Citadel Securities Observing Crypto ETF Space; Will Decide on Crypto ETFs After Regulatory Approval

Market maker Citadel Securities said it would dip its toes into exchange-traded funds holding cryptocurrencies if regulators give the green light.

As heavy-hitters like Grayscale Investments LLC and One River Asset management continue to push hard for the Securities and Exchange Commission to approve a bitcoin spot ETF, market maker Citadel Securities said it would not provide liquidity for such ETFs in the absence of regulation.

“We will be ready if and when those products are approved, but we are taking a measured approach,” Citadel’s ETF head Kelly Brennan told Bloomberg Tuesday.

Citadel Securities, which started as an offshoot of Ken Griffin’s multinational hedge fund Citadel LLC, now trades in U.S.-listed and international markets. It operates as a market-maker, offering buying and selling of securities, equities, options, ETF trading, and treasuries. Market makers profit from the highest difference in the asking price of equity, stock, security, options, and the selling price called a “bid-ask spread.” Market makers emulate a traditional order book system where sellers are matched with buyers and provide crucial liquidity and market depth. When a market maker receives an order from a buyer, it quickly sells off shares from its stockpile, making markets flow more smoothly.

Market makers operating on a stock exchange such as the New York Stock Exchange must comply with the by-laws of the exchange, which must be approved by a national exchange regulator, such as the Securities and Exchange Commission in the U.S.

Last year, the Securities and Exchange Commission approved an ETF tracking bitcoin futures contracts listed on the Chicago Mercantile Exchange. However, it has not yet approved an ETF that tracks bitcoin’s price directly.

Griffin urges SEC to table new regulations

Citadel CEO Ken Griffin urges the SEC to provide regulatory clarity so that “tier-one” firms, companies whose capital consists of shareholder equity and retained earnings, can provide necessary liquidity.

“We get a huge volume of calls about spot bitcoin ETFs, but they are all from prospective issuers. The calls are not coming from clients,” says Cory Laing of Delta-One sales at Citadel. Karl Williamson, a former market maker for derivatives products, describing Delta-One products, says “delta” measures the “sensitivity of the price of a derivative to a change in the underlying index.” A delta of one means that the derivative tracks the index very closely. Delta-One divisions of major banks provide returns of a specific index without the client needing to buy any underlying securities. The banks buy the securities or derivatives to garner the requisite exposure.

Customers not waiting for spot ETF

According to Laing, customers are finding ways to get into crypto and are not waiting for a niche product. Once a spot bitcoin ETF gets SEC approval, Laing anticipates that demand will follow. The SEC continues to deny applications made by Grayscale and One River. Grayscale said they would consider suing the SEC if denied their latest application.

Citadel is observing regulatory moves and watching the performance of existing ETFs holding crypto stocks before making any big decisions. Brennan said the company is considering “what comes next,” but has seen little movement in the spot crypto ETF space in the last few months.

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