Odd Lots - Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT

Episode Date: March 29, 2021

When the GameStop and Robinhood story exploded at the end of January, suddenly everyone took an interest in market structure and things like payment for order flow, as well as the role that high-frequency trading shops play in enabling free retail trading. This, of course, gave rise to lots of conspiracy theories about ways retail traders are taken advantage of. On the new Odd Lots, we speak with Doug Cifu, the CEO of Virtu, which is one of the largest HFT shops in the country, to get his perspective on how this part of the market really works.See omnystudio.com/listener for privacy information.

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all investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, do you remember GameStop? No, what was that, Tracy? I forgot. GameStop? Sorry, not familiar with it. You know, one of the most remarkable things about that whole episode was that for a brief, glorious moment in time, everyone was talking about market structure and things like payment for order flow. DTCC collateral. Like that was a discussion that you could actually have in mainstream media and sort of with your average person on the street.

Yes, but I mean, those conversations were in many cases deeply misinformed. So it is true that there was a lot of talk about market structure and payment for order flow and the DTCC and all that. And I actually did learn stuff, but there was a lot of noise of people who were like, you know, spinning conspiracy theories about what all this stuff, high frequency trading, how it really worked. So hopefully people learned something. But I also suspect a lot of people went away from that whole episode unless they listened to odd lots, of course, much less informed for them. Look, I'll take what I can get when it comes to getting people interested in market structure. But I think you're right. I think probably, especially on the payment for order flow subject, because it sounds kind of nefarious, you know, why would someone pay you for trade order flow? They must want something. They must be doing something with the information. I think it tends to lead to, you know, a lot of suspicion.

Yeah. I think that term in particular, you nailed it. There's something about that term that like invites a lot of sort of conspiratorial thought. Yeah, exactly. And of course, we saw that really ramp up during the GameStop drama. We even saw Congress start to, you know, they had an inquiry into payment for order flow. The concern is that high frequency traders are somehow profiting off of that order flow in a way that hurts retail investors. And of course, Robin Hood uses Citadel as its market maker. So we saw Citadel in the news as well. Citadel is one of its market makers. Yes. So, which is something we'll get into. It's like all these have lots, I mean, I've been sort of like spending the weekend, looking at some of these stats that the brokers face. And I have lots of questions about that.

So what are we going to talk about? How are we going to get into them? Okay. So today we are going deep into the payment for order flow discussion. And we're also going to talk more broadly about what exactly a market maker actually does. we have the perfect person to talk about all this. We have the CEO of Virtue, Doug Sifu. Welcome, Dub. Hello, how are you guys doing? Hey, we're good, thanks. Maybe to begin with, we should kind of go straight to the elephant in the room and talk about something very, very serious. But what's up with the hot dogs? So on your Twitter account, you seem to talk a lot about hot dogs. What's going to? on? Well, I resent the elephant in the room analogy. I'm a bigger guy, and my Twitter handle is

Dougie large. So against my better judgment about 10 years ago, I opened a Twitter account, and then my partner and I bought a hockey team, and I started tweeting about hockey, and you know, hockey fans, for the most part, are favorable, nice people, but then you get to 5% of the keyboard warriors and started to be abusive towards me. So I stopped tweeting about hockey. They said, I don't know what the hell I'm talking about. And I happened to run, as you say, a quote unquote high frequency trading firm. And in 2014, there was this little book called Flash Boys that came out and dark pools and all these nefarious sounding terms. And people started tweeting me like I was a criminal. I said, okay, well, that's not a good topic. I guess

I'll stop doing that. And then I found the one universal in this country that nobody can say anything negative about. It's the great American hot dog. And there's a company called Feltman's, which is founded by two great veterans from West Point. And they rediscovered the original Coney Island hot dog and they're fantastic. They got the perfect mix of spices and they kind of pop when you eat them. And I decided, okay, if I get behind these guys, I have no financial interest. I just love them. They're great Americans and they have a great hot dog. I said, there's not a chance people can give me grief about tweeting about hot dogs. And, you know, today I have not had any negative comments. These look really good. I'm on their website right now and I'm definitely going to

order. Get the mustard also. Trust me when I tell you. The It's better than like a salad. I put it on everything. I put it on everything. I'm miss hot dogs. I'm definitely going to order some of you. I know market making. I know market making and eating.

Those are the two things I'm an expert in. Maybe we should also talk about market making then. If you insist. So what is Virtue? So just give us the sort of brief version of its history and how it fits into the sort of market ecosystem. Sure, sure. So we started in 2008, believe it or not. My partner was an old school market maker.

He was in the pits. You know, those trading pits. Remember the movie trading places? Yeah. Of the New York Mercantile Exchange. His name was Vinnie Viola. He was an old school market maker, stood in the middle of pit,

and a bunch of guys screamed orders at him, and he tried to make what is known as the bid offer spread, the difference between what a willing buyer and a willing seller were willing to pay. In that pit, he was trading mostly like crude and gasoline futures, right? So he was a futures trader. And Vinny was smart enough to realize that, you know, 200-odd guys standing in a circular pit, screaming at each other, making funny hand signals.

was not going to be the end state of financial intermediation, price discovery, trading, whatever you want to call it, and that technology was going to evolve that process. And so that was his thought behind forming Virtue Financial. I was a lawyer very happily at a law firm in Manhattan called Paul Weiss for 18 years. I was his lawyer. And he said to me one day, you'd be a hell of a businessman. Do you ever think about quitting being a lawyer? I said, not until now.

And then I quit and we started Virtue. And our idea was to be a very large-scale, automated financial intermediary market-making firm that would try to be the best bid and the best offer in every electronic marketplace in the world. We had a very ambitious goal. And obviously, we're more well-known, as you guys indicated in your lead-in for U.S. equities and being a what's called a wholesale market maker. But we make markets in over 250 different marketplaces in the world in global equities, but also in FX and in Treasury future. and in commodity products, in metals, and corn, sugar, cocoa, cotton. You name a product that is traded electronically in a venue in the world, frankly, where there's enough need for a liquidity provider or market maker,

and that's what Virtue does. And we also, through an acquisition, have a very large agency business where we act as an agent for clients that want to access, generally the global equities market. So it's a pretty large-scale global financial services firm on the CEO of it. We got about 1,000 employees, 12 offices around the world. And last year, we generated about $2.3 billion of net trading revenue. And that equated to roughly about a billion, 6,5 of EBIDA.

So adjusted EBITDA. So we're a pretty large financial services firm. That's what we do. Not bad. Yeah. I think your stock is up quite a lot as well. And you're the only publicly traded market maker over in the U.S. So you have that distinction, too.

