0:11

Hello, and welcome to another episode

0:13

of the Odd Lots Podcast. I'm Tracy

0:15

Allaway and I'm Joe. Wisn't

0:17

all Joe? Do you remember

0:20

Game Stop? No?

0:22

What was that? Tracy? I forgot game

0:24

stuff? Sorry, not not familiar with it. You

0:27

know, one of the most remarkable

0:29

things about that whole episode was

0:32

that, for a brief, glorious

0:34

moment in time, everyone was talking

0:36

about market structure and things

0:39

like payment for order flow, dtc

0:42

C collateral like that

0:44

was a discussion that you could actually

0:46

have in mainstream media and

0:49

sort of with your average person

0:51

on the street. Yes,

0:54

but I mean those conversations

0:57

were in many cases deeply

0:59

missing formed. So it

1:02

is true that there was a lot of talk about

1:04

market structure and payment for order

1:06

flow and the dtc C and all

1:08

that, and I actually did learn stuff,

1:11

but there was a lot of noise of people

1:13

who, like you know, spinning conspiracy

1:15

theories about all this stuff

1:17

hyprequency trading, how it really worked.

1:20

Um, So hopefully people learn something,

1:22

But I also suspect a lot of people went

1:24

away from that whole episode unless

1:26

they listen to lots of course much

1:28

less in form Look, I'll take what

1:30

I can get when it comes to getting people like interested

1:33

in market structure. But I think you're right.

1:36

I think probably especially

1:38

on the payment for order flow subject,

1:41

because it sounds kind of nefarious.

1:44

You know, why would someone pay you for

1:46

trade order flow? They must want something,

1:48

they must be doing something with the information.

1:51

I think it tends to lead to

1:54

you know, a lot of suspicion. Yeah,

1:56

I think that term in particular,

1:59

you nailed it. There's something about that term that

2:02

like invites a lot of sort of conspiratorial

2:04

thoughts. Yeah, exactly. And of

2:06

course we saw that really ramp up

2:09

during the game's top drama. We even

2:11

saw Congress start to you

2:13

know, they had an inquiry into payment for

2:15

order flow. The concern is

2:18

that high frequency traders are somehow

2:20

profiting off of that order flow in

2:23

a way that hurts retail

2:25

investors. And of course Robin

2:27

Hood uses Citadel as its market maker,

2:29

so we saw Citadel in the news

2:32

as well. Citadel is uh

2:34

one of its market makers. Uh,

2:37

I think, so, which is

2:39

something we'll get into. It's like all these a lot. I

2:41

mean, I've been sort of like spending the weekend

2:43

looking at some of these stats that the brokers

2:46

phase and I have lots of questions about

2:48

that. Um, so who are what are we going to talk

2:50

about? How are we going to get into this? Okay,

2:53

so today we are going deep into the

2:55

payment for order flow discussion,

2:57

and we're also going to talk more broadly about

3:00

what exactly a market maker actually does.

3:02

We have the perfect person to talk

3:05

about all this. We have the

3:07

CEO of Virtue, Doug

3:09

Si. Welcome, Duve. Hello,

3:12

how are you guys doing? Hey, We're

3:14

good. Thanks. Um, maybe to

3:16

begin with, we should kind of go straight

3:19

to the elephant in the room and

3:21

talk about something very very serious. But

3:24

what's up with the hot dogs? So on

3:26

your Twitter account you seem

3:29

to talk a lot about hot dogs?

3:31

What's going on? Well, I

3:34

resent the elephant in the room analogy.

3:36

I'm a bigger guy and my Twitter handle

3:39

is Dougie Large. So, against

3:42

my better judgment, about ten years ago, I

3:44

opened a Twitter account and then my partner

3:46

I bought a hockey team and I started tweeting about

3:48

hockey. And you know, hockey fans for the

3:50

most part are favorable, nice people, but then you get

3:52

to five percent of the keyboard

3:54

warriors and it started to be abusive towards

3:57

me. So I stopped tweeting about hockey to said, don't tell

3:59

I'm talking about And I happen to run,

4:01

as you say, a quote unquote high frequency trading

4:03

firm. And in two thousand fourteen, there was this little

4:05

book called flash Boys that came out and

4:07

dark pools and all these nefarious sounding

4:09

terms, and people started tweeting me like

4:12

I was a criminal. And I said, okay, well that's not a good topic.

