Gary Gensler, 47%, Antitrust, and Yet Another Reason Why Citadel is Likely Irrevocably Fucked
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47%, Gary Gensler, Antitrust, and Citadel

Gary Gensler talked about a lot of stuff at the hearing earlier this week. The representatives generally focused on a lot of garbage, and they have justifiably taken a lot of shit from this community for their piss poor understanding of the things they are supposed to oversee. Lost in the gamification discussion was Gary Gensler talking about market concentration and Citadel how 47% of all retail order flow is routed through Citadel. This is a serious issue, and it is one that can be resolved through one of the Commissions established by Congress, for example: the SEC, but it can also be referred to the Department of Justice, Antitrust Division or the Federal Trade Commission.

Why This Guy?

Before I go any further, I used to be an employee of the one of these last two federal agencies, and I happen to have a bit of expertise in the subject matter I am about to talk about. Other things I might be blowing smoke out my ass, but I'm trying my best to educate, inform, or otherwise support my fellow apes. I am willing to provide my resume and identity to the mods, but I prefer to remain otherwise anonymous.

An Extremely Brief History of Antitrust in the US

There are 3 main laws that govern Antitrust Law in the US. They are the Sherman Antitrust Act(1890), the Federal Trade Commission Act(1914), and the Clayton Antitrust Act(1914).

The Sherman Antitrust Act outlaws restraints of trade or commerce, and declares people who monopolize or attempt to monopolize or conspire to monopolize in violation of a felony. The first part is a civil violation and the second part is a criminal violation involving jail time and financial penalties, and it is per se illegal, or by even agreeing to be part of a conspiracy to restrict a market a person is in violation of a felony. There's a lot of nuance and practical considerations to how judges and juries find in these cases. One of the first antitrust cases was brought against a labor organizer. It is now considered to be a vast misapplication of the law.

The Department of Justice was deemed to be insufficient to deal with fast moving technology in the early 20th Century, and so Congress passed the FTC Act to get expert engineers and scientists into an agency with lawyers---to be better able to enforce the law. The Supreme Court has ruled that every violation of the FTC Act is also a violation of the Sherman Antitrust Act. The FTC can unilaterally impose monetary penalties, where the DoJ has to go through the courts for everything. The FTC still needs to bring criminal prosecutions to the federal courts.

The Sherman Antitrust Act had the unintended consequence of causing companies to merge in order to avoid prosecution. The Clayton Act barred several items: price discrimination between purchasers if such discrimination lessens competition, sales on the condition that the buyer or lessee not deal with the competition of the seller or lessor or requiring the buyer to purchase another product on the condition that this not lessen competition, mergers and acquisitions that substantially lessen competition, and barring a person from being a director on the board of two or more competing firms. The key here is "lessen competition," and how that has been defined in the modern era.

We can more or less ignore the FTC Act, and the Clayton Act matters, but only tangentially. It is however a significant tangent.

Enter Robert Bork. [Get a Load of This Mug](https://upload.wikimedia.org/wikipedia/commons/d/d8/Robert_Bork.jpg) That's right. That Robert Bork. Nixon's Solicitor General, later federal judge, and then blocked from being on the Supreme Court due to being too extreme. He argued that the goal of antitrust law should be to protect consumers, because consumers are inherently foolish. So the consumer harm standard of antitrust enforcement was adopted. This implies that the harm to competition, the competitive process, can be observed through the effect on prices that consumers experience. This is still how antitrust law is enforced today.

Great, But How Does That Do Anything For Us?

In the short run, it probably does nothing. Antitrust matters move at the pace of the commissions and the courts, but buy and HODL, amirite?

This is a little heavy reading on how Antitrust cases are evaluated. <https://www.justice.gov/atr/horizontal-merger-guidelines-0>

Important notes not contained here: in order to prosecute a case for monopoly in order to break up the company there needs to be market power and abuse of dominance. Typically, the courts are skeptical of market power when a company controls less than 60% of a market. Control of market share is not enough. Due to the consumer harm standard, in order to prosecute monopoly or abuse of dominance harm to consumers must also be shown.

But how does this relate? Well... In comes market concentration, a popular proxy for how concentrated markets are already. The Herfindahl-Hirschman Index (HHI) is a measure of market concentration. It is calculated by squaring the market share of the market participants and summing them. A market with an HHI of 1800 or greater is considered to be highly concentrated. Using that 47% figure that Citadel touts-and no one else's share, the HHI for retail routed orders is 472 = 2209. That market is already there without the other 53% of the market included. This only matters in the event of merger and acquisition, however. There's another key point here: Payment for Order Flow.

By paying for order flow, Citadel may be changing the market definition in a couple of ways. The first is, they are the consumer of retail orders from brokers, and they are a dominant player in the buying side of this market. They might be foreclosing other wholesalers out of this market and exerting monopsony power or undue influence over the market through purchasing. The other way they could be messing up is through purchasing all of any given broker's order flow. By doing this, Citadel has given consumers in the market no choice of order routing, and they are monopolizing broker routings. There is huge potential for profit taking internally here, because the price that consumers see is rounded to 2 decimal places, but as we all learned with the 32 bit integer issue and Berkshire-Hathaway, the price is actually calculated out to 4 decimals. Citadel could buy up your order flow at the 4 decimal price, match against the other end of a trade, and take 2 decimals of profit on every order.

On top of that, Citadel knew about these anti-competitive issues associated with payment for order flow as early as 2004. They specifically commented against them. <https://www.sec.gov/rules/concept/s70704/citadel04132004.pdf> There is no way for them to say they did not know about the harm they were causing and continue to cause as they caused it and continue to cause it.

Any of the above could be construed as an abuse of a dominant position, harm to consumers, if not monopoly or monopsony. This could result in $100M fines per day that these could be demonstrated. If Ken Griffin is implicated through documentation or other evidence personally, he could face a fine of $1M and up to 10 years in jail.

Citadel is likely irrevocably fucked, whether or not they survive the MOASS, whenever it comes.

Edit: TL;dr: A mentor told me I should try to be able to explain it to a 5 year old.

By paying brokers for your order, my order everyone's order to go through them, Citadel has been doing something that isn't fair and is against the law. They knew it was against the law and unfair. Ken Griffin could face jail time if it can be proven that he knew about some of the problems they were causing.
