Citadel's Esposito Says Firm Focused on Fixed Income

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00:00Jim Esposito, thank you for joining us. This is, of course, a great conference. You're

00:04president of Citadel Securities. The conference has been going for a bit of time, but actually

00:08you joined from Goldman Sachs a year ago. What's it like now being part of a non-bank

00:13liquidity provider? Okay, thank you for being with us today, Francine, at our Future of

00:18Global Markets conference. I would say my one-year anniversary at Citadel Securities

00:23is noteworthy because what we're doing, I think, is in stark contrast to what the big banks do.

00:30When you think about Citadel Securities, in many ways, I think we're doing for trading

00:36what Amazon did for e-commerce. And what I mean by that is we're meeting our clients through

00:43three distinct channels in terms of doing transactions with them on exchange market

00:50making. We represent about a third of the volume on the New York Stock Exchange. We're obviously

00:55doing a lot in retail markets where we take flow off the books of Robin Hood, Charles Schwab,

01:01interactive brokers. We're 35% of retail volumes in this country. And more importantly, with this

01:08conference, we're directly covering institutions and we're trading their flow both via the electronic

01:14and voice channel. I'd point out the big banks are only represented in one of those three channels

01:21nowadays. So in many ways, when I talk about Amazon, we're creating a network liquidity effect

01:28that our clients are benefiting from. Jim, when you look at asset classes or geographies,

01:32is there anything that you're not into that you want to get into or where you want to expand?

01:37Yeah. In equities, we have a very significant position. We account for close to 25% of daily

01:45U.S. equity volumes. So we are a big, important player in equity markets. On the other hand,

01:51in fixed income, we can definitely get a lot bigger. We're just scratching the surface right now

01:56in fixed income markets. We trade U.S. rates, U.S. investment grade credit. We're growing a European

02:03rate business. But in many ways, we're only scratching the surface in fixed income markets.

02:09That's definitely going to be a big part of our strategic build in years to come.

02:14How much bigger? Do you have a target of how much market share you want or how quickly you want to

02:20grow? Not yet. I would say we're trying to apply our skills and experience that made us so successful

02:28in equity markets to the fixed income markets. And we're taking our time. It's a very balanced

02:34and measured build at this moment. So there's no definitive plan as to what product will be rolled

02:40out next. Will it be high yield bonds, emerging markets, mortgage-backed securities? I don't think

02:46we're that far along. We want to master the products that we're currently trading. And then you'll see us

02:52grow from there. Because there's quite a lot also on tokenization. Again, if you look at regulation,

02:56where do you see the best and biggest opportunity? I think it's helpful. I think we're about to get

03:02a much more defined rule set around the trading of digital assets. And that will be important for

03:08the market at large. Definitely be important for Citadel Securities. So that would be a product

03:13expansion that you could expect to see us get more active in, assuming we get a defined rule set.

03:19At our conference today, we have the founders of CalSheet, who are big making a market for event

03:25contracts. You can think of that as, you know, making positions or trades in terms of the probability

03:34of a political outcome or an economic release. We're not yet involved in event contracts. But

03:40there's no reason why we couldn't consider that in the future. Jim, when you look at AI and computing,

03:45how does it change building out of Citadel Securities, but also hiring?

03:49Yeah. I'd say first with our clients, the topic top of mind right now is clearly how can we support

03:58our clients to incorporate AI to either make them more operationally efficient or to make them better

04:05investors. And so we're spending a lot of time with our clients around that topic. In fact, as you saw,

04:12a major theme really underpinning this conference today is AI. We brought a lot of the best from the

04:19West Coast here to New York City. We had Jensen, the CEO of NVIDIA this morning. And I think that

04:25opened up the minds of our clients in a very profound way. And so AI is top of mind for our clients.

04:33It's top of mind for us. And I'm pleased to report we are making some progress around that front.

04:39What are clients asking today, actually, of Citadel Securities when it comes to AI? Or what are they

04:44asking you to try and understand where AI goes next?

04:47Yeah. I think generally, you know, we think a lot about our own content, what differentiates us from

04:54the big banks. And so we don't want to be a me-too bank in terms of the content that we provide to

05:01our clients. So we're doing maybe what you would expect us to do. We have differentiated skills around

05:08quantitative finance, around leveraging technology. Citadel Securities has been in business for 23

05:14years. We were built as a technology-driven first organization. That's core to who we are.

05:22That's what we're leading with in our client conversations. And so how do they get more

05:27efficient? How do they get smarter and become better investors from leveraging and harnessing the

05:33power of AI? Jim, we also talked about liquidity a little bit at the conference. I certainly had a

05:38conversation with Maria Draghi when we touched on that. You've in the past talked about, for example,

05:43teaming up with some of the smaller banks, right, to help your clients with some of, you know, the

05:47orders there. What conversations have you had recently that point into that direction?

05:51Yeah, this is no longer a strategic idea. It's actually now playing out. So we are attempting

05:59to provide mid-tier banks liquidity from Citadel Securities so they can better service their

06:07clients. I think there are probably 100 banks around the globe that want to service their end

06:14user client in markets, jurisdictions, in places that we're never going to touch. What are we great

06:21at? We're great at making markets, providing liquidity. And so if you're some captive client sitting

06:29in Latin America, you might want to get covered by a bank where you have a relationship with,

06:34we're never going to meet or touch that client, but we can provide the mid-tier banks the liquidity

06:40to better service their client. And we're starting to set up a whole mid-tier liquidity ecosystem

06:46to service these mid-tier banks. It's still early days, but we've seen signs where this model can work.

06:54It serves the end user client well, and it's servicing and allowing those mid-tier banks to be much,

07:00much more competitive against larger players. And how do you think about the markets in this kind of

07:04environment? So given the volatility that we've seen, will it stay like this, or does it die down from

07:11here until the end of the year and beyond? Yeah, look, there's a lot of talk about, you know, is the capital

07:16expenditure for AI running too high? People are starting to speculate, are we in some form of a

07:23bubble? I think a lot of the macro discussion in markets sort of correlates to what's going on and

07:31what we're talking about at this conference around AI. I think if we can have modest productivity gains

07:38in the real economy by better leveraging AI, market valuations look absolutely attractive. You don't need

07:46a big productivity boost in order to support these valuations. By the way, there's also a lot of talk

07:52about growing stocks of debt in developed countries. How do these countries service their debt? They can

07:58grow their way out of it with productivity gains. So I think that's the big bet. Don't think we're in

08:04a bubble right now. Reasonably confident we will get these productivity gains, but that's where the macro

08:09discussion really hinges right now.

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