Ken Griffin’s Citadel Securities sells $1.2bn stake to Sequoia and Paradigm

Hedge fund billionaire Ken Griffin has sold a $1.2bn stake in Citadel Securities to venture capitalists Sequoia and Paradigm, paving the way for an initial public offering of one of the world’s biggest market makers.

The deal, which values the trading firm at around $22bn, marks a rare foray into the financial sector for Sequoia, the Silicon Valley firm best known for its early bets on tech companies such as Apple and Google.

It is the first outside investment in Citadel Securities, which was founded in 2001 as a separate entity to Griffin’s $43bn hedge fund Citadel, and has emerged as a major player in global markets in its own right, handling about 27 per cent of all US equities trading.

Citadel’s market making business is one of the biggest beneficiaries from the move to high-speed trading over the past decade. It acts as an intermediary between sellers and buyers in stocks, bonds and derivatives, and by stealing market share from bulge-bracket banks has grown into the biggest market maker for US stocks.

“Citadel Securities has carved out a unique place in the financial markets through its ability to absorb and price risk using techniques and capabilities from far outside the traditional world of Wall Street,” said Sequoia partner Alfred Lin, who is joining the trading company’s board.

Citadel Securities chief executive Peng Zhao said the company planned to use the investment to expand more aggressively internationally, and into new markets and asset classes. This includes expanding into crypto, said Matt Huang, co-founder of Paradigm.

The investment also prepares the ground for a future IPO, according to a person familiar with the situation.

Citadel Securities is the biggest market maker for ordinary American traders — accounting for about 37 per cent of all retail trading — paying various brokerages for the right to handle their orders. Trading platform Robinhood used this “payment for order flow” to offer its customers commission-free trading, helping usher in the era of free trading in the US in recent years.

Citadel Securities’ prowess has attracted envy from other parts of Wall Street, and increased attention from regulators and politicians. While it has long been a behind-the-scenes powerhouse in the world of market making for retail brokerages, it was pushed uncomfortably on to the public stage last year during the market upheaval surrounding trading in Gamestop and other memestock shares.

Griffin’s Citadel hedge fund stepped in with a $2.bn cash injection to help Melvin Capital, one of the biggest hedge funds burnt in the tumult. Meanwhile Citadel Securities was blamed by Redditors for Robinhood’s decision to curtail trading in GameStop at the height of the frenzy, and some of them argued that the firm benefits from trading at their expense.

In October Sequoia launched a bold restructuring to create a single overarching fund, in a move that tears up the traditional venture capitalist playbook and is designed to give more flexibility to the group and its investors.

The Sequoia Fund will take in capital from investors and funnel it to the group’s traditional venture funds, which invest in US and European start-ups, and also hold its stakes in publicly listed companies. In a sign that the group is expanding beyond its roots in venture capital, Sequoia said that it is filing with the US Securities and Exchange Commission to become a registered investment adviser.

Paradigm is a newer venture capital firm, which was founded in 2018 by Coinbase co-founder Ehrsam and former Sequoia Capital partner Huang.

Griffin was called to testify before the House Financial Services Committee last February following the Gamestop frenzy. He defended his businesses and said that he was convinced that the “incredibly positive impact” of Citadel and Citadel Securities would shine through.

“I haven’t thought of us as having emerged in this position [as a populist bogeyman], because so much of what we do is so clearly constructive for capital markets, and widely appreciated by regulators and policymakers around the world,” he said.

Griffin owns about 85 per cent of Citadel Securities, according to Bloomberg, which would value his stake in the business at around $18bn. Late last year Griffin beat a group of more than 17,000 retail traders at auction, buying a copy of the US constitution for $43.2m. In 2019, he paid £95m for a London house near Buckingham Palace.

The venture capital investment was first reported by the Wall Street Journal.

Additional reporting by Philip Stafford in London