That is correct. Just on the market-making business, could you maybe talk to us a little bit more about that? Like, I think we throw this term around quite a lot, like, oh, they make markets and whatever. But can you talk to us about what exactly that entails? And why don't we narrow it down to U.S. equities? Yeah, sure. So in U.S. equities, think of it, but there's two forms of market-making, if you will, that we engage in. So right now, believe it or not, there are 15 national securities exchanges.

You probably know NASDAQ in New York, but there's another 13 IEX you may have heard of. Maybe you've heard of the CBOE Stock Exchange, but then there's, you know, 10 or other ones, including the Members Exchange, which I helped start at Virtue, you know, those kinds of things. And so we are a firm that does not really care about directional risk. In other words, we're not a hedge fund. We're not speculating. We're not buying Tesla at 600, hoping it goes to 800. Really, what we're trying to do is be the guy that's on the inside.

that's willing to buy from you and sell to you, right, and sell to somebody else, to try to make that little penny spread every single time. So our holding time in most of the top 500 names of U.S. equities, you know, will be hopefully a few seconds or less than a second, right? Because the likelihood that a willing buyer and a willing seller come together at exactly the same moment in time is pretty de minimis. It's sort of like, if you think about the Civil War, the Revolutionary War, two bullets meeting in the middle of the air. It doesn't happen all that often. So you need a company that is willing and able, has the financial resources, but also understands the U.S. equities market with 15 national securities exchanges and 40 different dark pools and a bunch of

other brokers. It's a very fragmented market. So stitching together that marketplace takes a lot of financial technology and a lot of investment. We invest hundreds of millions of dollars every year to have technology that's able to understand and stitch that marketplace together. But again, the difference between what we do and what a lot of other firms do, like quote-unquote, high-frequency trading firms, is that we are a passive market maker. We're always entering the market by saying, here we go, we're willing to sell you something at 10, we're willing to buy it at 9. And there's a penny spread in between, and we hope to collect that more often than not. A lot of times we get run over and we lose money. You mentioned GameStop before, I'm sure we'll

talk about that plenty. But in the GameStop situation, when the market's just crashing one way or the other, the market maker pretty much gets its face ripped off, right? It's on the train tracks. The train's coming and it can't get out of the way. The other thing we do, which I'm sure you want to talk a lot about, is what we call wholesaling. So there are these institutions called retail brokers, wealth managers, you know, Robin Hood, Fidelity, Schwab, E-Trade, which is now Morgan Stanley, but also Steeffel, Raymond James, JPMorgan Asset Management, RBC wealth management. Think of any aggregator of high net worth or professional trading flow. In the United States, we have this unique structure that those institutions have a choice. They can send their orders, their market orders,

right, to either an exchange, to a dark pool, or they can send it to a wholesale or a marketmaker. Citadel is the largest retail market maker. We're number two. They've got roughly 40% of the market. We've got roughly 30%. And then there's a handful of other institutions, Susquehanna, 2 Sigma, UBS, we're all competing for that order flow from roughly 200 retail brokers, wealth managers, excuse me, aggregators of flow, et cetera. So you just named a bunch of market makers that you compete with. And I'm wondering, when it comes to something like market making, it sounds like such a basic function.

You know, you're matching buyers with sellers and you're taking a small cut of the transaction. What is competing or what does competition actually look like? in that scenario? Like what makes Virtue special or different to, say, Citadel or Susquehanna? Yeah, that's a great question. So I should have actually explained that better. So let's go back to the 200 institutions that I mentioned before, right? Everybody from Ameritrade to Zcote, and everybody in between. Every single one of those institutions has a best execution committee. And what they're measuring is there's something called the National Best Bid and Best Offer. So that's the consolidated tape. You take those 15 national securities exchanges and you say, okay, at any

moment in time, right, for at least 100 shares, what's the best price that someone is willing to sell and the best price that someone's willing to buy a particular security? That's called the NBBO. Okay. And so every one of those retail brokers gets the same feed, right, the same consolidated feed that we do, right? And they are all measuring at the time that they send us a market order, right, you want to buy 100 shares of Tesla. what was the national best offer for Tesla at that moment in time? Okay. What we do as market makers is we try to improve that national best bid or best offer.

That's called price improvement or EQ. And as you mentioned in your lead-in, all of the statistics around price improvement are publicly available. And so the brokers have their own routing statistics where they measure our execution quality, the ability for the marketmaker to improve off of the NBBO, and to the extent and to the amount we're willing to do so, they will send us order flow. Now, obviously, they don't send 100% of their order flow to Citadel or to Virtua or to Susquehanna,

and they don't do it all as one big bucket. Sometimes they do it by different names, depending upon ADV, depending upon volume. They all have their own unique routing methodologies, but every single one of them is based off the amount that the market maker is willing and able to improve the national best bid and best offer. Just to give you some statistic, which is pretty compelling, in 2020, the five or six of us, the market making firms, in the aggregate, provided price improvement. So price is better than the MBBO in an aggregate amount of $3.7 billion. Right. So that means a retail investor in general, right, is getting.

getting a price that is better than what they could get on a national securities exchange, right? And so that's the, that's why they route us those orders, right? Payment for waterfall is a separate thing. We'll talk about that in second. But 200 odd brokers are saying, hey, you can provide better execution quality than we can get on an exchange. And the natural question you're about to ask me is why. Would you like to ask that question? You want me to just keep going. I just want to back up real quickly. I just want one. Sure. I get on a roll sometimes and I talk forever. So I'm trying to stop for you guys. This is great. It's our job to stop you. But this is super helpful. So the NBBO is purely exchanged prices. Correct. Because that's the only, the difference

between an exchange in a dark pool, right? You know, the marketplace is terrible at naming things, right? A dark pool sounds like this nefarious thing. It also, it's all flash trading. Exactly. Flash boys. Payment for order. I know. I know. I know. If I could do my life over again, I would have renamed all these things, but putting that aside. Virtue is named for virtue, right? We try to be virtuous to the market, so we at least have a nice name. So what a dark pool is, it's actually technically, it's called an ATS or an alternative trading system.

