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Ken Griffin’s shutdown playbook kept him on top of markets

Ken Griffin says his firm and others kept capital markets working in a way that those of yesteryear — dominated by voice-based brokering — could not have in the face of a crisis of this magnitude.
Ken Griffin says his firm and others kept capital markets working in a way that those of yesteryear — dominated by voice-based brokering — could not have in the face of a crisis of this magnitude.
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It took a thousand extra servers, new trenches for fiber-optic lines and a bunch of rooms at the Four Seasons resort in Palm Beach, Florida, for one of the world’s biggest trading shops to cope with the pandemic — all accomplished in less than a week.

That’s part of how billionaire Ken Griffin’s Citadel Securities has kept humming at a record pace as COVID-19 upends finance, mostly abandoning its New York and Chicago offices and shifting dozens of employees and their families to a work-from-resort bubble. Others are at another emergency facility in Connecticut. The company doesn’t appear to have missed a beat, in March trading 3.3 billion U.S. shares a day and digesting a 90% jump in electronic Treasurys volume even as liquidity dried up in many places.

Griffin, speaking in a rare interview, says his firm and others kept capital markets working in a way that those of yesteryear — dominated by voice-based brokering — could not have in the face of a crisis of this magnitude. Citadel was aided by an ample cash stockpile to pay for those trenches and all the rest of the necessary accoutrements to create a full-fledged trading floor in Florida.

“It’s infinitely easier for us to manage our affairs as a market-making community in a world of distributed computing, the internet and electronic exchanges, he said. “At 100,000 feet, our customers’ experience was as close to flawless as you can get across markets,” he said of the company’s trading in recent weeks. “Giving people a fair and transparent price every day is our mission, and we accomplished that.”

The fleet-footed response to the historic disruption shows why Citadel ranks among the largest traders of stocks, bonds and derivatives: it’s deployed automation as much, or more, than anyone else. Conventional players and their humans struggled to keep up during normal times; today, when trading firms can side-step the virus turmoil by running off computers in data centers — rather than physically jockeying for position in a trading pit or even hawking assets on the phone — the company’s competitive advantage is likely extra worrisome to the rest of Wall Street.

Of course, running multiple trading floors — including one at a luxury five-star hotel that in normal times boasts yoga classes, poolside cabanas and private surf lessons — doesn’t come cheap. But doing so has paid off for Citadel.

March was an enormously busy month in markets as the coronavirus panic spread quickly through markets, and Citadel seems to have kept up with it. U.S. stock volume amounted to more than 15.5 billion shares a day, with the company accounting for about a fifth of that. Its monthly average was about 65% higher than its busiest day in 2019.

For employees who aren’t hunkered down in Florida, working from home or from an emergency office in Greenwich, Connecticut, is now the norm. When they’ll return to New York and Illinois is very much up in the air. New York, the center of the U.S. outbreak, remains under lockdown until at least May 15. A separate stay-at-home order in Illinois won’t expire until May 30. Governor J.B. Pritzker on Tuesday outlined the progress required for the state to head back toward normal.

“We’ll be looking to Governors Cuomo and Pritzker, health officials and the president for leadership as we frame our decision on when and how to bring people back to work in our large urban environments,” Griffin said. “Currently, the vast majority of our workforce is working remotely.”

That was already the reality for many market makers and banks when the Treasurys market got especially hairy in March. It was the hardest period to trade U.S. debt since the 2008 financial crisis, in part because so many traders were out of the office. The Fed stepped in to backstop that market by purchasing as much as $75 billion a day in debt. Nevertheless, Citadel handled a surge in volume, and about 80% of its trading was in off-the-run Treasurys — which even under normal conditions are harder to trade, and in March bore the brunt of the liquidity drought.

Electronic trading has slowly become more key in the world’s biggest debt market. Even the U.S. Treasury department has given a nod to the role of electronic trading firms in that business, having named several of them in recent years to have a stint on their debt-advisory committee.

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Sufficient liquidity in Treasurys to ensure the true value of more than $50 trillion in global assets directly or indirectly linked to them may also never be more important. That’s because retail and institutional investors alike are on a razor’s edge wondering just how bad the economic fallout — and any lasting hits to their portfolios — from a shutdown of activity.

Ease in trading Treasurys is also crucial to Treasury Secretary Steven Mnuchin as he’s been ramping up issuance — with quarterly sales set to hit a record $3 trillion — to fund economic stimulus.

It’s against that backdrop that Citadel hopes to eventually join the elite bond trading club known as primary dealers. The firm has slowly been expanding its Treasury offerings as it moves toward that goal. That group is currently made up of 24 firms, mostly banks.

“One of the great things about U.S. Treasury market structure is that you don’t have to be a primary dealer to be a major market maker,” Griffin said. “With that said, Citadel Securities obtaining the designation would be constructive for the market and investors, making it a win all around.”

Bloomberg News