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

Jessy, Golden Finance

On February 25, news came 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. It handles approximately 23% of retail stock trading in the United States and 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, particularly in volatile markets.

Castle Securities is entering the crypto space, based on its judgment regarding U.S. crypto regulation, believing that Trump's ascension will bring prosperity to cryptocurrencies. It is reported that initially, it will avoid the uncertainty of U.S. regulation 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 getting involved. Although this has squeezed the existing market for market makers in the crypto space, it also provides retail traders with more protection 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 global hedge fund giant Citadel LLC. Citadel was also founded by Kenneth C. Griffin, but the two entities operate completely independently. Castle Securities focuses on market-making operations, 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. According to statistics from the well-known hedge fund investment firm LCH Investments, as of 2024, Castle Investment has generated 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 well-known as Castle Investment, its strength cannot be questioned. In January 2022, Castle Securities completed a financing round of $1.15 billion with a valuation of $22 billion, led by Sequoia Capital and others. It ranked 13th in the "2024 Hurun Global Unicorn List" with a market value of 155 billion RMB. According to information from 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 data from its official website, it is the largest stock liquidity provider in the global capital market. 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 Castle 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 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 Castle 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 wide influence in the traditional financial world entering the crypto world will undoubtedly first impact some native market makers in the cryptocurrency sector.

Currently, market makers in the cryptocurrency space can actually be divided into two types. One is the AMM within Dex, and the other is the centralized market makers in Cex, similar to traditional finance. Castle Securities is entering the crypto space to compete specifically 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 significant differences in operating models, technology, risk management, and regulation.

First, in terms of market size, the cryptocurrency market is still relatively small compared to traditional financial markets, and the scale of market makers in the cryptocurrency industry is also relatively small. The liquidity of the cryptocurrency market is relatively low, and volatility is high, 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 no strict market maker system to constrain it. The relationship among trading platforms, project parties, and market makers has become more complex. Then, market maker activities occur not only on centralized trading platforms but also involve on-chain market making, and based on this, some middleware and protocols for market making services have begun to emerge; lastly, 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 mainly provide liquidity and market depth for the cryptocurrency market while profiting from it. Like traditional market makers, crypto market makers also make profits through the price differences in buying and selling trades. However, in the case of a lack of regulation in the crypto market, these price differences can be significant, leading to high market volatility and more unstable returns. Crypto market makers also have two additional sources of income: helping project parties with market making and assisting trading platforms in maintaining sufficient 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 over 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 project teams pump prices and offload tokens. As a result, it has faced criticism from retail investors. Market makers in the crypto space operate with a generally wild and unregulated style due to the lack of oversight.

According to KOL Ai's icon analysis in June 2024, as of 2024.06.27, the ranking of several market makers by on-chain capital from highest to lowest is: 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 trading volume disclosed on its official website, about 23% of the transactions in the US stock market are executed on the Castle Securities platform. This means it has to handle nearly 410 billion dollars in transactions every day. This volume is much larger than the total of a few leading market makers in the cryptocurrency space.

It can be said that the entry of Castle is a dimensionality reduction attack on these native cryptocurrency market makers in the crypto space. Especially, the reason why Castle chose to enter is a bet on regulatory compliance in the crypto space. Once there are more rules in the crypto world, Castle Securities can conduct market making in a manner they are familiar with.

However, the entry of the castle is predicated on the premise of compliance development in the cryptocurrency market, so that it can capture a larger share of the market. If the cryptocurrency market remains in such a rough and chaotic state, Castle Securities may not be able to take a large slice 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 cryptocurrency sector, Castle Securities can indeed capture a significant market share on the compliance track.

The Impact of Castle Securities' Entry on Retail Investors

This foray into the cryptocurrency sector is a business expansion for Castle Securities and signifies that cryptocurrency is moving towards mainstream acceptance. It also represents that traditional financial institutions are increasingly embracing crypto assets. Moreover, the reputation that Castle Securities holds 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 crypto space will provide more ample buy and sell orders to 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 significant volatility in 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 certainly possible to better protect their interests in specific transactions.