Welcome back to the channel everyone today i want to talk about citadel connect and why they're not classified as a dark pool and why they don't have to report transactions to finra. Trust me guys. You do not want to miss this video, so stay tuned and let's make some money, but guys before i dive into the video. I just want to give a massive shout out to the 2 600 of you that have currently ding that notification bell, because you guys are always the first to watch a new video as soon as it's released so guys be sure to drop a like down below Subscribe to the channel and ding that notification bell, if you haven't already so that you don't miss another video, just like this one, and now i want to dive straight in with the key information.

Firstly, i want to talk about what citadel connect actually is and why? It's not classified as a dark pool. I don't want to talk about what it is classified as and why they don't have to report transaction data to finra and how actually, at one point, finra did actually try and make them report the data, but they fall back before dark pools. Institutional investors had to trade in blocks of shares outside trading hours to avoid upsetting the market. Now the utility found within dark pools is so high that some market makers have embedded them within their operations.

There are certainly some benefits here in terms of increased liquidity, but there's another side of the coin as well. Through 2021, retail traders have uncovered significant short positions held by hedge funds in a number of stocks. Naked short selling is suspect by many retail traders to be involved at this point. Hedge funds have collectively lost 12 billion dollars so far this year alone, one of the latest developments in this saga is citadel connect a dark pool operated by citadel securities.

If you haven't been following the wall street bet saga across multiple senate banking committee hearings. Here's a brief recap. As the largest designated market maker on the new york stock exchange and accounting for 47 of us-based retail trading volume, citadel securities llc also accounted for a significant portion of robin hood's quarter. One 2021 revenue thanks to robin hood's, pfof or payment for order flow business model.

Pfof is a highly controversial practice because it tends to cause conflict of interests, which is why it's illegal. In many western nations, the uk, canada and australia. Current sec chair gary gensler, noted some avenues for its abuse on the 9th of june. Payment for order flow raises a number of important questions.

Do broker-dealers, have inherent conflicts of interest and, if so, are customers getting best execution in the context of that conflict, our broker dealers incentivized to encourage customers to trade more frequently than is in those customers best interests. In the same statement, gensler further noted that around nine percent of january's trading volume was executed on alternative trading systems. Ats's. These are commonly referred to as dark pools, benefiting their monika.

Dark pools have the effect of occluding the market's resolution in stock market jargon. The aggregate quote, reporting on the bid, ask quote, spread the national best bid and offer nbo is skewed, as noted by gensler himself. First, as evidenced in january, nearly half of the trading interest in the equity market is in dark pools or is internalized by wholesalers. Internalization means that the order is not routed to the market maker, but the broker itself fills the order from its inventory of shares, as in takes the other side of that trade.

For instance, citadel securities have prepared 22 million penalty in 2017 for misleading statements, suggesting that it would provide or tried to get the best prices it saw for retail orders rooted by other broker. Dealers, basically citadel, doesn't give you the best price. When you purchase a stock, it gives it to you a few pence more expensive, so they can profit a difference. Dark pools and wholesalers are not reflected in the mbbo.

Moreover, the nbbo is only as good as the market itself, thus under the segment of the current market, nearly half of trading, along with a significant portion of retail market orders, happens away from the lit markets and that there just proves that the order flow that comes From those trading platforms like weeble and robin hood, that is sold to citadel ends up going through the dark pool away from the lit markets, citadel securities owns and operates. One such dark pool out of currently 50 in the u.s called citadel connect. What is a dark pool and can it be abused? An alternative trading system, ats or dark pool is a private exchange that has liquidity benefits, but can also obscure trades together with internalizers. They account for over 40 of the global equity market.

Dark pools gained traction after 2005., following the sec's adoption of the regulation. Nms national market system nms modernized the stock market to make it as we know it is today. Therefore, dark pools are completely legal and regulated. However, they're also called dark because the orders don't show up on the exchange's order books.

The obvious purpose for this feature is to stabilize the market so that, when large orders from institutionalised investors are placed, other market players are not alerted. Otherwise, with the order size in the open on the lit market, other participants will be able to trigger a downward price shift by preventing that from happening, dark pools, increase liquidity and market efficiency. Nonetheless, the same way dark pools, eliminate transparency by design. They can also obscure conflict of interests and then it lists a number of firms that have been fined by the sec for sketchy, dark, poor practices.

The most common abuse found in dark pools is the so-called front running with the knowledge that a trader is about to execute a trade. Another trader can trade the stock first and then sell it to satisfy the original request at a profit. So is citadel connect, a dark pool, numerous reliable reports suggest citadel connect is indeed a dark pool. Interestingly enough, however, citadel connect is not registered as an ats, nor does it report its trading volume to finra, which is overseen by the sec.

The features of citadel connect align with the purpose of dark pools, however, the sec chair gary gensler differentiated between dark pools, ets and off-exchange wholesalers, that leaves about 38, most of which was executed by off-exchange wholesalers. Just seven wholesalers accounted for the vast majority of this group and we know the top two citadel connect and virtue within the off exchange market maker space we're seeing concentration. One firm has publicly stated that it executes nearly half of all retail volume citadel, so citadel connect is actually an sdp, a single dealer platform. So what is an stp? An sdp is not an exchange, and it's not an ats, rather sdps have been defined as portals by which traders are granted access to prices from one dealer, they're very common in the fx world, and started to appear in equities of the implementation of mifid2.