The linchpin of the U.S. equities market, and indeed, you know, the U.S. economy is competition, right? And so a long time ago, back when I was a lawyer, someone said, you know, at these exchanges, and it was really just the New York Stock Exchange until, let's say, the early 90s, they have a monopoly, they're really expensive, bad things going. on there. There was, you know, alleged criminal activity with the specialist. You can Google all that. So the exchanges weren't all of that. Let's put it that way, right? And they were, you know, it was kind of a private boys club, if you will. And so a bunch of banks and other brokers said,

we want to be able to create an alternative trading system at S. So the SEC has reg ATS. And it basically says, if you want to be a place where people are sending orders, right, as long as you don't have more than 5% of the market in a particular name, you, can do that. You have to publish your rules. We run two ATSs at Virtue. You've got to publish your rules, but you cannot display market data. Okay, so it has to be quote unquote dark. That's why people call them dark pools. So people, brokers, right, can rest orders in an ATS with the safety and security that they know that they're not exposing large size to the rest of the world. Why don't people like to trade on exchanges? It's because the entire world knows, like, you know, I'm

I'm an agency broker. If I get an order from a large asset manager to buy 100,000 shares of Tesla, and I just post that on an exchange. Now, the entire world knows that there's a giant whale out there that wants to buy 100,000 shares of Tesla. What's going to happen to the market? You can imagine people will change the risk that they see in that market because they know that there's a huge imbalance.

And so that's one of the reasons why investors, brokers, smart folks in the marketplace wanted choices. and that's why they created these ATSs, right? So an exchange has public displayed market data, right? It gets quoting revenue because of that. They make about $400, $500 million a year just in consolidated tape revenue. That's one of the benefits to being in exchange, right? Whereas an ATS is only charging a transaction fee, right?

And orders, et cetera, are executed, quote, unquote, in the dark. And that's why people call them dark pools. There's nothing nefarious about them. It's just an alternative method. again, always think what the great thing about our marketplace in the U.S. and why it's so darn efficient and why it's so damn competitive and cheap is because you have this competition. So I want to ask a follow up. You know, all of the, I was doing a little trying to learn a little bit to prepare for this discussion.

And so I see all of the brokerages or the retail brokerages or I guess everyone follows these, files these Form 606, where they talk about, the market makers to whom they're routing orders and they hopefully sort of like basically break down their market share. And so for example, Robin Hood in the last quarter, it looked like almost 40% of their shares went through Citadel. Virtu looks like got a little bit under 20%. What determines how a broker allocates its routing? Is it is every trade its own discreet auction of and you're all competing for it or like how does this process work no not at all not at all so the way it works is um as i tried to articulate they have a best execution committee right and they have their routing protocol again it's 100 percent always based off of how much are we willing to improve off of that MBBO so quote

unquote price improvement um and so in the beginning of the month quarter some brokers do it weekly but it's not daily and it's certainly not by symbol right there's just way too many orders for everything to be an individual auction. So they said it in the beginning of the week, let's say at the beginning of the month, every broker's got their own rule and they say, okay, in the prior period, right, so it's, you know, we're now in March. So in February, Virtue, Citadel, Susquehanna, two sigma, I don't know who else is in, you know, UBS, Wolverine, right, there's five or six firms. We all bashed, we bashed our heads against, you know, each other. And for, you know, every broker's got a different way of looking at it, but for the top 500 names that are in the

S&P, here's the aggregate amount of price improvement. And Citadel came in first place, right, because they provided 42 points of EQ. It's all measured off of the mid of the mid. So how much are you willing to improve off of the midpoint between the bid and the offer? And Virtue came in second place, Susquehanna, third, two sigma, et cetera. So this, therefore, in the month of March, right, we're going to give Citadel 42% Virtu, 23%, Susquehanna, 12%, etc. During the measurement period, whether it's a week or a month, we're in constant dialogue with them. They'll say, hey, look, you're doing really well in the top 500 names, but you're really doing poorly in the bottom thousand names. Can you improve your EQ? So they're always, you know, trying to get us to, to frankly provide more value

back to their clients. And if you watch TV, I'm not going to name the network, because it's a competing network, there's actually one of the really, really large brokers. There's two dudes sitting having lunch. And one guy shows him his little iPhone and says, well, you know, look at the execution quality I got. And he buys and he saved $12.93 and he pays for the grilled cheese sandwich at lunch. They must be in like, not in New York because the grilled cheese would cost more. But that's literally, that's what we do. Right. So think about how important it is that an advertising agency for one of the largest retail brokers in the world, right, that's an American institution. I'm not going to name their name. You can think of the

commercial, right? They are spending money advertising. work that Citadel, Virtues, Susquehanna, et cetera do. Think about how ingrained that is in the system and then juxtapose that against the, frankly, lunacy that people were articulating about Robin Hood and Citadel. It's just, you know, that's why I watched late January and my jaw was like hitting the table and thinking, my God, these people have no idea what the hell they're talking about. You know, it's such an important part of the ecosystem and it's so ingrained and it's so valuable that one of the largest American financial institutions

thinks so much of it that it advertised it that this as like a service, right? I apologize for my voice changing there, but it's like the juxtaposition of the two was just so amazing. Here I am watching, you know, the anchors on that network who don't have a clue what the hell they're talking about.

If you follow my Twitter account, I actually tweeted one of them and told them that, and then he had me on a show. I saw you tweeted your personal phone number. that seemed kind of risky. Well, not really. You know, I got nothing to hide, and he was so naive, I'll be nice, about what he was saying. It was embarrassing, I thought, and I told him as much.

Anyhow, so I will get off my soapbox and allow you to continue. Well, so why don't we get over to the GameStop phenomenon? And maybe just to begin, I'll ask a sort of broad question. So how much did the shift to a no commission trading model and the sort of boom in retail? stock trading that we've seen over the past year. Like, how much of a difference did that make for your business? Yeah, look, I mean, it was huge. I mean, and again, thank you for noting.

It really was the zero commission phenomena. And that was a long time coming, right? There was a whole bunch of regulatory changes in 2005, you know, decimalization, right? So spreads narrowed, technological advances, you know, give a lot of, give a shout out to all of the pioneers and guys that started Ameritrade and E-Trade and et cetera. et cetera. Robin Hood, you know, was the first zero commission broker, I believe. They started, I think, in 2015. And I knew at some point the incumbents, obviously, you know, Schwab, Fidelity, E-Trade, et cetera, would have to match that pricing. And they did. And that happened in November

2019, right? So that was like sort of the coup de grace of a long period of technology and evolution. You know, and then on top of that, you know, the pandemic hits, right? Work from home, you know, there's no sports betting, you know, Tesla. There's a whole bunch of other factors, right, that led into it. But it really was a zero commission phenomenon. And so if you think about retail trading as a percentage of the U.S. equities market, it went from call it like 15-ish percent to as high on some days as like 25 percent.