4:14

I guess I'll stop doing that. And then

4:16

I found the one universal in this country

4:18

that nobody can say anything negative about.

4:20

It's the great American hot dog. And there's

4:23

a company called Feltman's which is founded

4:25

by two great veterans from West Point, and

4:27

they rediscovered the original

4:29

cone Allan hot dog and they're fantastic. They've got

4:32

the perfect mix of spices and they kind

4:34

of pop when you eat them. And I decided,

4:36

Okay, if I get behind these guys, I have no

4:38

financial interest. I just love them. They're great Americans

4:40

and they have a great hot dog. I said, there's not a chance

4:43

people can give me grief about tweeting

4:45

about hot dogs. And you know, I

4:48

have not had any negative comments.

4:50

These these look really good. I'm

4:52

on their website right now, and I'm

4:55

definitely going to mustard get

4:57

the mustard. Also, trust me, when I tied the mustard

5:00

better than like a sell, I put it on everything. I

5:02

put on everything. I'm definitely

5:04

gonna order or something. I know market making.

5:06

I know market making and eating. Those are the two things

5:08

I'm an expert in. Maybe we should

5:11

also talk about market making though, if you insist,

5:13

So what is H two?

5:16

So I just give us the sort of brief version of

5:18

its history and what how it fits

5:20

into the sort of market ecosystem. Sure,

5:22

sure, So we started in two thousand eight,

5:24

Beril even or not. My partner was an

5:26

old school market maker. He was in the pits, you

5:28

know those trading pits, remember the movie Trading Places

5:31

of the New York of the New York Mercantile Exchange. His

5:33

name was Vinny Viola. He was an old school market

5:35

maker. Stood in the middle of the pit and a bunch

5:37

of guys screamed orders at him, and he tried to make

5:40

what is known as the bid offer, spread the difference between

5:42

what a willing buyer and a willing seller we're

5:44

willing to pay. In that in that pit, he was trading

5:47

mostly like crude and gasoline futures,

5:49

right, So he was a futures trader. And

5:51

Vinny was smart enough to realize that two

5:54

odd guys standing in a circular

5:56

pit screaming at each other making funny hand signals

5:59

wasn't not going to be the end state of financial

6:02

intermediation, price discovery, trading,

6:04

whatever you want to call it, and that technology

6:06

was going to evolve that process. And

6:09

so that was his thought behind forming

6:11

Virtue Financial. I was a lawyer, very

6:14

happily at a l offer him in Manhattan called Paul Weis.

6:16

For eighteen years I was his lawyer, and he

6:18

said said to me one day, you

6:20

know you'd be a hell of a businessman. Do you ever think about quitting

6:22

being a lawyer? I said, not until now, and then

6:24

I quit and we started Virtue and

6:26

our idea was to be a

6:29

very large scaled, automated financial

6:31

intermediary market making firm that would try

6:33

to be the best bid and the best offer

6:35

in every electronic marketplace in

6:37

the world. We had a very ambitious goal and

6:40

obviously we're we're more well known as

6:42

you guys indicated in your lead in for US

6:45

equities and being a what's called a wholesale

6:47

market maker, but we make markets in

6:49

over two d and fifty different marketplaces

6:51

in the world, in global equities, but also in

6:53

f X, and in treasury futures,

6:56

and in commodity products and medals and

6:58

corn, sugar, cocoa, you

7:00

name a product that is trade electronically

7:03

in a venue in the world.

