Castle Securities enters the encryption space, what is the impact on the industry?

Jessy, Jinse Finance

On February 25, news emerged that Castle Securities would enter the cryptocurrency industry, becoming a liquidity provider for exchanges such as Coinbase and Binance.

Castle Securities is the largest market maker on the New York Stock Exchange, with operations in over 50 countries. It handles about 23% of retail stock trading in the United States and is known as the "shadow exchange of Wall Street." The institution excels in high-frequency trading and data analysis, enhancing market liquidity and trading efficiency, particularly performing well in volatile markets.

Castle Securities is entering the crypto space, believing that Trump's rise to power will bring prosperity to crypto based on its assessment of US crypto regulations. It is reported that initially, they will avoid the uncertainty of US regulations and prioritize establishing teams overseas.

The entry of Castle Securities also marks the gradual move towards compliance in the cryptocurrency industry, with more mainstream financial institutions entering the market. Although this encroaches on the existing market of market makers in the crypto space, it also provides retail traders with more protection in their trading.

Unicorn with a market value of 155 billion yuan

Citadel Securities was founded in 2002 and is headquartered in Miami, with founder Kenneth C. Griffin being a U.S. hedge fund manager.

Castle Securities is better known for its namesake with the global hedge fund giant Citadel LLC (Citadel Investment). Citadel Investment was also founded by Kenneth C. Griffin, but the two institutions operate completely separately and independently. Castle Securities focuses on market-making business, while Citadel Investment focuses on asset management.

Castle Investment is a world-renowned hedge fund established in 1990. According to the Securities Times, as of January 2025, its asset management scale has exceeded $65 billion. According to statistics from the well-known hedge fund investment firm LCH Investments, as of 2024, Castle Investment has earned a total profit of $83 billion since its establishment in 1990, maintaining the title of "the most profitable hedge fund in the world" for the third consecutive year.

Although Castle Securities is not as famous as Castle Investment, its strength cannot be questioned. In January 2022, Castle Securities completed a US$1.15 billion financing at a valuation of US$22 billion, led by Sequoia Capital and others, which once ranked 13th in the "2024 Hurun Global Unicorn List" with a market value of RMB155 billion. And according to the information on the official website of Castle Securities. In U.S. retail market making, 23% of U.S. retail stock trading volume is executed through Castle Securities' platform.

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Over the course of more than twenty years, Castle Securities has clearly become a super unicorn. According to its official website data, it is the largest provider of stock liquidity in the global capital markets. In addition to stocks, its services cover a wide range of fixed income and equity products, with its unique advantage being the reduction of trading costs, helping to meet the liquidity needs of asset management companies, banks, brokerage firms, hedge funds, government agencies, and public pension plans.

In terms of executives, the CEO of Fortress Securities is Zhao Peng. Zhao Peng was born in 1983, entered Peking University in 1997, and obtained a Bachelor's degree in Applied Mathematics in 2001. He then studied abroad in the United States and earned a Ph.D. in Statistics from the University of California, Berkeley in 2006. Zhao Peng joined Citadel in 2006 as a quantitative researcher and officially became the CEO of Fortress Securities in 2017.

In addition to the announcement of entering the cryptocurrency space, on January 17 of this year, it also submitted an application to the China Securities Regulatory Commission to establish a securities company in China. Whether entering the cryptocurrency space or actively expanding into the Chinese market, it is evident that there is ambition to expand new businesses.

Advantages of Castle Securities Compared to Native Crypto Market Makers

A market maker with extensive influence in the traditional financial world entering the crypto space will undoubtedly first impact some of the native market makers in the cryptocurrency circle.

Currently, market makers in the cryptocurrency space can be divided into two types. One is the AMM within DEX, while the other is centralized market makers, similar to those in CEX and traditional finance. Castle Securities is entering the crypto space to compete directly with the business of centralized market makers. The market maker business in the crypto market is essentially not much different from traditional finance. However, there are vast differences in operational models, technology, risk management, and regulation.