So that is a meaningful increase. It's kind of settled somewhere between 22 and 23 percent of the overall U.S. equity market. But this is a very important, and as was demonstrated, in late January, a powerful segment of the marketplace. And so it needs to be understood and reckoned with. And the regulators obviously will look at all this. But at the end of the day, you've seen a systemic shift in the U.S. equity market. I will say, because we're a global market maker, this is not unprecedented. You know, if you travel over to Japan, where we have,

we do a lot of business, you know, we have a partnership with SBI securities, where we do something similar in terms of being a retail market maker. And over there, you know, retail is a big part of the market. You know, people have their smartphones and they're trading all the time. And not just equities. I mean, they're trading yen futures. They trade, you know, the S&P futures. They trade the Russell. You know, so this shift is important and systemic, but it's not without global precedent. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day.

But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Can we go back? You mentioned the term payment for order flow,

and it's scary and people don't understand it. It is an ominous sounding term, but I do think it's like one of the things in this whole GameStop story that people got super confused about, why would you pay for order flow? What does it so value about my five Tesla? trade on Robin Hood that you'd pay for it. Yeah, exactly. We're waiting for your trade. Just tell me when it's coming. So let me take a step back. So before I mentioned there were

200 odd retail brokers, wealth managers, et cetera, right? And those are our clients and Citadel's got, you know, a similar bunch. It's not just U.S. institutions, by the way. There's Canadian and European wealth managers. They're sending us orders and getting guaranteed execution along the ecosystem, you know, in the ecosystem I described to you earlier. So of that 200 odd brokers, there's roughly 10. that say, okay, in addition, in addition, that's the key to price improvement, we want you to pay us a rebate. Okay. And so effectively, and that rebate is going to be set.

There's not an auction, right? They're not routing flow because Citadel's willing to pay a couple pennies more than vertue. It's set and it's in stone. So there are some brokers that say give us 10 mils, right, 10 cents per 100. I don't want to be too technical. Others say 18 per 100, whatever it is. And that goes into our calculation of how much value are we willing to provide back to the broker. From our perspective, from the virtue perspective, and I imagine Citadel and the other competitors look at it the same way, we're Switzerland.

There is value to us as the market maker in extracting the bid and offer. Really, what we're doing is, you know, if Tesla is a nickel wide in the marketplace, we think we can narrow that spread maybe by a half penny, maybe by a penny, right? because we're really good. We've really good. We've invested a lot of money in it. And because your order, and literally the hundreds of thousands of other orders that we're getting are smaller in size. So they're not going to move the marketplace. Right.

They're not big institutional orders. And they tend, emphasis on the tend, not to be correlated with the remainder of the marketplace, right? Because the theory is, hey, Joe is a retail investor. He's going to trade five times a day, five times a month, whatever it is. He's going to buy his hundred shares. He's going to push his little button. he's going to want to buy a market, buy 100 shares of Tesla at the market, and he's going to hold it for six months a year, three months, and whether he buys it at, you know, 10 or we're

going to slightly price improvement, Joe doesn't really care, but we care a lot. So you're not competing with Virtue and Citadel, right? Virtue and Citadel have this unique ability to narrow the bid offer spread and extract some value, right? Joe has a very different, you know, a temporal view of the world. Joe's things, all right, I'm going to hold this thing for a week, a month, whatever it is. We're trying to hold it literally for, you know, if we can, 10 milliseconds, a second because it's going to be thrown into this portfolio that we're managing and we're going to try to extract that bid offer. And really what the brokers have done, they're smart. They realize there's value to smaller non-correlated markets, to orders, excuse me, and they've gone to the

market makers over the last 30 years. This is not a new phenomenon. And said, listen, we know you guys are good. We know you guys can make money off this. We know that this money means this value is only there for the market makers. It's not there for anybody else. We're not taking money from a retail investor. But we, the retail brokers, we want you to pay profit share some of that bid offer back to us. And for the most part, we're going to return that to our clients in the form of price improvement, the ad I mentioned before, right, the 1293. And in some cases, the brokers have made a decision, which I don't care about that they're going to take that money and they're going to use it to offset their costs of providing their service so that they can provide that service back to their clients

for zero commission. Right. So think about it this way, and then I'll stop my diatribe, which is Joe is a retail investor. Tesla is offered on the market at 10. We're willing to say, all right, Joe, we're going to give it to you nine spot nine-nine. So we're actually going to price improve it. So Joe's happy. He bought it actually at a better price than what he saw it on.

exchange. The reason we're willing to do that is because we think we can make, maybe there was a nickel, we can make maybe half a penny. So Joe gets price improvement, Virtue makes a little bit of money, and Joe pays literally zero. The alternative would be, if there's not payment for it flow, Robin Hood's going to charge you $4.95 per trade. So you bought 100 shares, and maybe we made half a penny and you got a penny of price improvement. You're not buying that Tesla at 10 because you think it's going to go to 10-01 and you're going to sell it and you're going to make, you know, a dollar, right? You're buying it a 10 because you think it's going to go to, you know, 30. Right. And you're going to make $20. So where the critics are just completely

asked backwards is there's no value that I'm taken out of your pocket. I'm taking value out of the marketplace. And in fact, I'm profit sharing it back to you. It's a win-win for everybody. The last point I'll make. And then I promise I'll shut up is the reason I got so pissed off at Sorkin was because he sits there every time he says, Well, it's like Facebook. There's an information advantage. We're getting client information. Complete and utter bullshit.

Am I allowed to say that on this? It's complete utter bullshit. Sorkin is 100% wrong about that. I told them that. I'll say it publicly round and round again. This is not Facebook. If anything, there's six or seven firms competing. Every single one of the orders we get.

We get millions per day are 100% anonymous. We have no idea if it's Joe Sally or if it's some institution behind it. Right. So the notion that there's some big nefarious Facebook thing going on here is just, you know, a concoction of people that spend way too much time looking at Silicon Valley companies. This is completely opposite. If anything, the information asymmetry is the opposite way. We have no idea if everybody's going to send us 100 shares to buy Tesla at the same time and we're going to get our faces ripped off. We have no way of knowing that. We don't have a clue. So this is something I actually wanted to ask you. So you mentioned, this idea that retail orders tend to be uncorrelated with the wider market, and that makes them attractive for various reasons. So what happens when you do get a situation like GameStop where suddenly everyone is piling in in one direction? We lose millions of dollars. I sit in my office and I'm sitting there grabbing my table and my knuckles are turning red. On whatever it was,

January, whatever it was, I forgot that day. When the market rips in one direction and there's limit up, limit down. I mean, it doesn't always happen. Sometimes we get lucky because we're not flat at all, right? We can be long or short. All right. So sometimes we get lucky. More often than not, you do not get lucky and you get your faces ripped off and we lose millions of dollars. Now, you know, that's why we trade 8,000 names. That's why we have a big firm that does a lot of other things. This business is not profitable every day, retail market making. It's not. The critics think we just sit there and we collect the spread between Joe and Sally and we collect pennies like we're a toll bridge, if that was the case, then literally dozens of other institutions would come in.

