Is the largest market maker on Wall Street, Citadel Securities, shorting ETH?

Author: Jaleel Jia Liu

Who is shorting ETH?

Recently, a mysterious institution's asset allocation sheet has surfaced, notably marking a "3.1 billion dollars in Ethereum short assets" in its "multi-strategy" portfolio.

So the question arises: who exactly holds this 3.1 billion dollars in Ethereum short assets?

We explored various sources of this asset allocation sheet and speculated on two of the most likely candidates:

First is Bridgewater Associates. Some other sources' leaked data aligns with this asset allocation sheet, and Bridgewater's CEO Ray Dalio has expressed interest in cryptocurrencies, being a BTC maximalist, which somewhat aligns with the logic of shorting ETH.

Another candidate that has been discussed the most is Citadel Securities, which we will focus on today.

One "big player" falls, another "big player" rises

If you remember the Black Monday in August 2024, triggered by Japan's interest rate hike, it caused a massive crash.

The first interest rate hike since Japan ended its negative interest rate policy led to a surge in the yen against the dollar, reversing arbitrage trades and triggering large-scale liquidations. The global financial markets collapsed instantly, with the Japanese stock market plummeting 9%, and the Nikkei index triggering circuit breakers twice, marking the largest single-day drop in eight years. The stock markets in South Korea and Taiwan were also not spared, and the cryptocurrency market suffered heavy losses, with Bitcoin briefly falling below 50,000 dollars, while Ethereum plummeted over 25%, wiping out all gains for the year.

However, to say that only Japan's economic impact caused the collapse of cryptocurrencies is clearly not convincing for everyone, until some veteran players revealed the inside story.

As an early crypto king who appeared before SBF, BitMEX co-founder Arthur Hayes posted on social media that he learned through traditional financial channels that a "big player" was liquidating crypto assets.

Although he did not specify names, the community's pointing has become quite clear: it was Jump Trading and its cryptocurrency division Jump Crypto. Since June last year, the U.S. Commodity Futures Trading Commission (CFTC) has begun investigating Jump Crypto. In addition to facing regulatory pressure, Jump Crypto is also embroiled in several controversial incidents. Firstly, the collapse of FTX caused significant losses for Jump Crypto. Additionally, Jump has drawn regulatory attention for its involvement in the TerraUSD stablecoin collapse.

As the CFTC's investigation deepened, Jump Crypto's young CEO Kanav Kariya announced his resignation, and the official Twitter account related to Jump also stopped updating, seemingly signaling Jump's gradual exit from the crypto industry.

However, while one "big player" fell, another "big player" emerged.

Yesterday, Citadel Securities, a market maker, announced plans to enter the cryptocurrency market-making field. It seems like a traditional financial giants' relay race, with Jump Crypto exiting, and Citadel Securities, also from a traditional financial background, choosing to take over the baton in the crypto market.

Jump and Citadel, as representatives of traditional financial giants, share similar backgrounds and strategies. Both companies started as market makers, with Jump securing a place in the financial markets through high-frequency trading, while Citadel became one of the largest market makers globally through hedge funds and high-frequency quantitative analysis. When Jump entered the crypto market, it brought a strong technical team, hardware, and financial support, and Citadel possesses these advantages as well.

The myth of Citadel, Wall Street's largest market maker

Citadel Securities is one of the largest market makers on the NYSE. Its daily trading volume accounts for nearly 35% of U.S. stock trading, equivalent to the daily transaction volume of the Shanghai and Shenzhen stock exchanges, with annual revenues around 7 billion dollars. Related reading: "Earning over a hundred million a day, why is Citadel Securities so good at attracting capital?"

Beyond its market-making business, Citadel's main business is hedge funds, managing 65 billion dollars in assets. It is a tech-driven hedge fund that, while focusing on fundamental investment value, analyzes the market through vast amounts of information and various mathematical models, reportedly investing tens of billions of dollars annually in models and hardware.