7:05

Frankly, where there's enough need

7:07

for liquidity, provider a market maker, and

7:09

that's what Virtue does. And we also,

7:12

through an acquisition, have a very large agency

7:14

business where we act as an agent for

7:17

clients that want to access generally the global

7:19

equities market. So it's a pretty large scaled

7:21

global financial services firm. On

7:24

the CEO of it, we've got about a thousand employees

7:26

twelve offices around the world and last

7:28

year we generated about two point three

7:31

billion dollars of net trading revenue

7:33

and that equated to roughly about a billion six

7:35

five of of IBADA so

7:37

adjusted EBADA. So we're pretty large

7:39

financial services firm. That's what we do.

7:43

Not bad. Yeah, I think your stock is up

7:45

quite a lot as well. And you're the only

7:47

publicly traded market maker

7:49

over in the US, so you have that distinction

7:52

too. That is correct. Just

7:55

on the market making business. Could

7:57

you maybe talk to us a little bit more about that.

8:00

I think we throw this term around quite a lot,

8:02

like, oh, they make markets and whatever,

8:04

But can you talk to us about what

8:07

exactly that entails

8:09

and why don't we narrow it down to US

8:11

equities? Yeah? Sure, so in US

8:13

equities, think of it. There's two

8:15

forms of market making, if you will, that we

8:18

engage in. So right now, believe

8:20

it or not, there are fifteen national securities

8:22

exchanges. You you probably know NASDAC in New York,

8:24

but there's another thirteen i E actually may have

8:26

heard of. Maybe you've heard of the cbo

8:28

E Stock Exchange. But then there's you

8:31

know a ten or other ones, including the Members Exchange,

8:33

which I helped start at Virtue, you know those kinds

8:35

of things. And so we are

8:37

a firm that does not really care

8:39

about directional risk. In other words, we're

8:41

not a hedge fund. We're not speculating.

8:44

We're not buying Tesla at at

8:46

six hundred hoping it goes to eight hundred. Really,

8:48

what we're trying to do is be the

8:51

guy that's on the inside that's willing to buy from

8:53

you and sell to you, right and sell

8:55

to somebody else to try to make that little penny

8:58

spread every single time. So are

9:00

holding time in most of the

9:02

top five names of US equities you

9:04

know will be hopefully a few seconds

9:06

or less than a second, right, because the

9:08

likelihood that a willing buyer and a willing seller

9:10

come together at exactly the same

9:13

moment in time is pretty diminimous. It's sort of like

9:15

if you think about the Civil War, the Revolution I wore

9:17

two bullets meeting in the middle of the air.

9:19

It doesn't happen all that often. So you need

9:22

a company that is willing enable,

9:24

has the financial resources, but also understands

9:26

those The US equities market, with

9:28

fifteen national securities exchanges

9:31

and forty different dark pools and a bunch of other

9:33

brokers, it's a very fragmented market. So

9:35

stitching together that marketplace takes

9:38

a lot of financial technology

9:40

and a lot of investment. We invest hundreds of millions

9:42

of dollars every year to have technology

9:45

that's able to understand and stitch that marketplace

9:47

together. But again, the difference between what we

9:49

do and when a lot of other other firms do,

9:51

like quote unquote high frequency trading firms,

9:53

is that we are a passive market maker.

9:56

We're always entering the market by saying,

9:58

here we go. We're willing to sell

10:00

you something at ten, we're willing to buy it at nine,

10:03

and there's a penny spread in between, and

10:05

we hope to collect that. More often than not, a lot of

10:07

times we get run over and we lose money.

10:09

You mentioned game stop before. I'm sure we'll talk about

10:11

that plenty. But in the game stop situation, when

10:14

the markets just crashing one way or together,

10:16

the market maker pretty much gets its face ripped

10:18

off right. It's on the train tracks, the trains coming,

10:21

and it can't get out of the way. The other

10:23

thing we do, which I'm sure you want to talk a lot

10:25

about, is what we call whole selling. So there

10:27

are these institutions called retail

10:30

brokers, wealth managers. You know robin

10:32

Hood, Fidelity, Schwab e Trade

10:34

which is now Morgan Stanley, but also

10:37

Stifle, Raymond, James, JP, Morgan

10:39

Asset Management, RBC

10:42

Wealth Management. Think of any aggregator

10:45

of high net worth or professional trading flow.

