm. Making money in high-frequency trading was initially all about speed, but that arbitrage opportunity has become much more limited. While understanding where prices are in different markets is important, traders need to predict where prices are going.

“Getting faster is expensive, but it’s actually kind of easy,” Tabb said. “It’s much more difficult to become smart. The hedge fund lineage helps with understanding some of the relationships and nuances and portfolio theory a little differently than traditional market-makers that don’t have that investment background.”

Technology has fueled the rise of nonbank market-makers, according to Tabb. Their smaller size and highly targeted business models make it easier to respond to changes and improve technology.

“While the banks tend to have big scale,” he said, “it’s really difficult for them to be as agile as some of the smaller guys, to pivot and to update infrastructure.”

Volcker Rule

The rise of Citadel Securities also has been helped by regulations meant to reduce risk in the financial system.

One example is the Volcker rule, a provision of the 2010 Dodd-Frank Act that was designed to restrict proprietary trading by banks, though not their market-making activities.

But the rule named for former Federal Reserve Chairman Paul Volcker created uncertainty because “market-making from the bank perspective was very difficult to define,” said Nathan Dean, a Bloomberg Intelligence analyst. Banks “didn’t want to go too far to be seen breaking the rule.”

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