So who currently operates sdps in the us citadel virtue, jane street imc and hrt, so are sdps regulated like exchanges or atss. The short answer is no. According to a 2018 sec comment letter from virtue, the commission specifically provided for an exemption from the definition of exchange to exclude automated trading systems of dealers, i.e, market makers and other dealers whose systems matched orders as an incidental part of the operation of the system. In other words, sdps do not have any special regulations, but rather are just overseen by finra and the sec, just like any other broker.

So a single dealer platform is basically where you sell your securities to that single broker dealer being citadel, and you also buy your securities from that platform being citadel as well with a normal ats or even a normal exchange. It's just a third party that connects two people together, more just like a middleman, the difference here being that citadel connect isn't a middleman, you can only buy from citadel connect and you can only sell to citadel connect. Citadel connect doesn't connect two people together. Our concerns, regulation and fairness sdps are not required to maintain a market and can cease operating their sdp at any time they see fit.

So basically, sdps can just pull the rug out from underneath you whenever they fancy they're, not covered by regulation, ats or regulation sci and are limited to normal broker dealer regulation. This lack of regulation for sdps raises concerns about what they can and cannot do. For example, can they give their better clients a first look at their iois? Will clients who have a bigger research budget with a particular sdp receive preferential treatment? Will there be a liquidity profiling system, like some atss currently have which distinguishes who they want to interact with, and will they back away from orders that respond to their iois? So something i found very very interesting is that finra actually tried to make virtue in citadel report more data on their sdps, but of course they didn't want to. They wanted to keep it hidden behind locked doors.

So here's virtue's response to that letter finra is proposing to publish monthly aggregate non-ats block size trading data for all nms stocks on the same terms as current block size. Ats data virtue supports this aspect of the proposal currently finra aggregates a firm's volume with similarly situated firms for firms that average fewer than 200 non-ats transactions per day. Obviously, virtue is not supportive of this component of the proposal because they have way more than 200 non-ats transactions per day and finally, the real kicker finra is also proposing to separately identify firms volumes of trading through their single dealer platforms. In order to gather this data.

Finra proposes requiring firms to obtain a unique mpid for purpose of reporting trades executed on the stp to a finra equity trade reporting facility. If a firm has multiple sdps, it would be required at its own cost and expense to obtain separate npids for each stp. Regardless of where the sdp activity is situated, virtue is not supportive of this facet of the proposal and submits that its economic impact was not correctly evaluated and considered by finra. Obviously, virtue doesn't support this part of the proposal and says that the economic impact was not fully considered because if they have to publish all of their data to finra they're going to be screwed because everyone's going to know what sketchy stuff they're doing this next paragraph.

That did make me laugh because it says virtue is a strong proponent of marketplace, transparency, but guys we don't want to report our data, but we love transparency, though trust me virtue is committed to transparency in the marketplace. For example, virtue provides its clients with information and analytics that clients need to assess execution quality we've consistency, practice what we preach in supporting marketplace disclosure enhancements by providing our clients and the public with greater levels of order, handling information, but we're still not going to disclose Our transactions virtue is not supportive of finra's proposal to publish information regarding trading through a firm's sdps. As previously stated, virtue is not supportive of this facet of the proposal and submits that such a requirement is inconsistent with the concept of an stp, as articulated by the sec and potentially has detrimental economic effects that have not been properly evaluated and considered by finra, because It would screw virtue and citadel connect. Both ats data and market maker data are already published on finra's website.

Virtue does not see the benefit of artificially segmenting a market maker's business activities to create a category of data whose benefits are unclear. Further virtue does not agree with finra's assertion that expanding transparency to all segments of the otc market would bridge gaps in information between ats versus non-ats segments of the otc equity market and reduce any competitive distortions that may be associated with information gaps. Basically, they're saying that if their data is released, they're not going to be competitive anymore, boohoo stonks batman also noted that citadel connects platform awfully sounds a lot like a spoofing platform wondering why citadel connect isn't registered as an ats, also not saying they're spoofing, but it Sounds an awfully lot like spoofing. An immediate order to cancel order is an order to buy or sell a stock that must be executed immediately.

Any portion of an ioc order that cannot be filled immediately will be cancelled. That was the definition of citadel connect's, immediate or cancel platform and here's the definition of spoofing spoofing is a form of market manipulation in which a trader places one or more highly visible orders, but has no intention of keeping them and subsequently redacts. That order guys be sure to, let me know down in the comments below what you think about virtue, not wanting their sdp data being reported to finra. And if you want to pick up some shares in amc.

But you haven't even yet signed up to a trading platform, be sure to sign up with fidelity because they don't sell their order flow to market makers like citadel who pass that order flow through the dark pool. Therefore, don't use weeble and robin hood because they do sell their order fly. Although saying that weibo is an excellent beginner investment platform, they've got good. Charting they've got news, they've got company fundamentals, they've got option order.

Flow they've got a lot. So if you do want to sign up with weeble and you're in the us, be sure to use my link down in the description below or if you're in the uk be sure to sign up with free trade again using my link in the description below, because They also don't sell their order flow and, as always guys if you enjoyed this video, be sure to check out some of my others. Alternatively, subscribe to the channel and ding that notification bell, because that way, you'll be alerted. When i upload a new video cheers.