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

Jessy, Golden Finance

On February 25, news emerged that Castle Securities will 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, operating in over 50 countries, and handling about 23% of retail stock trading in the U.S. It is known as the "shadow exchange of Wall Street." The firm excels in high-frequency trading and data analysis, enhancing market liquidity and trading efficiency, especially in volatile markets.

Castle Securities is entering the cryptocurrency market, based on its judgment regarding U.S. cryptocurrency regulations. It believes that Trump's presidency will bring prosperity to the crypto space. It is reported that initially, it will avoid the uncertainty of U.S. regulations and prioritize setting up teams overseas.

The entry of Castle Securities also signifies that the crypto industry is gradually moving towards compliance, with more mainstream financial institutions joining the market. Although this has encroached upon the original market for market makers in the crypto space, it also provides retail traders with more security in their transactions.

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, an American hedge fund manager.

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

Castle Investment is a world-renowned hedge fund that was established in 1990. According to Securities Times, as of January 2025, its assets under management have exceeded $65 billion. Furthermore, 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 inception 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 well-known as Castle Investment, its strength cannot be questioned. In January 2022, Castle Securities completed a $1.15 billion financing at a valuation of $22 billion, led by Sequoia Capital and others. It ranked 13th on the "2024 Hurun Global Unicorn List" with a market value of 155 billion RMB. According to information on the Castle Securities official website, 23% of the U.S. retail stock trading volume is executed through the Castle Securities platform.

Over the course of more than twenty years, Castle Securities has seemingly become a super unicorn. According to its official website data, it is the largest stock liquidity provider 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, then studied abroad in the United States, earning 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 it is entering the cryptocurrency space or actively expanding the Chinese market, it is enough to see its 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 affect 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, and the other is centralized market makers that are similar to those in Cex and traditional finance. Castle Securities is entering the cryptocurrency market to compete with the business of centralized market makers. The market maker business in the cryptocurrency market is fundamentally not much different from that in traditional finance. However, there are significant differences in terms of operational models, technology, risk management, and regulation.

Firstly, in terms of market size, the crypto market is still relatively small compared to the traditional financial market, and the market maker scale in the crypto industry is also relatively small. The liquidity of the crypto market is relatively low, with large fluctuations, so market makers need to be more cautious in managing risks; secondly, because the trading process in the crypto market is difficult to regulate, there is also no strict market maker system to constrain it. The relationship between trading platforms, project parties, and market makers has become more complex. Then, market maker businesses are not only generated on centralized trading platforms but also involve on-chain market making, leading to the emergence of some middleware and protocols for market making services; the last point is that in terms of technical architecture, the crypto industry needs to possess higher technical capabilities to ensure the security of transactions.

However, there is not much difference in the operating model between crypto market makers and traditional market makers. Both 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 income: helping project parties to market and assisting trading platforms in maintaining sufficient liquidity and trading volume.

In the current crypto industry, the liquidity in the crypto market is essentially monopolized by a few market makers, including Jump, Wintermute, Amber Group, B2C2, DWF Labs, and others. Taking DWF, which has gained fame in the last two years, as an example, it is known not only for market making but also for manipulating the market. Its market-making model often involves helping project parties pump prices and offload their tokens. This has led to criticism from retail investors. The market makers in the crypto space, due to a lack of regulation, tend to have a generally wild and unregulated 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 highest to lowest 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, according to the disclosure on its official website, about 23% of the trading volume in the U.S. stock market is executed on Castle Securities' platform, which means it has to handle nearly $410 billion in transactions every day. This volume is significantly larger than the total of a few leading market makers in the crypto space.

It can be said that the entry of Castle is a dimensionality reduction strike against these native cryptocurrency market makers in the crypto circle. Especially since the reason for Castle's entry is a bet on the regulatory compliance of the crypto circle. Once there are more rules in the crypto circle, Castle Securities will be able to conduct market making in a manner they are familiar with.

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

However, from another perspective, the entry of Castle also shows that the United States is gradually advancing its cryptocurrency compliance efforts. These top financial institutions have always had the keenest sense of the financial market. By riding the wave of compliance in the cryptocurrency space, Castle Securities can indeed seize a large market share on the compliance track.

The Impact of Castle Securities' Entry on Retail Investors

This foray into the cryptocurrency sector marks a business expansion for Castle Securities and signifies the development of cryptocurrency towards mainstream acceptance. It also represents the increasing acceptance of crypto assets by traditional financial institutions. Furthermore, 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 sector will provide more sufficient buy and sell orders for the cryptocurrency market, effectively narrowing the bid-ask spread, reducing trading costs, and making it easier for investors to find trading counterparts, thus making transactions in the crypto market smoother and more efficient.

At the same time, Castle Securities can leverage its rich experience in risk management and market operations to provide a certain level of stability during market fluctuations, reducing the dramatic volatility of cryptocurrency prices, and bringing more stability and predictability to the market, which can attract more funds seeking stable investments into the market.

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