The High-Speed Debate
One person familiar with the inquiry said that based on the tenor of the discussions with investigators, Citadel expects the probe will conclude with no action recommended.
If authorities do move ahead, they would be marching forcefully into the debate over high-speed trading. Critics have alleged that firms with the fastest trading technology are using speed to manipulate stock prices, giving investors a raw deal. The industry counters that its technology delivers cheaper and more transparent trades to investors.
The Justice Department inquiry is the latest example of increased scrutiny on speed traders since the "flash crash" of 2010, when markets suddenly plunged and quickly rebounded. A study commissioned by U.S. regulators later found that high-speed trading contributed to the crash.
Citadel and KCG are among several firms being examined in a separate probe by the New York State Attorney General. New York authorities are examining firms that buy and sell the flow of trading orders placed by investors, according to a person familiar with that investigation. The authorities are also looking at other practices in the world of high-speed stock trading that may disadvantage retail investors. Citadel and KCG declined to comment on that inquiry.
The New York State Attorney General recently reached settlements with Barclays and Credit Suisse after finding that the two banks were making inadequate disclosures related to high-frequency trading in their private stock-trading venues, known as dark pools.
Citadel is led by one of Wall Street's most powerful billionaires. Founder and chief executive Ken Griffin topped Forbes magazine's 2016 list of the highest-earning hedge fund managers, making $1.7 billion in 2015 alone, according to Forbes. In February, Griffin made headlines with what is believed to be the largest private art purchase ever, paying $500 million for two paintings by Willem de Kooning and Jackson Pollock.
Citadel is best known for the consistently market-beating returns of its $23 billion hedge fund. But for years, the firm also has been in the vanguard of creating alternative electronic markets for trading stocks and other financial assets.
Citadel's own private stock-trading platform is so large that, if it were an official exchange recognized by the Securities and Exchange Commission, it would one of the largest registered exchanges in the United States - bigger than Nasdaq Inc, according to data published last month by the Financial Industry Regulatory Authority. Citadel Execution Services, the firm's wholesale market-making unit, executes 35 percent of all trades by retail investors in U.S.-listed stocks, according to the firm.
KCG was formed in December 2012 from the merger of New Jersey-based Knight Capital Group and Chicago-based high-frequency-trading firm Getco LLC. Knight was forced into the merger after an August 2012 computer trading glitch led to millions of accidental stock orders flooding the market in less than an hour, leaving the firm with a $468 million loss.