Ken Griffin’s money machine

In today’s newsletter:

• The rise and rise of Citadel Securities

• The lasting ‘risk premium’ in gilts following UK Budget

• Investors step up bets that US election will trigger market volatility

Ken Griffin’s money machine: Citadel Securities

In July, Ken Griffin paid a record $45mn for a near-immaculate 11-foot tall stegosaurus skeleton called “Apex” — a fitting purchase for a billionaire that many consider to be at the apex of finance.

Griffin made his name through his hedge fund Citadel, now the most profitable investment firm in the industry’s history. But a larger chunk of his fortune, estimated by Forbes at $43bn, actually comes from Citadel Securities — valued at $22bn when venture capitalists Sequoia and Paradigm bought a small stake in the company two years ago.

In the latest fascinating instalment of a Financial Times series on the secretive trading firms that now dominate a key part of Wall Street, we take a close look at Citadel Securities. 

In just two decades it has become the world’s biggest buyer and seller of stocks; in August, more equity trading was conducted within its electronic ecosystem than on the New York Stock Exchange’s main market. Last year it generated profits of $2.8bn on revenues of $6.3bn. In the first six months of this year alone, it made $4.9bn in net revenue.

A firm that already handles one in four US equity trades and is a major player in Treasuries has now set its sights on new targets: among them China’s vast but politically sensitive equity market, the European government bond market, and the hitherto bank-dominated world of credit trading.

It is unlikely to settle for becoming a minor player in any of them. “We don’t enter a business just to make a little money. We enter a business to be number one. Every single time,” said Matt Culek, Citadel Securities’ chief operating officer.

It is that success which has bred a new set of challenges for future growth, according to dozens of interviews with insiders, competitors and analysts, as watchdogs have begun to scrutinise more closely how risks have shifted from traditional banks to their non-bank rivals since 2008 — and whether regulation now needs to catch up.

“The key risk is that the regulator looks at the likes of Citadel Securities and Jane Street, sees the risk there and then decides to regulate them like a bank,” said a top executive at a major bank. “Then you go from an infinite return on equity business to a mid-teens [one].”

Read the full story here 

Investors warn of lasting ‘risk premium’ in UK gilts

UK chancellor Rachel Reeves put a £40bn tax increase at the heart of a plan to fix the country’s “broken” finances and public services, with business and the wealthy bearing the brunt of the biggest Budget tax hike in a generation.

Investors warned of a lingering “risk premium” in UK government borrowing costs after the Budget sent gilt yields close to their highest levels since the 2008 global financial crisis. 

While the market reaction echoed the reaction to then prime minister Liz Truss’s ill-fated “mini” Budget two years ago, which sparked a pension fund fire sale and full-blown gilts crisis, most investors played down comparisons with the much steeper gilt sell-off back then, which also saw the pound crash to an all-time low. But they nevertheless said Reeves’ plans would have a lasting effect on the government’s cost of borrowing. 

“The move is the market kind of rejecting the Budget itself, introducing a new fiscal risk premium into the UK,” said Mark McCormick, head of FX and EM strategy at TD Securities. The government had “really tried to push the needle” with its spending and borrowing plans, he added.

Reeves also announced long-anticipated reforms to the taxation of carried interest, the share of profits private equity executives get to keep when they exit investments. 

Don’t miss this great explainer on how what Oxford university professor Ludovic Phalippou has controversially described as the “billionaire factory” actually works.

And here’s our deep dive into how the private equity industry’s well-resourced lobbying efforts unfolded, ensuring that it avoided its nightmare scenario of all carried interest being taxed as income.

Chart of the week

Investors have been raising their bets that this week’s US presidential election will trigger sharp price swings in bond and currency markets.

Nowhere is this more starkly evident than in expected currency market volatility, which has jumped as traders debate the potential impact of policy proposals such as sweeping tariffs on US imports, write Will Schmitt and Nicholas Megaw in New York.

A CME index of implied volatility across a basket of developed market currencies last week hit its highest level since early 2023, while its volatility index for the Mexican peso has surged to its highest level since the first Donald Trump presidency.

Steve Englander, head of G10 FX Research at Standard Chartered, said that the moves in currency volatility had been sharper than during recent election cycles. They reflected “both uncertainty on the outcome of the election and on what the policy agenda would be in case of a Trump win, as well as uncertainty on whether the outcome will be a sweep or split Congress”.

Implied volatility has historically tended to rise before presidential elections and quickly dissipate after the vote, and many analysts and investors expect a repeat. Englander said currency volatility could start to reverse “very quickly as election results are inferred”.

John McClain, a portfolio manager at Brandywine Global, said “the market hates uncertainty [but] as soon as you have certainty, the market moves on”.

However, with polls suggesting the election is on a knife edge, some have cautioned that volatility could last longer than usual, for instance, if the result is challenged.

There is a chance of “a very, very close disputed election that is challenged for an extended period of time”, said Steven Oh, global head of credit and fixed income for PineBridge Investments. “It’s not a foregone conclusion that we won’t have some potential for violence — and hopefully we won’t have that type of action.”

Meanwhile Wall Street banks have been preparing well in advance — with some pausing software updates and booking downtown hotel rooms for suburb-dwelling traders, to make sure they are ready to handle any unexpected moves on election night or throughout the rest of the week.

Five unmissable stories this week

Warren Buffett continued to slash his stake in Apple as part of a selling spree that has seen his Berkshire Hathaway dump $166bn worth of stocks over the past two years, with the Oracle of Omaha finding few other opportunities to chase in the US stock market.

The UK’s Financial Conduct Authority has warned Crispin Odey that it intends to take action against the hedge fund founder after finding his conduct following allegations of sexual harassment and assault had breached its rules and demonstrated a “lack of integrity”.

Saudi Arabia’s $930bn Public Investment Fund plans to scale back the share of its international investments by about a third, drawing a line under the past decade’s multibillion-dollar global spending spree as it refocuses on the domestic economy. 

Activist investor Carl Icahn has suffered a new blow to his ailing financial empire as its largest investment — CVR Energy, a small Midwestern refinery — suspended its dividend, cutting off one of the veteran investor’s crucial sources of cash. 

Hong Kong’s Securities and Futures Commission is cracking down on how banks discuss block trades with hedge funds, after a criminal case against Segantii Capital Management and its founder Simon Sadler threw a spotlight on the practice.

And finally

Heinz Berggruen was a Jewish refugee who fled Berlin for California in 1936. After making his fortune as an art dealer in Paris, he returned to his native city in 1996, bringing his paintings. Before he sold them at a fraction of their value to the German state in 2000 in a gesture of “forgiveness and reconciliation”, Berggruen’s was Europe’s greatest private collection of classical modernism, writes our chief visual arts critic Jackie Wullschläger. The Musée de l’Orangerie’s new exhibition Heinz Berggruen: A Dealer and his Collection features nearly 50 works by Berggruen’s friend Pablo Picasso. The collection is fascinatingly strong in works from 1936-43, when the Spanish civil war and Nazi occupation of Paris infused Picasso’s art, and Berggruen himself was a struggling exile.

To January 27, musee-orangerie.fr