According to data from LCH Investments, in 2022, the top 20 hedge fund companies generated a total of 22.4 billion dollars in profits (after fees), with Citadel ranking first with a profit of 16 billion dollars, setting a new record for annual returns among hedge funds. The latest data shows that Citadel still ranks first in net profits and valuations among all global hedge funds since its inception, with Bridgewater Associates in fourth place.

Data source: LCH Investments

Citadel's founder Ken Griffin has a net worth of 45.9 billion dollars, ranking 22nd on the Forbes 400 list of billionaires and 31st globally. He even boldly stated, "We do indeed produce money."

The CEO of Citadel Securities has a name very similar to the crypto world's richest person: Zhao Peng.

Compared to Ken Griffin's background, Zhao Peng's resume resonates with every Asian: he entered a gifted class at age 10, was admitted to Peking University's mathematics department at 14, and then pursued a Ph.D. at the University of California, Berkeley.

In 2006, Zhao Peng joined Citadel, quickly standing out due to his exceptional mathematical talent. By 2017, he had risen to the CEO position, becoming one of Ken Griffin's most trusted individuals.

During Zhao Peng's four years as CEO, he quintupled Citadel Securities' net trading revenue, a growth rate that is almost unimaginable. Under his leadership, Citadel Securities not only strengthened its advantageous position in the market but also achieved unprecedented levels of profitability.

Zhao Peng's name quickly became synonymous with the elite among international students over a decade ago. Related reading: "Citadel Securities CEO Zhao Peng: The pinnacle of Chinese Americans on Wall Street, life has been smooth since age 10"

According to recollections from international students at the time, in an old Sichuan restaurant in Chinatown, they discussed Zhao Peng while enjoying spicy hot pot: "On the Chicago landmark Lakeshore, he bought two luxury apartments facing Lake Michigan and connected them, worth over ten million dollars." They all hoped to become the next Zhao Peng.

Citadel's "dark maneuver" with Sequoia and Paradigm

Citadel officially entered the crypto space much later than its competitors, as Jane Street and Jump Trading began establishing digital asset businesses in 2017 and 2021, respectively. It seems that due to regulatory issues, Citadel's connections to the crypto market have been "underwater."

In 2021, a very notable event occurred in the crypto world. A Sotheby's auction featured a 1787 edition of the U.S. Constitution. At that time, 1,700 crypto players formed a decentralized organization called ConstitutionDAO, crowdfunding a total of 43 million dollars through social media to bid on this U.S. Constitution, which led to the creation of the PEOPLE token.

Unfortunately, they did not succeed in purchasing the Constitution, and the highest bidder was none other than Citadel's founder Ken Griffin.

In 2022, this billionaire accepted the first external investment for Citadel Securities, completing a 1.15 billion dollar financing at a valuation of 22 billion dollars, led by familiar names in the crypto industry, Sequoia Capital and Paradigm.

Sequoia Capital partner Lin Junrui will join the board of Citadel Securities, and Paradigm co-founder Matt Huang stated that they would work with Citadel Securities to expand its technology and expertise to more markets and asset classes, including crypto assets. Nevertheless, at that time, Griffin still claimed to the media that Citadel Securities had not yet ventured into cryptocurrency trading to avoid regulatory issues.

However, such a response clearly did not conceal the traces of Citadel's quiet layout. It was from that year that Citadel officially began to test the waters in the crypto industry, establishing a dedicated crypto business unit.

First, they appointed Jamil Nazarali, Citadel Securities' global business development head, as the CEO of Citadel's crypto business, collaborating with another top market maker, Virtu Financial, and financial giants Charles Schwab and Fidelity to start digital asset trading and brokerage services.

Then, in June 2023, they officially launched their jointly developed cryptocurrency trading platform EDX Markets, with Jamil Nazarali as CEO. The trading platform focuses on "non-custodial" and "no retail," with trading limited to Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.

In addition to Jamil Nazarali, Citadel has also nurtured many elites closely related to the crypto space. For example, Brett Harrison, the former president of FTX US, who left due to management issues with SBF, previously served as the technical head at Citadel Securities, bringing significant technological innovations to the company.

