Citadel Didn’t Just Bail Out Melvin Capital, They Had a Big Short Bet in GME

Politico reported yesterday that the House Financial Services Committee plans to call Vlad Tenev to testify on February 18. That’s the CEO of the online trading app known as Robinhood that has played a role in the controversy surrounding the bull raid (now turned bear raid) in the shares of GameStop. If that’s to be the only witness, you might as well call Ken Griffin’s personal shopper to testify.

Griffin is the billionaire founder, CEO and majority owner of Citadel, which has been operating in the GameStop saga like a maestro from an orchestra pit. (For our previous profile of Griffin and Citadel, see here.)

As Melvin Capital, a major short seller in the shares of GameStop was about to collapse as the stock soared, Griffin and Citadel’s hedge fund rode to the rescue, injecting $2 billion in cash into Melvin to save its hide. The first question for the House Financial Services Committee is exactly what was the motivation for Griffin to prop up a competing hedge fund.

Then there is the fact that as all of those millennials and Gen-Zers at Reddit’s WallStreetBets message board were strategizing on their bull raid against the short sellers, Griffin’s Citadel Execution Services had a telescopic view of what was happening because Citadel Execution Services executes a big chunk of both stock and option trades for Robinhood. That unit of Citadel can see both the direction and the dollar volume of money heading to push a stock up or down. And, it gets to see all of that before it executes the trades, raising speculation that it might be tempted to front-run these trades for its own account.

This is known as payment-for-order-flow and it’s probably not a comforting thought that this is what Bernie Madoff’s broker-dealer was doing while Bernie was running the largest Ponzi scheme in history.

According to Robinhood’s 606 form that it filed with the SEC for the final quarter of last year, Citadel Execution Services paid it tens of millions of dollars a quarter for the privilege of executing its stock and option trades. The really big bucks resulted from Robinhood’s option trades, not its stock trades. The 606 form shows that in just the month of December 2020, Citadel Execution Services paid Robinhood $28 million for directing its option trades to Citadel.

Now we have just learned that Citadel Advisors LLC (one of the sprawling tentacles of Citadel) had a large net short position in GameStop but also stood to make money as the stock whipsawed up and down. According to Citadel Advisors LLC’s most recent 13F form filed with the SEC for the quarter ending September 30, 2020, it owned puts on 2.5 million shares of GameStop (which are option bets that the stock price will decline); it owned calls on 2 million shares of GameStop (option bets that the price will rise); and it owned 111,805 shares outright of GameStop. Unfortunately, the 13F does not provide the strike prices or expiration dates of the puts and calls. (That information is missing on all 13F forms and the SEC needs to include that information in the interest of transparency.)

Here is where things get very interesting about Citadel Advisors LLC. Its Form ADV which was filed on January 15 of this year, shows that it has just 19 clients for which it manages a total of $234,679,962,503. That’s $12.35 billion per client. So let’s get this straight: Citadel Execution Services is allowed by the SEC to pay for order flow so that it can trade against the dumb money coming in from Robinhood while another tentacle of Citadel is managing money for 19 clients who can cough up $12.35 billion each. Welcome to the most lop-sided playing field in the history of markets.

It’s also quite interesting that while Citadel is headquartered in Chicago, the capital of options and futures trading, the tentacles of Citadel Advisors LLC spread to three continents. It has offices in London, Hong Kong, Edinburgh, U.K. and numerous cities in the U.S. including Chicago, New York City and Greenwich, Connecticut (the town that hedge fund titans call home).

Maxine Waters, Chair of the House Financial Services Committee, needs to put Ken Griffin under oath and unravel all of the moving parts of Citadel. The unflappable Katie Porter and her Harvard Law degree should do the grilling of Griffin.

Waters also needs to call all of the other high stakes players who had big long or short positions in GameStop and put them under oath. That’s Gabe Plotkin of Melvin Capital, a former trader at Steve Cohen’s SAC Capital. (In 2013 four of SAC Capital’s businesses pled guilty to a sprawling insider trading case brought by the U.S. Department of Justice and paid $1.8 billion in fines and restitution.)

Then there is Ryan Cohen of RC Ventures that ramped up its purchases of GameStop to 9 million shares as of January 10 of this year; Richard Mashaal’s Senvest Management which showed ownership of 3.6 million shares of GameStop at the end of the third quarter of 2020; and John Broderick’s Permit Capital and Kurt Wolf’s Hestia Capital, that held big stakes in GameStop and frequently acted together in advocating change at GameStop.

Another indispensable voice on the panel of witnesses is Michael Burry, who owned 2.8 million shares of GameStop through his company, Scion Asset Management. Burry is one of the guys that bet big against subprime debt in the leadup to the 2008 Wall Street crash. His character was played by Christian Bale in the movie, The Big Short. Business Insider reports that Burry was Tweeting about GameStop and then deleted his Tweets. One of the Tweets by Burry stated this, according to Business Insider:

“There really can’t be another GME [stock symbol for GameStop]. Nothing else is/was even close to as shorted (100+% of float), so small (microcap), and so hated/ignored/dismissed prior to the #thebigshortsqueeze.”

Then there is billionaire Jeffrey Yass, a founder and now Managing Director at the stealthy Susquehanna International Group (SIG). The company filed a 13F with the SEC for the third quarter of 2020 that listed the following position in GameStop: 4.44 million shares owned outright; puts on 2.8 million shares; calls on 697,700 shares; giving it a net long (bullish) stance on GameStop.

Donald Foss, a Michigan billionaire who founded subprime auto lender, Credit Acceptance Corp, also held a large stake in GameStop. As of February 2020, Foss owned 3.5 million shares of GameStop, representing at that time approximately 5.3 percent of the company.

In addition to ferreting out whether there was any coordinated actions among the big players in GameStock (both long and short) the House Financial Services Committee needs to find out how such a high percentage of GameStop’s shares were in the hands of sophisticated investors and yet 140 percent of its outstanding shares were reportedly shorted. Exactly which Wall Street firms or Prime Brokers were loaning GameStop shares to be shorted, in excess of the total shares in existence.