E*TRADE's (NASDAQ:ETFC) biggest investor is cutting back on its appetite for the popular online broker.

Citadel Investment Group began selling off a chunk of its stake this week. The firm expects to eventually sell 120 million shares -- all but a little more than a quarter of its original 166 million shares -- between now and the end of October.

That's not the kind of surprise the market likes to see.

E*TRADE's stock traded 4% lower yesterday after Citadel filed its intentions, and the stock is losing even more ground today.

Citadel seemed to be doubling down on its wager before this week's filing. It was an active participant when E*TRADE hit the market this summer with convertible bonds and a secondary stock offering. Citadel bought both, preventing dilution to its stake. Citadel's CEO even joined E*TRADE's board two months ago.

Investors are worried. There were plenty of reasons to feel confident before. E*TRADE's insiders have been buyers. Its brokerage accounts are growing, with clients trading more actively.

What does a shrewd Citadel see on the horizon that makes it so imperative to scale back its position dramatically over the next three months?

E*TRADE isn't perfect, of course. It's not profitable the way rivals Charles Schwab (NASDAQ:SCHW), optionsXpress (NASDAQ:OXPS), and TD AMERITRADE (NASDAQ:AMTD) consistently are. And it's still feeling the pain that mainstream bankers Bank of America (NYSE:BAC) and Citigroup (NYSE:C) felt when they played it loose in the residential mortgage market. However, all of this has already been baked into E*TRADE's wee price.

Citadel's sale won't help magnify that price, alas. If there is any silver lining here, it's that Citadel is vowing to sell shares only at a price of $1.20 or higher. It apparently doesn't want to take a loss on stock that it paid as little as $1.10 a share for during June's secondary offering. That should keep the near-term downticks in check.

Citadel's also retaining its debt position in the company, and its CEO will remain on E*TRADE's board.

Citadel isn't going away -- it's diversifying. That's just what investment companies do.

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Longtime Fool contributor Rick Munarriz believes in self-service gasoline pumps and self-service stock brokerages. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.