When industry critics say, oh, this is an easy business, you know what I say? Compete. There's no barrier to entry here. Get yourself, you know, some investors spend hundreds of millions of dollars in technology like we have developed the relationships and compete. This is a very sharp elbowed, difficult business. the market rips in one direction in a particular name, more often than not, we lose money. And there are days where I sit in my office and we can be down significant eight figure amounts. That's like tens of millions of dollars, right, for time periods. More often than not, it reverts. And we've learned over the years, and this business predates me and vertu because we bought it from a firm called Knight Capital,

that over 20 years, right, it tends to make more money than not. But it is not an easy business. And the marketmaker has zero, zero informational advantage. That's the thing that really pissed me off about when Sorkin was talking because he made it out like there was some informational asymmetry for the market maker. And it's exactly the opposite. We have no clue when the Reddit Army is going to strike. How the hell would we know? But on the other hand, eventually, at least Robin Hood and some of the other online brokerages did start to curb trading in GameStop. So setting aside the informational asymmetry, that gave rise to concerns. And as you just said, when you have extreme and extreme weird situations like in GameStop, you start to lose money. And then suddenly, you know,

the trading curbs kick in. So doesn't that invite questions about, oh, well, were these curbs put in place because you were losing money? Sure. Of course. No, I mean, look, overall, we were making money during that time period, right? And we, I didn't have any conversations with Robin Hood, Nordet Citadel. Ken Griffin is a once in a lifetime, you know, a business builder, entrepreneur. He's is extremely ethical, right? There's not a chance in the world he would risk his billion dollar empire, you know, to have some kind of conversation with Robin. I knew immediately, immediately, I don't want to like sound like the guy. I mean, we are a self-clearing broker dealer. We know the folks at the DTC very well. We know how the margin rules work. I understand the plumbing

of Wall Street. So I knew immediately what their issue was and that they had had had a huge margin call. Could the public relations and the explanation of that been better? Yeah, of course. I'm sure if Vlad could go back and redo his life and he's an incredibly talented guy, he probably would have been more direct or a little more transparent. But it's not an easy thing to explain how margining works in this country. I'm happy to do it. I'll put you guys to sleep. I know it very well because I started this firm and it was my money making the margin calls, right? So when it's your own money, you tend to really know the rules pretty well. but they got one-sided GameStop because that's where their clients were buying or selling.

It's an enormously volatile security. And so the rules of the DTC, technically the NSCC, are that the variation margin, so the variation at risk the var margin, if you will, for that name is going to be 100%. So when they had clients literally buying billions of dollars, right, they're going to get margin 100%. And the rules do not allow you to use customer funds to meet that margin call. right so this was literally as he said a five or six sigma once in a generation kind of event that happened really it was the rules of wall street that really slowed this thing down so the system worked exceptionally well we were in constant communication with the nsCC because we wanted to make sure

that we could trade with robin hood right they're a counterparty of ours we take risk and so the ns did a brilliant job in risk managing what was otherwise a situation that was you know getting out of control, right? They didn't do it for any nefarious reason other than to mitigate risk in the system because you had a broker that had gotten a little over at ski tips, right? Once they did that, obviously Robin Hood raised an unbelievable amount of money. So there's some really smart people that believe in the business model. I applaud that. And Robin Hood did the only thing they could do, which was de-risk their portfolio and reduce their margin. I would have done the exact same thing were I in this in their situation. I would have done a much, much, much,

better job, I would think, explaining it because I know these rules exceptionally well. So since we're on the topic of, you know, what people think might be nefarious behavior, you talked about this idea of information asymmetry. One other criticism that I've seen or that people sometimes bring up is the idea that retail trades are somehow treated differently to large institutional trades. You talk a little bit about that. Like, what does execution actually look like they are they get much better they get much better execution yeah that's the irony of this thing right we we have both sides of the business okay so i'll give you an example i'll use a couple names you know these are public companies right or they're large companies so fidelity and vanguard

are giant companies right they both have retail arms and they have institutional arms right fidelity's got an asset management business got a retail business vanguard is the same they're both great clients of the of ours i love them dearly we have fantastic relationships with both them. I literally have been to visit both of them. And the retail and institutional business are clients and they're in different buildings, right? And I literally, we get orders from the institutional side and they're paying us, right, something less than a penny a share, but more than zero. I can't tell you exactly how much to route orders of Tesla. And the notional size of that order and the way we traded is really not much different than what we do on the retail side.

On the retail side, we get paid, and let me go back to institutional order, we're measured, not whether we can provide them the NBBO, but whether over the course of a day what the impact of their order is on the marketplace. So as long as we beat a certain benchmark, right, they're happy. They haven't moved the market too much with their order, right? So that's kind of institutional trading 101. We're getting paid a commission. We're acting as an agent.

We use our order routing skills and our financial technology in order to route those orders as adroitly as we possibly can to minimize impact to not move the MBBO too much, right? Now you go to the retail side, and what the federal securities law say is that every order that is retail attested from a broker that is less than nine, listen to this, 9,999 shares is eligible for those 606 reports. So literally, I can get a thousand share order of Tesla. I don't know what the hell Tesla is at right now. Let's say it's 700, right?

So you can do the math. That's a large order. That order comes into the retail, through the retail pipes that we have. And as soon as it hits our environment, regardless of what the NBBO is in terms of size, that 100, that thousand share order or 5,000 share order, it gets measured and we price it off of the MBBO. So even if there's only 100 shares, right, at the inside, I'm being very technical right now, we're not only are we price improving that, we're size improving it.

And in some instances, like for Robin Hood, we're actually paying for the privilege of doing that. And there's some other brokers that take payment for to flow that are very large, right? So think about that juxtaposition. You've got a retail attested order that could be hundreds of thousands of dollars that's getting guaranteed execution at or better than what they could get at an exchange. And sometimes they're getting price improvement and the broker is getting paid for it. Whereas an institutional order, we're getting paid by the broker. Now, look, I'm not screaming poverty. For the most part, the orders aren't that size.

