By making those retail trades, which were immediately executable, available to institutional traders and other market makers in its dark pool, it opens up liquidity that might not have been available otherwise, said Jamil Nazarali, head of Citadel's retail and institutional market making division.
"You can't have two market orders just hit. It's like two bullets flying through—one of them has to be passive and the other active—that's the only way you could cross," he said.
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"Instead of crossing the two market orders, we do the next best thing, we bridge the liquidity by buying from one and later selling to another."
Nearly 40 percent of U.S. equity trades take place away from public exchanges in dark pools or through internalization, which is when a firm like Citadel takes the other side of a trade.
Dark pools began as a way for institutional firms to trade very large orders without tipping off the wider market, which could drive up the cost of their trade. But in recent years, the size of trades in dark pools has become smaller, comparable with exchanges, partly because many large orders are now broken into smaller pieces to be executed, and partly because more firms look to dark pools to avoid exchange fees.
Trades in Citadel Connect occur at the best bid and offer price offered by exchanges, though some occur at better prices. The average size of trades on the platform is around 240 shares, similar to the average on public exchanges.
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There are around 45 U.S. dark pools and as many as 200 broker-dealer-run internalizers. Some of the largest dark pools include Credit Suisse's Crossfinder and KCG Holdings' Knight Link, which is comparable to Citadel Connect.
Very few stock orders that retail investors place with their brokers, such as Charles Schwab Corp, TD Ameritrade , or Fidelity, go through public stock exchanges, such as IntercontinentalExchange Group's New York Stock Exchange. Instead, the brokers send the orders to other brokerage firms like or Citadel, or KCG, which trade against the incoming orders, and then send the leftovers to other internalizers, dark pools, or as a last resort, exchanges.
By doing this, the retail brokers not only avoid paying fees to the exchanges for active orders, but actually receive trading rebates from the off-exchange trading venues.