A Time for Choosing
In an earlier post I surmised that behomoth hedge fund Citadel was playing balance-of-power politics, working with the banks and against the CME by supporting the upstart ELX futures exchange, and working with the CME and against the banks in a CDS clearing venture. In each case, Citadel was allied against the incumbent, dominant player (CME in futures, and the banks in the CDS market).
It appears that Citadel has decided this is not a viable strategy, and that it can’t play both sides against the middle. According to a Bloomberg story by Matt Leising (not yet online), Citadel has resigned its ELX board seat. Though it will still retain an ownership stake, it will no longer promote the ELX venture.
Presumably the deciding factors were (a) Citadel’s assessment of the likely success of the two ventures, and (b) its estimate of the profit potential of each. One inference is that Citadel decided that the CME clearing venture is likely to succeed, and potentially in a big way, and that ELX is a much more iffy proposition.
There is definitely a case to be made for both propositions. Although I’ve identified some hurdles that CME must overcome to make the CDS clearing venture go, most of the reporting I’ve read suggests that the exchange has the inside track.
Overall, I think this is another signal that the banks’ dominance in derivatives has been eclipsed. Not only are their stock prices low, but their political stock is low as well. Citadel is a savvy player, and its choice is a lot more credible statement about the current landscape than anything that I, or any other observer, can put forward; they are putting their money on the table.