But if you talk to any institutional investor that is, I would say, balanced and even keeled about how they explain themselves, right? They will say that retail investors have an amazing deal in this country. They would love to be able to do that. Their jobs would be so much easier. The institutional traders, all they would be doing would say, here you go, VirtuCit, I'll take these orders. Unfortunately, it doesn't work that way. The ecosystem in the United States, where you can get literally for no money, a guaranteed fill of a price that you see on your smartphone or better, is by far the best ecosystem in the world. We're in every marketplace in Europe and in Asia, and there is not a market structure that is as beneficial to retail investors as in the United States.

that's why I get so frustrated when I see folks on that other network sitting there like mixing metaphors and castigating an ecosystem that they have no clue about they don't even understand I mean Sorkin sitting there talking about his grandmother

and I went on TV and said yeah your grandmother can hold up her smartphone and he talked about his grandmother not me and for no money can get a price that's better than what Tiro price can get what the hell are you complaining about Eating well shouldn't be complicated, but somehow it turns into recipes, prep, clean up, and half your Sunday gone. Factor solves all that.

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Make space for what's next. Visit XYZ Storage.ca. People who need space. I want to go back to the competition that you guys are in with the Citadels of the world, the two sigmas, and so forth. So what are the determinants of who can deliver better price? So I assume technology is a factor. Your capital probably presumably lets you, I don't know, take risks here and there,

be willing to extend a better offer speed. Like what are you guys competing on? And why is the market such that one firm does. to just swallow the whole thing by building up a surmountable edge? Why is it always competition? Yeah, what I would say is it's not in the, the brokers don't want there to be a monopoly, right? So there's sort of like a natural cap, if you will, that any one of us has over market share. If you look at, if you go through all those 606 reports, yeah, I mean, maybe with some with some small exceptions, you're never going to see anybody really north of 50 percent, certainly when it comes to

marketable orders, maybe non-marketable. limit orders, it might be higher. But so the brokers, naturally, right, what would you do if you needed vendors, right? And you could have people bash their heads together. You'd like to keep two, three, and sometimes four or five of us in competition. You want to give us enough that we can be profitable, right? And we can make the investments in technology. And I'll come back to why we make money.

But you don't want to be, you know, dependent on a single provider. Right. So they want competition. So that's why when analysts, research analysts, asked me about, market share. I say, well, it's really overcooked because there's a natural cap. Really, the way we make money is, look, and again, this predated vertu, so it was a firm called Knight Capital that actually kind of helped create this ecosystem. It was called Knight because it was the Knights of the Roundtable. They got all the retail brokers around a table and said, hey, you guys are mad as hell at the New York Stock

Exchange essentially. Why don't you send your orders to us? And that was, you know, the genius of the pioneers of of night capital. And so starting, you know, 20 years ago, they built a simulation environment, a research environment, obviously that we now run that costs us a lot of money. We've got very sophisticated algorithms and strategies, right, that can internalize that order flow and hopefully more often than not make money on it. We've got, you know, dozens and dozens of really, really smart men and women, you know, that have PhDs and things that I vaguely understand. I'm a liberal arts guy, right? So this is not my area of expertise that literally spend, you know, thousands and thousands of people hours every year trying to be better at.

And, you know, what I'm good at and what Virtue's good at is we run a very, very lean efficient environment. So yeah, we trade an awful lot, but we're not a big bank, right? So we have less than a thousand employees, and we have a very large-scale business that's in over 250 marketplaces. So what's our competitive advantage? It's we've got great relationships. We provide great service to those retail brokers, right? Because it's a guaranteed execution. If we F up and the market data is wrong or we have like, you know, the power goes out and in our data center or something like that, it's still our execution. We got it. We eat it. So if we have a mistake, we eat it. exchanges can't do that. So it's a service we're providing. And as I said, we've been doing this for a

long time and invested a lot of money and we do it really, really efficiently. So if you think about, like, what's the margin on this? Like the margin on an individual basis, like on a single name, is literally single digits and sub penny. And why are we so profitable? And why is this business work? Again, it comes back to scale, right? We trade 25,000 different financial instruments. And if we, you know, We try to make a couple hundred bucks, a thousand bucks on them, that kind of thing. And it adds up over the course of a day. And this is a very, you know, scaled business, which is why it's very difficult. You know, you didn't notice in the names of competitors, Goldman Sachs or JPMorgan or Barclays or Morgan Stanley, right?

They all used to do this business, right? But they had to get out of it. If you go look at the list, like UBS is in the business, they're probably like number four or five. and they're kind of, you know, not as competitive, frankly, because it's really hard to do this business if you've got a huge global institution you've got to feed. You know, someday I'll invite you to my office when the pandemic's over.

It's not that pretty, right? We don't spend money on, you know, that kind of thing. We have to spend money on the research environment and the simulation environment. And so that's why this business works for these kinds of firms. And Citadel is by far, you know, our biggest competitor and they're fantastic at it. And, you know, the notion that somehow, you know, they were mixed up in this Robin Hood,

you know, a conspiracy theory was just, you know, beyond comical to me. So I mentioned in the intro that one of the big things about GameStop and Robin Hood was that it kind of thrust this issue into the spotlight, which, you know, can be a bad thing. And we did see politicians in D.C. take a sudden interest in payment for order flow. what's your read on how they are thinking about it at the moment? And would you expect them to crack down in some way on the business? And actually, can I just add on, so in the UK, they don't have payment for order flow as far as I can remember. I think they banned it. So why has the U.S. gone ahead with this, but other jurisdictions have, you know, there's something about the model

that has turned them off. So why is that? Yeah, what I would say is, look, I mean, this is not like some new, obviously people acted like as this was a new situation, right? This has been, you know, this structure, this ecosystem has been going on for 30 plus years. To answer the first part of your question, which is, you know, the SEC has looked at this five or six times, the whole notion of wholesaling and payment for order flow or rebates, the SEC and FINRA are always examining the best execution, statistics and obligations of all the retail brokers from Robin Hood to Zecho trade and of all the market makers from Virtue Citadel, etc. So this is not like an area that has not been looked at by regulators. Because of some of the hysteria, I'll say it around these meme stocks and kind of the

situation, it ended up in Congress. And I will charitably say there was a lot of misinformation at the hearing and I felt kind of bad for Ken and for Vlad and for the others who were basically, you know, they were pinatas for five and a half hours. And I know how Washington works. It's great. I have spoken to over half a dozen Congress folks and more of their staff to try to explain, hey, this is when you peel back the hysteria and peel back the onion and look at it, it really isn't that bad. And actually, if you're a progressive, a Democrat, whatever you want to say, you should be thrilled with this ecosystem because the 300, 500, 500,000, dollar broker that used to rip you off by making you pay, you know, an eighth or a 25 cents spread

doesn't exist anymore. So the old Wall Street way of like really taking it to the retail investor has gone away. The retail investor is totally empowered to use an overused word. There's been democratization. Now in Europe, right, everything isn't as it seems, right, what the retail brokers do in Europe, which I think is actually worse for the investors, right? Of course, unbiased but it's worse on this. They just mark up the trade. So you get a worse price. You get a worse price. So the bid offer that we otherwise could extract on our own, right, the retail brokers effectively are charging more back to their clients. So you're getting a worse price. So which environment do you worsen? Would you rather pay zero commission and get the

