The Office of Thrift Supervision has decided, in something of a surprise, to put the kabosh on Citadel's plans to invest $100 million in E*Trade. The OTS was a bit vague about its rationale, but Reuters adds some analysis. Apparently, Citadel and E*Trade struck a little-noticed tentative deal in June that calls for the ailing online broker to route nearly all of its customers' Nasdaq stock and options trades to Citadel's market-making operation.

The go-slow stance by the OTS reflects the public angst over high-frequency trading. Citadel is one of a handful of firms that wield real power in such markets. "Citadel's market-making division, Citadel Derivatives Group, is the big kahuna. Its high-frequency trading-powered desk controls some 30 percent of the daily trading activity. So if this exclusive pact with E*Trade goes through, Citadel's stranglehold on the options market will simply get a bit tighter."

Citadel is not a big proprietary hi-fi trader; its market-making business is distinct from its proprietary high-frequency trading business. But the issues are not clearly understood at the regulatory level and are being sorted out. The deal may well be approved at some point. 

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