10:47

In the United States. We have this unique structure that

10:50

those institutions have a choice.

10:52

They can send their orders, their market orders

10:55

right to either in exchange

10:57

to a dark pool, or they can

10:59

send it to a whole sell or a market maker. Citadel

11:01

is the largest retail market maker. We're

11:03

number two. They've got roughly the market

11:05

we've got roughly. And then

11:07

there's a handful of other institutions,

11:10

Susquehanna too, Sigma Ubs, We're

11:13

all competing for that order flow

11:15

from roughly two hundred retail

11:17

brokers, wealth managements, wealth

11:19

managers, excuse me, aggregators of flow, etcetera.

11:23

So you just named a

11:25

bunch of market makers that you compete with, and

11:28

I'm wondering, when it comes to something like market

11:30

making, it sounds like such a basic function. You

11:32

know, you're matching up buyers with

11:34

sellers and you're taking a small

11:36

cut of the transaction. What

11:38

is competing or what does competition

11:41

actually look like in that scenario? Like

11:43

what what makes Virtuo special

11:46

or different to say Citadel or Susquehanna.

11:49

Yeah, that's a great question. So I should

11:51

have actually, uh explained

11:54

that better. So let's go back to the two

11:56

hundred institutions we we we that I

11:58

mentioned before, right, everybody from

12:00

a Merror trade to Zecho Trade eight Z and

12:02

everybody in between. Every single one of those

12:04

institutions has the best Best Execution

12:06

committee, And what they're measuring is there's

12:08

something called a national best bid and best offers.

12:10

So that's the consolidated tape.

12:12

You take those fifteen national securities

12:15

exchanges and you say, okay, at any moment

12:17

in time, right, for at least a

12:19

hundred shairs, what's the what's the best price

12:21

that someone is willing to sell in

12:24

the best price that someone is willing to buy a

12:26

particular security. That's called the n b B Okay.

12:29

And so every one of those retail brokers gets

12:31

the same feed, right, the same

12:33

consolidated feed that we do, right,

12:36

and they all measuring at the time that they send

12:38

us a market order. Right, you want to buy a hundred

12:40

shares of Tesla, what was the national

12:43

best offer for Tesla

12:45

at that moment in time? Okay. What

12:47

we do as marketmakers is we try to improve

12:50

that national best bid or best offer. That's called

12:52

price improvement or e Q. And

12:54

as you mentioned in your in your lead

12:57

in, all of the statistics around

12:59

price improvement are publicly available,

13:01

and so the brokers have their own routing

13:05

statistics where they measure our execution

13:07

quality, the ability for the market

13:09

maker to improve off

13:12

of the n b b O and

13:14

to the extent and to the amount we're willing

13:16

to do so, they will send us order

13:18

flow. Now, obviously they don't send their

13:20

order flow to Citadel or

13:23

two vertuur to Susquehanna. But

13:25

and they don't do it all as one big bucket.

13:27

Sometimes they do it by different names, depending

13:29

upon a DV, depending upon volume. They

13:31

all have their own unique routing

13:34

methodologies. But every single

13:36

one of them is based off the

13:38

the amount that the market maker

13:41

is willing and able to improve the

13:43

national best bid and best offer. Just

13:45

to give you some statistic which is pretty

13:47

compelling, in two thousand and twenty, the

13:49

five or six of us the market making firms in

13:52

the aggregate provided price

13:54

improvement, So prices better

13:56

than the n b b O in an aggregate amount

13:58

of three point seven billion dollars. Right,

14:01

So that means a retail investor in

14:03

general, right, is getting a price that

14:06

is better than what they could get

14:08

on a national securities exchange. Right.