NBBO or better? Or I know there's a zero, you know, commission broker or brokers in Europe, but would you rather get that or get a price that is instead of Joe's $10 for Tesla, Joe's now paying, you know, 1001 or 1002? I would argue, you know, Joe's getting a worse deal in Europe than he is in the United States. So, you know, to me, it's just, you know, regulators looking at this and kind of, you know, in a knee-jerk reaction, not acting what in the best interest of retail broker. So long and short of it, I think this will get thrown back to the SEC. We have a new chairman who is a brilliant guy who I've worked with a little bit when he was at the CFTC.

There's some staff folks there that have been there for a long time that know this ecosystem exceptionally well. I think they'll look at the data and I'm very optimistic. They will conclude that this all makes sense. Wholesaling for sure makes sense. I think they will look at payment for order flow or rebates and say maybe we need more transparency and disclosure around it. So clients know. But at the end of the day, if you don't. want to trade with a broker that uses that does payment for water flow, then open up a new account.

You know, go to fidelity. They don't charge payment for water flow and they have good prices. So at the end of the day, it's all about choices. I don't understand this hysteria, particularly from those that are on the left of the political spectrum, because you think it actually would fit in nicely with the whole notion of a progressive that wants to empower the little guy. The little guy is unbelievably empowered in this country, and yet people look at the ecosystem like somehow there's something nefarious going on. So there's always questions of power when it comes to, I mean, especially when you bring politics into it. And there's like, who has the power at any given moment within existing market structure? And you mentioned that the retail brokerages that are your counterparties, they want to maintain some leverage.

So they'll never give one of you guys too high market share of their flow. because they want to pit you against each other. I want to go back to something you mentioned very early in the conversation, and that is the power that the exchanges have over data and the data they sell. And I know you said you're a backer of the members exchange, which is one of the new like whatever 18 stock markets. There are. Talk to us about that power over data because my understanding is that that exchange wants

to sort of disrupt that a little bit. And how do you see that aspect of the market potentially changing? Yeah, I mean, this was, if you go around in Google, I got, you know, I was pretty vocal about this. I don't know, five, six years ago, I can't exactly remember because I got annoyed that you had a duopoly effectively. You know, they had three large exchange groups. And between what is called the SIP or the consolidated feed, right, that's roughly $500 million of quoting revenue that we all pay that gets disseminated to those exchanges, right? And then on top of that, the exchanges charge for what they call a private data feed, right, which we obviously have to buy because we're a low latency market making firm. And then on top of that, they charge you for physical connectivity. So I actually went to the SEC. There's an article about this when I brought like a cable that I had bought on Amazon that we paid $179 for, right? Literally a physical Ethernet cable that connected our server to the exchange server. And NASDAQ was charging this. I'm being a little hyperbler. but really not that much. They were charging us about a half a million dollars a year for that because there was a monthly charge for quote-unquote connectivity. And it literally was just an

Ethernet cable that you could buy. So I got pissed off and said, okay, you know, physical connectivity and market data are elements of an exchange and in exchange for your license from the government, right, which gets you that market data fee that I mentioned, the SIP revenue and everything like that, and gives you immunity, right? There's a limited liability in the securities laws, you know, you need to have the SEC approve not only just your order types, but your market data fees, your connectivity fees. It's all part of the, quote, unquote, facilities of the exchange. You said you wanted wonk. I'm giving you full-on walk. That's a defined term. In the Securities Exchange Act in 1934, I used to be a partner

at Paul Weiss. I researched this stuff myself, read all about it. So I went to the SEC and created a star, put in a comment letter, and said, you know what? The exchanges of McGe getting away with this for a long time. This should be regulated, et cetera, et cetera. The politics of the moment were good because Jay Clayton and Brett Redfern, who were the chairman and the head of trading markets at the time, kind of had a similar view of the world as I did. You know, on his way out the door, Clayton and the commissioners, you know, by, I think it was a five zero vote and nothing in Washington happens unanimously anymore, kind of agreed with the argument that I was starting to make in virtue was starting to make five years ago,

that those items needed to be, they need to be a, cost-benefit analysis, right? You couldn't just every year keep charging us more and more and more without any cost-benefit because it was part of the quote-unquote facilities of a national securities exchange. That is now in litigation, because my friends at the exchanges, who I get along great with, by the way, where they're their biggest customers. They kind of have to be nice to me. They sued the SEC to enjoin enforcement, if you will, that regulation. So that'll be in litigation in the D.C. circuit probably for the next, you know, five years or so, given the, you know, the amount of money here at stake. So there's a, and that, that's a continuing kind of kabuki dance between the

regulators, SIFMA, which is the, you know, the banks and the brokers, we're a member of SIFMA and the exchanges. This is nothing new. They've been fighting over who controls that data and who can charge for it. Because if you think about it, I'm creating the data, right? You know, to get back to Facebook, Virtue sending literally hundreds and hundreds and millions of bids and offers every day. That's like important valuable information. The exchanges, I'll be a schmuck now. I'll say, all they do is they take it, repackage it kind of in a crappier format, and then sell it back to us, right, along with Citadel and other information, at a premium price. So that's what really pissed me off. That in the cable really kind of pissed me off. Your designated market maker

for the Bitcoin ETF that exists in Canada, it just got started. It's already, from what I understand, like a huge hit in Canada in terms of like how much money it's taken in. We might get one at some point in the US. What have you learned about that business? Like how big and how interesting is that whole space for you guys right now? Yeah. I mean, for the record, I'm not like an expert in crypto or Bitcoin or whatever it was. I'm a market maker.

And so my determination to get into it was, okay, when I saw that, it was going to be recognized and regularized, if you will, by a regulator. we think the world of, right? We're a market maker up in Canada big time. And so when I Rock said that they could do this, that's the SEC up there. I was like, you know, done, virtues all over this, because this plays right into our wheelhouse, right? It's an ETF with the underlying basket is a different asset class, right? That's what we're good at.

