Citadel CEO Peng Zhao Steps into the Spotlight (But Why?)

The stock market is rigged against retail traders. The only difference between the market and the casino is the rules in the casino games like blackjack, craps or roulette are known to all parties. Retail in the market has no idea what they’re up against, it’s intentionally obscured because it never was or will be fair.

Look no further than payment for order flow (PFOF).

When you place a trade from your brokerage firm like Robinhood or E*TRADE, they send your order to a market maker (ex: Citadel) who then executes the trade for you. Robinhood is paid for the flow.

Ever wonder why trading options only free on Robinhood?

They’re able to do this because the default option for buys and sells is somewhere in between the bid ask spread.

Let’s look at a $NVDA 290c for next Friday 5/19.

Bid: 4.25 - - - - - Ask: 4.35

There’s a .10 spread between the bid and the ask, Robinhood sells your order to Citadel at 4.30 which they then execute at any price below 4.30, pocketing the a few dollars or a few cents in milliseconds.

The real money is made with retail market order buys and sells because there is no minimum or maximum price set (just get me in or get me out). There’s a time and a place for these trades of course, we like to use them in 0dte situations when seconds matter. Just know every time you click the market sell or buy button, you’re adding another piece of art or American history to Ken Griffin’s collection like the $43.2m he spent to buy the US Constitution so the crypto nerds wouldn’t collect it.

The best part about this racket is Citadel doesn’t even have to go to the market with the orders. They can match them directly out of the flow they’re spending billions on each year from Robinhood, TD Ameritrade, E*TRADE, etc. So a Robinhood order matches with E*TRADE order and Citadel pockets the spread.

The business is actually better than selling meth online.

Citadel was founded in 2002 but only made the pivot into electronic trading and market making in 2011. Today they are the largest in the space with over 22% of the US equity market volume executed via their platform.

PFOF came under fire during the Gamestop mania in 2021. Essentially Robinhood stopped all trades for $GME and the conspiracy theory goes Ken Griffin cut off their execution because the short squeeze was killing Melvin Capital (they lost $6.8 billion) and the wolves of Wall Street prefer to protect their own (even tho Plotkin was an SAC guy).

Last June SEC Chairman Gary Gensler (ex- Goldman Sachs a bank not involved in PFOF) proposed rules that would require brokerages to send retail orders to be routed in auctions where market makers compete for them. In theory competition would ensure trades are executed at the best price the market is willing to bear for buys and sells. Brokers would still make money because the order flow is still being sold, but of course the resistance is the competition will eat their margins. At this time changes have been proposed and will likely be adopted sometime later this year. If you’d like to nerd out, this is interesting.

While Ken Griffin is the lightning rod eccentric billionaire ex-Trump now team DeSantis fundraising fanboi, Peng Zhao his prodigal CEO has remained out of the public eye, curious for the CEO of the market maker executing roughly one out of every five US stock trades.

Like us or not like us, Peng Zhao went to an accelerated high school at age 10 before finding his life calling two years later from a newspaper article on the Beijing subway.

How touching…

The PR spin on campus life then pegs Peng as a math prodigal savant who would finish problem sets in days instead of weeks and spend the rest playing video games which if true means he was probably dominant in the regional StarCraft scene. Then it shifts into party tricks where apparently Peng can somm as well as he can maths, blind tasting wine at restaurants and able to identify the type, vintage and origin. All while not liking alcohol.

Why the puff piece? Why now?

Perhaps the reclusive spotlight averse math genius profiting off of retail just went through a breakup and is trying to get back out there - tell the world he’s a really good guy.

Or maybe… the strings are really being pulled this time…

While the article tells the story of Peng Zhao - that’s not what it’s really saying.

Our favorite part:

The real message:

#1 KEN GRIFFIN IS BARELY INVOLVED (according to a source outside of but close to the firm)

2# PENG ZHAO IS THE CEO OF CITADEL SECURITIES. NOT KEN GRIFFIN.

Peng made it this far without caring about his profile or notoriety. He didn’t wake up and want to tell the world about how much he loves math. The message is he’s the CEO, he’s been the CEO and he’s the one behind their market making activities. 

Why send the message? Why now?

We’re not sure but in the masterful dance we like to call media manipulation - this is clearly the start of something much bigger.

The media like the markets… #rigd

Thanks for reading, we had fun writing it for you.

We’ll be back Monday before the open to preview the week!

[ bloomberg ]

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