Castle Securities' entry into the crypto space: What is its impact on the industry?

Jessy, Golden Finance

On February 25, 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, with operations in more than 50 countries. It handles about 23% of retail stock transactions in the United States and is known as the "shadow exchange of Wall Street." The institution is good at using high-frequency trading and data analysis to improve market liquidity and trading efficiency, especially in volatile markets.

Castle Securities' entry into cryptocurrencies is based on its judgment of U.S. crypto regulation, and it believes that Trump's coming to power will bring prosperity to cryptocurrencies. It is reported that in the initial stage, it will avoid U.S. regulatory uncertainty and give priority to setting up teams overseas.

The entry of Castle Securities also marks that the crypto industry is gradually moving towards compliance, and more mainstream financial institutions have entered the market. Although it has squeezed out the original market maker market in the currency circle, it also gives retail traders more protection in transactions.

Unicorn with a market value of 155 billion yuan

Founded in 2002, Castle Securities is headquartered in Miami. Its founder is Kenneth C. Griffin, an American hedge fund manager.

Castle Securities is better known for having the same name as the global hedge fund giant Citadel LLC (Castle Investments). Castle Investments was also founded by Kenneth C. Griffin, but the two institutions are completely separate and operate independently. Castle Securities focuses on market making business, while Castle Investments focuses on asset management business.

Castle Investments is a world-renowned hedge fund. It was founded in 1990. According to the Securities Times, as of January 2025, its assets under management have exceeded US$65 billion. According to statistics from LCH Investments, a well-known hedge fund investment institution, as of 2024, Castle Investments has earned a total of $83 billion in profits since its establishment in 1990, maintaining the title of the world's "most profitable hedge fund" for the third consecutive year.

Although Castle Securities is not as famous as Castle Investments, its strength is unquestionable. In January 2022, Castle Securities completed a $1.15 billion financing with a valuation of $22 billion, led by Sequoia Capital and others. It was ranked 13th on the "2024 Hurun Global Unicorn List" with a market value of 155 billion yuan. According to the official website of Castle Securities. In the US retail market making, 23% of US retail stock trading volume is executed through the Castle Securities platform.

In more than two decades, Castle Securities has become a super unicorn. According to 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. Its unique advantage is to reduce transaction costs and help meet the liquidity needs of asset management companies, banks, broker-dealers, 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. He was admitted to Peking University in 1997 and received a bachelor's degree in applied mathematics in 2001. He later studied in the United States and received a doctorate 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 crypto market, on January 17 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 crypto market or actively expanding the Chinese market, it is enough to see its ambition to expand new businesses.

Compared with native crypto market makers, Castle Securities' advantages

 A market maker with a wide influence in the traditional financial world enters the crypto world, and the first to be affected is undoubtedly some native market makers in the currency circle.

Currently, there are two types of market makers in the currency circle. One is the AMM in Dex, and the other is the centralized market maker in Cex, which is the same as in traditional finance. Castle Securities' entry into crypto is to compete with the business of centralized market makers. Compared with traditional finance, the crypto market market maker business is essentially not much different. However, there is a world of difference in operation mode, technology, risk management and supervision.

First, in terms of market size, the crypto market is relatively small compared to the traditional financial market, and the scale of crypto market makers is also relatively small. The liquidity of the crypto market is relatively low and the volatility is large, so market makers need to be more cautious in risk management; secondly, because the trading process in the crypto market is difficult to be regulated, there is no strict market maker system to constrain it. The relationship between trading platforms, project parties and market makers has become more complicated. Then, the market maker business is not only generated on centralized trading platforms, but also involves on-chain market making, and on this basis, some middleware and protocols for market making services have begun to appear; the last point is that in terms of technical architecture, the crypto industry needs to have higher technical capabilities to ensure the security of transactions.

However, in terms of operation mode, there is not much difference between crypto market makers and traditional market makers. They mainly provide liquidity and market depth for the cryptocurrency market and make profits from it. Like traditional market makers, crypto market makers also make profits through the spread of buying and selling transactions. However, in the absence of regulation in the crypto market, this price difference may be large, the market volatility is large, and the income will be more unstable. Crypto market makers also have two sources of income: helping project parties to make markets and assisting trading platforms to maintain sufficient liquidity and trading volume.

In the current crypto industry, the liquidity in the crypto market has basically been monopolized by several market makers, such as Jump, Wintermute, Amber Group, B2C2, DWF Labs, etc. Take DWF, which has become famous in the past two years, as an example. It has always been famous in the circle for not only making markets, but also being a banker. Its market-making model often helps project parties to pull the market and ship goods. Therefore, it has been criticized by retail investors. Because the market makers in the currency circle are not regulated, they generally have a more barbaric and irregular market-making style.

According to the chart analysis of KOL Aunt Ai in June 2024, as of June 27, 2024, the ranking of the market makers from high to low in terms of on-chain funds is: 1. Jump Trading: 673 million US dollars; 2. Wintermute: 475 million US dollars; 3. GSR Markets: 86 million US dollars; 4. Amber Group: 50 million US dollars; 5. DWF Labs: 41 million US dollars; 6. B2C2: 37 million US dollars; 7. Flow Traders: 3.9 million US dollars.

Let's look at the market making amount of Castle Securities. According to the disclosure on its official website, about 23% of the trading volume of the US stock market is executed on the Castle Securities platform, so it has to process nearly 410 billion US dollars of transactions every day. This volume is far greater than the sum of the on-chain transactions of the top few market makers in the currency circle.

It can be said that Castle's entry is a dimensionality reduction attack on these native crypto market makers in the currency circle. In particular, the reason why Castle chose to enter the market is to bet on the compliance supervision of the currency circle. When the currency circle has more rules, Castle Securities can make markets in the way it is familiar with.

However, Castle's entry is premised on the premise of the compliance development of the currency circle, so that it can seize a larger share of the market. If the currency circle is still in such a rough and chaotic state, Castle Securities may not be able to get too much cake in this market.

However, from another perspective, Castle's entry also shows that the pace of US crypto compliance is advancing step by step. These top financial institutions always have the most sensitive sense of smell in the financial market. Stepping on the east wind of currency compliance, Castle Securities can indeed seize a large market share in the compliance track.

The impact of Castle Securities' entry on retail investors

 This entry into the crypto track is a business expansion for Castle Securities, and it also indicates that crypto is moving towards mainstream development. This also means that traditional financial institutions are increasingly accepting crypto assets. The reputation that Castle Securities enjoys in the traditional financial world has also given other traditional institutions a certain role model.

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

At the same time, Castle Securities can rely on its rich experience in risk management and market operations to play a certain stabilizing role when the market fluctuates, reduce the sharp fluctuations in cryptocurrency prices, and bring more stability and predictability to the market, which can attract more funds pursuing stable investment to enter the market.

To sum up, for retail traders in the secondary market, their interests can definitely be better protected in specific transactions.