First of all, in terms of market size, the cryptocurrency market is still relatively small compared to the traditional financial market, and the scale of market makers in the cryptocurrency industry is also relatively small. The liquidity in the cryptocurrency market is relatively low, and the volatility is high, requiring market makers to be more cautious in managing risks. Secondly, because the trading process in the cryptocurrency market is difficult to regulate, there is also no strict market maker system in place. The relationship between trading platforms, project parties, and market makers has become more complex. Then, market maker operations are not only generated on centralized trading platforms but also involve on-chain market making, leading to the emergence of some middleware and protocols that serve market making. The last point is that in terms of technical architecture, the cryptocurrency industry needs to possess higher technical capabilities to ensure the security of transactions.

However, in terms of operational models, crypto market makers and traditional market makers do not differ much; they primarily provide liquidity and market depth for the cryptocurrency market while profiting from it. Like traditional market makers, crypto market makers also earn profits from the price differences in buying and selling transactions. However, in the absence of regulation in the crypto market, these price differences can be significant, market volatility is high, and returns can be more unstable. Crypto market makers also have two additional sources of revenue: helping project teams with market making and assisting trading platforms in maintaining sufficient liquidity and trading volume.

Currently, in the cryptocurrency industry and market, liquidity is basically monopolized by a few market makers, including Jump, Wintermute, Amber Group, B2C2, DWF Labs, and others. Taking DWF, which has gained fame in the past two years, as an example, it is known in the community not only for market making but also for manipulating prices. Its market making model often involves helping project parties pump prices and unload assets, which has led to criticism from retail investors. Additionally, market makers in the crypto space operate without regulation, resulting in a generally more chaotic and irregular market making style.

According to the chart analysis by KOL Ai Yi in June 2024, as of 2024.06.27, the ranking of several market makers based on on-chain capital from high to low is as follows: 1. Jump Trading: 673 million USD; 2. Wintermute: 475 million USD; 3. GSR Markets: 86 million USD; 4. Amber Group: 50 million USD; 5. DWF Labs: 41 million USD; 6. B2C2: 37 million USD; 7. Flow Traders: 3.9 million USD.

Looking at the market making amount of Castle Securities, based on the trading volume disclosed on its official website, around 23% of the trading volume in the US stock market is executed on the Castle Securities platform, meaning it has to handle nearly 410 billion dollars of transactions daily. This volume is much greater than the total of several leading market makers in the cryptocurrency space.

It can be said that the entry of the castle is a dimensionality reduction strike against these native cryptocurrency market makers in the crypto space. Especially, the reason for the castle's entry is a bet on the compliance and regulation of the crypto space. When there are more rules in the crypto world, Castle Securities can carry out market making in a manner they are familiar with.

However, the entry of the castle is predicated on the premise of compliance and development in the cryptocurrency space, which would allow it to capture a larger market share. If the cryptocurrency space remains in such a wild and chaotic state, Castle Securities may not be able to secure a significant piece of the pie in this market.

However, from another perspective, the entry of Fortress also indicates that the pace of cryptocurrency compliance in the United States is gradually advancing. These top financial institutions have always had the keenest sense in the financial market. By embarking on the compliance journey in the crypto space, Fortress Securities can indeed capture a significant market share in the compliance lane.

The Impact of Castle Securities' Entry on Retail Investors

This foray into the cryptocurrency sector is a business expansion for Castle Securities and also signifies that cryptocurrency is moving towards mainstream acceptance. It also represents the increasing acceptance of crypto assets by traditional financial institutions. Moreover, the reputation that Castle Securities enjoys in the traditional financial world serves as a role model for other traditional institutions.

Specifically, as a top global market maker, Castle Securities has strong financial strength and a professional trading team. Its entry into the cryptocurrency field will provide more sufficient buy and sell orders for the cryptocurrency market, effectively narrowing the bid-ask spread, reducing transaction costs, and making it easier for investors to find trading counterparts, leading to smoother and more efficient trading in the crypto market.

At the same time, Castle Securities can leverage its rich experience in risk management and market operations to play a stabilizing role during market fluctuations, reducing significant volatility in cryptocurrency prices and bringing more stability and predictability to the market. This can attract more funds seeking stable investments to enter the market.

In summary, for retail traders in the secondary market, it is certainly possible to better protect their interests in specific transactions.