Citadel Securities to Receive First Outside Investment

Citadel Securities is set to receive its first outside investment in a deal that values ​​the e-commerce company owned by billionaire hedge fund Ken Griffin at nearly $22 billion.

Venture capital firm Sequoia Capital and cryptocurrency investor Paradigm have agreed to invest $1.15 billion in a Chicago-based company, the company told the Wall Street Journal. Alfred Lane, a Sequoia partner, will join Citadel Securities’ board of directors.

Citadel Securities is managed separately from Citadel, the $43 billion hedge fund on which Mr. Griffin has built his fortune, which Forbes has estimated at $21.3 billion. Founded in 2002, Citadel Securities has grown into a global giant that trades stocks, options, futures, bonds and other assets, handling about 27% of the shares traded on the U.S. stock market each day, according to its website. Much of this volume comes from deal processing for online brokerages like Robinhood Markets company

The company said the deal would give Citadel Securities capital to continue expanding globally, and could be a precursor to the company’s initial public offering. There’s no guarantee the company will go ahead with the listing, and no plans to launch one are imminent.

Sequoia, one of the country’s largest investment firms with a management of nearly $80 billion, has backed companies including Airbnb Inc. and Google prior to being publicly traded. Paradigm focuses on cryptocurrency and Web3, which is a reimagining of the Internet, areas that Citadel Securities is likely to incorporate in the future as it becomes more regulated.

Until now, Mr. Griffin has been a crypto skeptic and has avoided trading cryptocurrencies in his business even with its high prices and popularity. In October, he said that Citadel Securities is not trading cryptocurrencies due to a lack of regulatory clarity.

The explosion in trading volumes and volatility in the financial markets during the coronavirus pandemic has boosted Citadel Securities’ revenue. In 2020, net trading revenue was $6.7 billion, nearly double the previous high in 2018. Net trading revenue in 2021 was even higher, according to a person familiar with the matter. Ping Zhao has been CEO of Citadel Securities since 2017.

The trading frenzy that Reddit fueled last year at GameStop corp.

And other so-called meme stocks have drawn attention to Citadel Securities’ relationship with online brokerages.

After the GameStop trading frenzy, the Securities and Exchange Commission (SEC) is expected to take a fresh look at pay-to-order flow, a decades-old practice at the heart of how commission-free trading works. The Wall Street Journal explains what it is, and why critics say it’s bad for investors. Illustration: Jacob Reynolds/The Wall Street Journal

Some small investors active on social media accused Citadel Securities of orchestrating trading restrictions on January 28, 2021 in which brokerages limited clients’ ability to buy GameStop and a number of other stocks. Citadel Securities has denied any role in the trading restrictions, which sparked a massive rally in the meme company’s shares. The brokerages said they have imposed restrictions on processing large margin orders from the clearinghouse for US stock trades. In November, a federal judge dismissed a lawsuit accusing Robinhood and Citadel Securities of colluding to prevent investors from buying meme shares, citing a lack of evidence.

However, this incident fueled regulatory scrutiny of the company and its business practices. Securities and Exchange Commission Chairman Gary Gensler has floated the idea of ​​blocking payment for order flow, a practice in which trading firms pay brokers like Robinhood and TD Ameritrade to handle their clients’ orders. Bloomberg Intelligence data showed that Citadel Securities paid out more than $1.1 billion for order flow during the first nine months of 2021, making it the largest source of such payments.

Mr. Griffin has looked at deals previously. The newspaper reported in 2015 that Citadel was considering an IPO, a move the hedge fund company had also influenced prior to the financial crisis. The magazine reported in 2019 that Blackstone was in talks to buy a stake in both Citadel Securities and Citadel, with the company’s managers at the time estimating the hedge fund’s value to be between $5 billion and $7 billion.

write to Cara Lombardo at cara.lombardo@wsj.com and Alexander Osipovich at alexander.osipovich@dowjones.com

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