Morning Coffee: Citadel Securities is paying someone a lot of dividends. Hedge fund analysts vs. AI

Citadel Securities, the electronic market making firm, is far more profitable than the trading arm of an investment bank. But as it grows, there are signs that it's becoming proportionately less profitable on some measures than it used to be.

Bloomberg reported on Friday that revenues at the firm rose 28% year-on-year in the first quarter thanks to volatility, while profits rose by a lesser 10%. Citadel Securities generated $1.9bn of net income on $4.3bn of trading profits. A net profit margin of 44%. 

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That's a fine amount, except that back in the first quarter of 2025, the Financial Times reported that Citadel Securities' generated a 70% increase in profits and a 45% increase in revenues, and had a margin of 50%. 

Citadel Securities' falling net margin appears to be the result of its generous treatment of its equity holders. The firm is a partnership and in the first quarter of this year, Bloomberg noted that it made $1.25bn of "distributions" to equity holders. This includes many of its 1,800 employees who are also shareholders with substantial salaries and bonuses. 

Citadel Securities is investing in growth, including in growing its people. In the recent past it's hired the likes of Nikhil Choraria from Goldman Sachs (who's due to arrive in September) and Elan Luger from JPMorgan (who's already there). Choraria was Goldman's head of European rates trading and is unlikely to have come cheap. Luger was JPMorgan's global head of high touch equity sales trading and will also have commanded a large package. 

Luger's arrival (along with a variety of other equities hires) reflects Citadel Securities' move into the sorts of trades that require higher levels of human intervention. Speaking last month, Citadel Securities' president Jim Esposito said the firm will be going after any trading product market where clients don't have access to liquidity or the best technology. That also includes investment grade credit. 

While net profits at Citadel are falling, we understand that the EBITDA margin at the firm has remained stable at around 53%. Underlying profitability is therefore steady. It's just that the "distributions" to employees and other shareholders are rising.

Separately, being a hedge fund analyst in 2026 isn't the same as being a hedge fund analyst in 1996. In some ways, it's worse. In some ways, it's better.

It's worse because people like Joe O’Donnell, a 42 year-old "veteran" hedge fund analyst are pitching AI products to help do the jobs of analysts. The Wall Street Journal reports that O'Donnell has got something called Canary that can scour the internet for data that hasn't been publicly divulged and that can identify stocks that have been mispriced. 

It's better because even in the age of AI, the best bit of being a hedge fund analyst still requires a human being. Speaking on a recent podcast, Dan Loeb at Third Point said that when he began his career as an analyst in the 1990s, he differentiated himself by spending a weekend reading a 3 inch thick file of papers on Drexel Burnham's bankruptcy. "It was super complicated," Loeb explained. "The claims were overstated, the assets were understated." Much money was made by people who'd got to grips with the document.

Today, AI can read the three inch stack of complicated papers. Loeb said that what makes an analyst great now is therefore not the willingness to grind through complex details all weekend, but being able to deeply understand "the nuances of a company of a technology." He used the example of an analyst who went into Casey's General Stores and ate pizza, thereby realising that it was a "pizza store masquerading as a general store" and was highly successful as a result. 

Even O'Donnell admits that his AI cannot unearth these kinds of hidden facts. AI cannot converse with company management and quizzing them in person on granular aspects of their business, notes Bloomberg. Hedge fund analysts of the future need to be conversational sleuths. They may also be intrepid adventurers; witness Citrini Research. 

Meanwhile...

SquarePoint is building a prop trading arm under Kirill Gelman. Yiming Zhang is building a new prop trading business at Millennium. Voleon Group, run by DE Shaw executives, has set up Voleon Securities; Adam Kravetz is in charge of it. (Alphaville Substack) 

UBS cut several hundred jobs in EMEA. They were mostly support staff but some bankers too. (Bloomberg)

Deutsche Bank fired some people who had relationships with Jeffrey Epstein. It didn't say who. (Bloomberg)

Nomura's executives are being paid 40% more on average. (Bloomberg) 

John Waldron at Goldman Sachs: "I would say we have a mark-to-market culture. So we mark our books kind of all the time. We like that because it gives you clarity on kind of where real market prices are with liquidity." (Seeking Alpha) 

If you earn more than £207k in the UK, you're in the top 1%. (The Times) 

A lot of women in Manhattan are on the hunt for the same type of man: men in finance who wear tailored suits, take you to Michelin-starred dinners, fly you business class to luxurious destinations, and buy you endless Chanel. It sounds deluded, but these men actually exist. (InternetBimbo)  

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