E*Trade Ends Citadel Order Flow Deal

NEW YORK ( TheStreet) -- E*Trade Financial ( ETFC) has confirmed that its three-year contract with Citadel Investment Group -- where the giant investment firm would provide order flow for a large chunk of E*Trade's retail trades -- expired as of Dec. 31.

The agreement was formed in late 2007 shortly after E*Trade inked a deal with Citadel to provide a nearly $3 billion cash infusion to the brokerage firm, which was swiftly sinking at the time from soured mortgages and toxic assets and forced its former chairman and CEO Mitch Caplan out the door.

E*Trade says the agreement covered substantially all its customer orders in options and approximately 40% of customer orders in listed securities.

Citadel will still receive a portion of E*Trade's option and equities orders, as it did prior to the 2007 agreement, but the company "now also has the flexibility" to send orders to various third-party market makers to achieve "best execution", an E*Trade spokeswoman said in an e-mail.

"Our main objective is best execution," the spokeswoman said on a follow-up call. "So when you have more competition and more flexibility, you have that option."

While there are many market makers providing liquidity to investors, some of the more prominent names specifically for retail trades include Knight Capital ( KCG), UBS ( UBS), Citadel Investment Group, Citigroup ( C) and E*Trade.

As of Sept. 30, Citadel Securities directed 36.6% of E*Trade customer non-directed orders, 42.52% of its market orders, 30.3% of its limit orders on the New York Stock Exchange listed securities, according to a company report.

E*Trade has been increasingly expanding its own market making business under E*Trade Capital Markets.

E*Trade Capital Markets has some 165 broker-dealers that it is currently working with, including E*Trade Securities, the company says.

E*Trade CEO Steven Freiberg said during the brokerage firm's third-quarter earnings call with analysts that the capital markets group "provides a strong foundation for organic growth in our market making activities," according to a transcript of the October call.

"We are completing effectively, and acquiring more external order flow. We will continue to insure we are extracting maximum economic benefit from our retail customer engagement," Freiberg said.

Since the crisis, E*Trade has undergone two recapitalizations, with Citadel emerging as its largest equity and debt holder, which has been gradually lowered through a series of transactions.

At Sept. 30, Citadel owned 9.9% of E*Trade. Citadel's CEO Ken Griffin has been on E*Trade's board of directors since June 2009.

Last June, it completed a reverse stock split.

E*Trade shares are currently trading at $16.38 a share. The stock rose 9.3% from June to the end of the year.

-- Written by Laurie Kulikowski in New York.

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