And there's also a future on the CME. So there's various products we can move back and forth in. So I think as cryptocurrencies like Bitcoin get, further regularized and regulated, if you will, and institutions like ETF issuers, the U.S. securities market, future houses like the CME, recognize that this is a valuable asset class and include them in products, right, that represent the underlying coin. You're going to see an explosion of interest because then institutions get more comfortable. It's no longer the wild west of, you know, 100 venues, 98 of which you have.

haven't heard. We trade on Coinbase and Gemini because we've done our diligence on them. And there's no central clearing there. So you're taking counterparty risk against those institutions. And so if it's, you know, Bitcoin venue you've never heard of out of some, you know, country far, far away, that doesn't really fit our risk parameters, right? We're not a hedge fund. We're not day traders, right? So as it becomes more, I'll say, systematized, you're going to need market making firms like Virtue to, you know, provide a spread between the coin, the future, and the ETF. I'm hopeful that in this new administration, you'll see the SEC approve them in the United States as well and will be a big market maker in those. A lot of people think this is going to be the

year. You think it could be? I think it will be. Yeah, I think there's just too much, you know, when you see it on TV and the price of it, there's too much mainstreaming of it. And when the institutions start buying it, and then on top of that, you know, we've got a lot of retail that have come to us and said, hey, we want to make this available to our high, high net words. Will you provide a two-sided price in it? So when that happens, when names you know of and you can read the articles, want to make it available to their high networks, then it's becoming more mainstream. And that's when, obviously, we need to be there as a liquidity provider. Got it. So since Joe brought up something slightly different to payment for order flow,

I have one more question. You mentioned the administration there. And of course, one of the big proposals from the Democrats is this idea of a financial transaction tax. How much would that affect your business? You're really trying to get me in trouble and say something really colossally stupid and offensive about the administration, aren't you? I want to hear your voice go high again. Yeah, you want to hear my voice go high. Okay, so there's probably nothing more inane than a financial transaction tax. I have studied this backwards and forwards. I read about the Swedish transaction tax of 1994, where on Friday they closed their derivatives market. On Monday, it moved to London. What I have always said is liquidity is like water. It finds its level. So if the folks in

Washington see fit to an act of financial transaction tax, I don't think they will because Chuck Schumer is, in my view, the smartest man in the Senate, and he happens to the majority leader. Smart thing of you to say. Yeah. And he happens to represent New York. He happens to understand and that Wall Street and Manhattan depend on the financial services market and at financial transaction tax, it wouldn't just impact vertue, right? It would reduce volumes. The spreads would widen and Mr. and Mrs. 401k would underpaying the price and the pension plans would pay the price. So when I see like, you know, unions, public service unions advocating for a financial transaction tax, I say to myself, you know, they've either been severely misled by some Washington

and hack that's trying to raise money, or they just don't understand how markets work. Because that's just a friction in the market. And what happens to the market makers and to the financial intermediaries, we pass that cost on, right? We're not going to go out of business and make markets, and you're going to still need a market maker. So we would just widen out, and volumes would decline, the exchanges would be impacted, and ultimately, you and I in our 401Ks and our pension plans would pay that price.

So as a policy matter, it is assinine. as a practical matter has not worked in any jurisdiction in the world where it's ever been proposed and implemented and if it ends up happening in the United States you know folks up in Canada, Bermuda, Switzerland, the UK, Singapore, they will light up alternative exchanges and all of the U.S. secures will just trade on CFD over there and the Treasury will be deeply disappointed that they won't collect Bubkis. How's that? That's pretty good. Your voice could have gone higher, but I'll accept it. I can't say bub I can't say bubkis as a soprano it does not work but kiss indeed doesn't work that doesn't work

no it doesn't work bubcice is more of a baritone yes oh Doug thank you so much for coming on odd lots that was great thank you thank you I appreciate it cheers nice to meet you so joe uh I enjoyed that conversation. It's nice to talk to Doug, and clearly he feels very passionately about a lot of these topics. One thing I was thinking is just how much different the conversation would be right now had people decided not to name dark pools, dark pools, or to name, you know, payment for order flow, payment for order flow. Like, imagine if you had a much less evocative name. Yeah, all of it, very evocative. And like, you know, I think like it was, you know, he talked about his dispute with, you know,

Sorkin and just this whole idea. I mean, I think the dominant storyline that a lot or at least a lot of people came away with their idea in their heads that's like payment for order flow. It's like they're buying your order flow because like they want some information. And so like the Facebook model is like, well, we want your information and then we're going to sell ads against it. Or people have this idea is like Citadel is like going to buy your trade and then they're going to like make their own like. side bets against the trade. And I think like his description that basically it's like they make a margin on a trade and so the broker demands or could like pursue a rebate on it. It's not as sexy, but I think it makes it makes a lot of sense as he describes it. Yeah. And also I mean,

we did a whole episode on this before, but the margin requirements for trades and the idea, the idea that if trade flow is going all in one direction, then that kind of leaves, the broker at risk. And for that reason, they would have to stop out the GameStop trades, for instance. I thought that was a pretty clear explanation. Yeah, totally. And just as I, you know, it's like obviously on any given trade, they don't, you know, any specific trade, they don't make much money. And so like if trading is sort of noisy and uncorrelated, and just a bunch of like random people doing whatever, then, you know, that's a pretty good environment. But something like GameStop, it was just, I mean, that story took over the whole world for like a

week. That's all anyone was talking about. And so it's like, you just have this like, and that doesn't happen with a single stock trade very often. Like, we're sort of used to crashes or sort of used to rallies. I can't think of any other time where like a single stock trade captured that much attention, but you could see then how like all of these sort of like the algorithms that they used to like put forward a price on a trade kind of got complete, would get completely busted. Yeah. And obviously that sort of attention. It can be a good thing for businesses, you know, market making businesses, because it attracts additional retail trading, or it could be a bad thing because it attracts political scrutiny. And we get regulators who start to take a look at this and decide they don't

like it for whatever reason. So definitely something to watch. Sounds good. I'm continuing to look forward to seeing where this goes. I got to check out the hot dogs as well. They sound good. Oh, dude, to be honest, the whole time during the discussion, I've just been scrolling to hot dogs. All right. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall.

You can follow me on Twitter at The Stallwart. Follow our guest, Doug Seifu on Twitter. He is at Dougie Large. And really, most of his tweets are about hot dogs, but maybe sometimes he'll also tweet about electronic market making. follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcasts, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts.

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