Online share-broker E*Trade Financial Corporation will have to wait for a much needed USD100m cash injection from Chicago hedge fund Citadel, while the regulator ponders the implications of a flow trade deal, as it affects Citadel's high frequency trading operations.
The Office of Thrift Supervision (OTS) has "suspended consideration" on an application to approve a deal between Citadel and E*Trade that would require the online broker to increase from 40% to 97.5% the proportion of its customers' Nasdaq stock and stock option trades routed to Citadel's market-making operation. The 40% arrangement dates back nearly two years to the time when Citadel made a USD2.5bn investment in E*Trade. Last Friday was to be the deadline for the OTS decision, but they have not given a reason for the surprise suspension, and spokesman William Rubery has said there is no longer a "timeframe for the decision."
As part of the overall regulatory concerns arising from the economic crisis, a torchlight has swept over high-frequency trading. Citadel is among a small number of firms that dominate this market. Citadel Derivatives Group also controls some 30% of the daily trades in the options market, but this is a separate unit from high frequency trading. High-frequency trading causes regulatory concerns because its little-understood computer program trading, acting automatically at lightning speeds, is thought to be capable of going on an uncontrollable selling spree to further disrupt a shaky market. There are also complaints over an unfair price advantage obtained by buying and selling stocks a split second ahead of the market.
In June 2009, in a deal designed to reduce the company's debt service burden, E*Trade announced an offer to convert its 8% and 12.5% senior notes into more than USD1bn zero coupon convertible debentures, which was approved by the OTS.
Citadel has announced a plan, to be voted on at a meeting on August 19, providing that up to 120m shares of E*Trade owned by Citadel will be sold by a broker in an orderly fashion in accordance with a predetermined SEC approved formula. Affiliates of Citadel, including Citadel Equity Fund, Ltd, maintain significant holdings in both the common stock and debt of E*Trade; Citadel state that even after expiry of the plan, expected in October 2009, they will probably remain E*Trade's largest shareholder. Citadel has already sold nearly 14 million E*Trade shares according to SEC filings, and its present stake is just under 15%. Citadel Chief Executive, Kenneth Griffin, joined the E*Trade board in June, and intends to remain a director.
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