However, Griffin himself has maintained a contradictory attitude towards cryptocurrencies. Initially, he publicly stated that he was cautious about cryptocurrencies, believing they had no intrinsic value. Yet in a recent interview, he admitted regretting not investing in Bitcoin early, stating that if he had seen clearer value, he might have bought these assets long ago.

The reason for Citadel Securities' entry into the crypto field is not as complex as we might imagine; politically "standing on the right side" has further deepened his connection with the crypto world. After Trump was elected president, especially with his support for the crypto industry, many traditional financial giants, including Griffin, saw the immense potential of crypto. Like most crypto industry whales, Griffin firmly supports the Republican Party during the 2024 election. In the recently concluded election cycle, he was one of the top five donors to the Republican Party, second only to Elon Musk.

Citadel's shorting, from the stock market to the crypto market

Returning to the topic we discussed at the beginning of the article, why is the institution holding "3.1 billion dollars in Ethereum short assets" suspected to be from Citadel?

Aside from its recent activities in the crypto industry, Citadel's name is often closely associated with "shorting." There are many rumors in the market about their shorting activities.

As early as during the stock market crash in 2015, there were rumors that foreign short-selling forces were one of the culprits behind the sharp decline of A-shares. At that time, the China Securities Regulatory Commission investigated many accounts and suspended a batch of trading accounts suspected of affecting stock prices or other investors' investment decisions.

Among them was an inconspicuous company: Sidu (Shanghai) Trading Co., Ltd. This Sidu company was shown in the national enterprise credit information public system to be a foreign-owned enterprise, with Citadel as the shareholder. After a lengthy five-year investigation and negotiation, Sidu ultimately agreed to pay 100 million dollars to reach a settlement with Chinese regulators. At that time, a well-known overseas financial blog, Zerohedge, revealed that Citadel was closely linked to the Federal Reserve and often held secret meetings, effectively acting as a tool for the Federal Reserve to control market stability. They used high-frequency trading and other means to inflate the U.S. stock market.

Looking at 2021, when Robinhood banned retail trading during the GameStop (GME) crash, Citadel's name again appeared at the center of numerous accusations. Retail investors believed that Citadel manipulated the showdown between retail and institutional investors through its financial support of Robinhood. Although Ken Griffin denied these allegations during the hearings, the close ties between his company and Robinhood still left these accusations unresolved.

It's important to note that Citadel Securities is not just any market maker. Its relationship with Robinhood appears to be a client-supplier relationship on the surface, but behind the scenes, Citadel provides a substantial amount of order flow to Robinhood. All of this was laid bare during the GameStop incident. Since Citadel paid Robinhood tens of millions of dollars to execute these trades, it naturally became the "puppet master" in the eyes of retail investors.

In fact, Citadel's shorting operations over the years have already made it an "invisible manipulator" in the market.

Even in 2023, Terraform even accused Citadel of possibly participating in the shorting of UST, which ultimately led to the de-pegging of UST in May 2022, demanding that Citadel Securities provide some key trading data. Even though Citadel firmly denied any direct connection to the UST collapse.

"No wonder the price movements of GME are so closely aligned with ETH," pointed out a community member, noting that Citadel Securities plays an important role in this, using similar strategies and methods for market making. Indeed, since July 2024, ETH's price movements have closely mirrored those of GME.

Top image: ETH price movement; bottom image: GME price movement

It's no wonder that Citadel Securities is suspected of being one of the institutions shorting ETH.

However, it should be noted that as a top hedge fund, the possibility of holding a large amount of ETH spot while simultaneously shorting ETH for risk hedging is also plausible. From this perspective, perhaps this is a good thing, as their spot holdings are the main position, and shorting is merely an auxiliary strategy aimed at ensuring the stable appreciation of assets.

This also indirectly supports the widely circulated rumor of a "great change of hands in ETH," as Wall Street giants are gradually building positions to become new crypto players. The competition and rivalry among crypto market makers continue.