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

Jessy, Golden Finance

On February 25, it was reported that Castle Securities will enter the crypto industry and become 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 approximately 23% of retail stock trades in the U.S., 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 outstandingly in volatile markets.

Castle Securities is entering the cryptocurrency market, believing that Trump's presidency will bring prosperity to crypto based on its judgment of U.S. crypto regulation. It is reported that initially, it will avoid the uncertainties of U.S. regulation and prioritize setting up teams abroad.

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

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 an American hedge fund manager.

Castle Securities is better known for its name being the same as the global hedge fund giant Citadel LLC. Citadel 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 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 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 establishment in 1990, maintaining its title as 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 $1.15 billion financing with 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 Castle Securities' official website, 23% of the retail stock trading volume in the U.S. is executed through the Castle Securities platform.

Over the course of more than twenty years, Castle Securities has evidently become a super unicorn. According to data from its official website, 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 a unique advantage in reducing trading costs to help 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 later studied in the United States and received 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 market, 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 market or actively expanding into the Chinese market, it is enough to see its ambition to expand new businesses.

Comparison with Crypto Native Market Makers: The Advantages of Castle Securities

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 sphere can actually be divided into two types. One is the AMM in DEX, while the other is centralized market makers similar to those in CEX and traditional finance. Castle Securities is entering the crypto market, aiming to compete with the business of centralized market makers. The market maker business in the crypto market is fundamentally 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 of the cryptocurrency market is relatively low, with high volatility, so market makers need 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 to constrain it. The relationship between trading platforms, project parties, and market makers has become more complex. Then, market maker activities are not only generated on centralized trading platforms but also involve on-chain market making, and based on this, some middleware and protocols for market making services have started to emerge; the last point is that in terms of technical architecture, the cryptocurrency industry needs to have higher technical capabilities to ensure the security of transactions.

However, in terms of operational models, crypto market makers do not differ much from traditional market makers. 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 substantial, and the market volatility is high, leading to more unstable returns. Crypto market makers also have two additional sources of income: assisting project parties with market making and helping trading platforms maintain adequate liquidity and trading volume.

In the current cryptocurrency industry, the liquidity in the crypto market 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 industry not only for market making but also for manipulating prices. Its market-making model often involves helping projects pump their tokens and offload them, which has drawn criticism from retail investors. Additionally, market makers in the crypto space generally exhibit a wild and unregulated style of market making due to the lack of oversight.

According to the icon 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; 2. Wintermute: $475 million; 3. GSR Markets: $86 million; 4. Amber Group: $50 million; 5. DWF Labs: $41 million; 6. B2C2: $37 million; 7. Flow Traders: $3.9 million.

Looking at the market-making amount of Castle Securities, if approximately 23% of the trading volume in the US stock market disclosed on its official website is executed on the Castle Securities platform, then it needs to handle nearly $410 billion in transactions every day. This volume is far greater than the total of a few 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 choice to enter is a bet on the compliance and regulation of the crypto space. Once there are more rules in the crypto space, Castle Securities can conduct market making in a way they are familiar with.

However, the entry of the castle is predicated on the premise of compliant development in the cryptocurrency space, only then can it capture a larger market share. If the cryptocurrency sector 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 Castle also shows 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, Castle Securities can indeed seize a large market share in the compliance track.

The Impact of Castle Securities' Entry on Retail Investors

This foray into the cryptocurrency space is a business expansion for Castle Securities, and it signifies the trend of cryptocurrencies moving towards mainstream adoption. It also represents a growing acceptance of crypto assets by traditional financial institutions. Moreover, the reputation that Castle Securities holds in the traditional financial world serves as a role model for other conventional institutions.

Specifically, as a leading global market maker, Castle Securities has strong financial strength and a professional trading team. Its entry into the crypto space will provide more ample 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 counterparts, thus making trading 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 play a stabilizing role during market fluctuations, reducing the significant volatility of cryptocurrency prices and bringing more stability and predictability to the market, which can attract more funds seeking stable investments to enter the market.

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