14:11

And so that's the that's why they

14:13

rout us those orders. Right. Payment for wonder

14:15

face a separate thing. We'll talk about that in a second. But

14:17

two d Odd Brokers are saying,

14:19

hey, you can provide better execution

14:22

quality than we can get on an exchange. And the natural

14:24

question you're about to ask me is why would you like

14:26

to ask that question? You want me to just keep going. I

14:29

just want to back up real quickly. I just want

14:31

one I got. I got on a roll sometimes and

14:33

I talked forever, so I'll try to stop for you. Guys. This

14:36

is great. It's our job to stop you, but

14:38

this is super helpful. I just one. So the

14:40

NBBO it's purely

14:43

exchange price correct because that's

14:45

the only the difference between exchange

14:47

and a dark pool. Right. You know,

14:50

the marketplace is terrible at naming

14:52

things, right, A dark pool sounds like this nefarious

14:55

thing, and also it's a flash trade.

15:00

I know, if I could do my

15:02

life over again, I would have renamed all these things. But

15:04

putting that aside, virtue is named for virtue,

15:06

right, we try to be virtuous to the market, so we at least have

15:08

a nice name. So what a dark

15:10

pool is? It's actually technically it's

15:12

called an a t S or an alternative

15:15

trading system, the lynchpin of

15:17

the U S equities market. And indeed, you know, the

15:19

U S economy is competition, right,

15:21

and so a long time ago, back when

15:23

I was a lawyer, if someone said, you know what these exchanges

15:26

and it was really just the New York Stock Exchange until

15:29

let's say the early nineties. They have a monopoly,

15:31

they're really expensive. Bad things go on

15:33

there. There was you know, alleged criminal activity

15:36

with the specialist. You can google all that. So the exchanges

15:39

weren't all that, let's put it that way, right, and they were,

15:41

you know, it was kind of a private boys club, if you will.

15:44

And so a bunch of banks and other broker said,

15:46

we want to be able to create an alternative

15:48

trading system and a t S. So the SEC

15:51

has REGGAETS and it basically

15:53

says, if you want to be a

15:56

place where people are sending orders, right,

15:58

as long as you don't have more than five

16:01

of the market in a particular name, you

16:03

can do that. You have to publish your rules. We

16:05

run to a t S is at Virtue. You've got to publish

16:08

your rules, but you cannot display

16:10

market data. Okay, so it has to be

16:12

quote unquote dark. That's why people call them dark

16:15

pools. So people brokers

16:17

right can rest orders in an

16:19

A T S with the safety

16:22

and security that they know that that they're

16:24

not exposing large

16:26

size to the rest of the world. Why don't people

16:29

like to trade on exchanges is because

16:31

the entire world knows, Like you

16:33

know, I'm an agency broker. If I get in order

16:35

from a large asset manager to buy

16:38

a hundred thousand shares a Tesla and

16:40

I just post that on an exchange. Now the entire

16:42

world knows that there's a giant whale

16:45

out there that wants to buy a hundred thousand

16:47

shares a tesla. What's going to happen to the market? Right?

16:49

You can imagine people will change the

16:52

risk that they see in that market because they know that

16:54

there's a huge imbalance, right.

16:56

And so that's one of the reasons why investors,

16:59

broker a smart folks in the marketplace wanted

17:02

choices, and that's why they created these A T s s.

17:04

Right. So, an exchange has

17:07

public displayed market data, right, it gets

17:10

quoting revenue because of that they make it. They

17:12

make about four or five million dollars a year

17:14

justin consolidated tape revenue. That's one of

17:16

the benefits to being exchange, right,

17:18

Whereas an a TS is only charging a transaction

17:21

fee, right, and orders etcetera

17:24

are executed quote unquote in the dark, and that's

17:26

why people call them dark pools. There's nothing to various

17:28

about them. It's just an alternative method.

17:31

Again, always think what what the

17:33

great thing about our marketplace in the US and why

17:35

it's it's so darn efficient and why it's so damn

17:38

competitive and cheap is because you have this

17:40

competition. So I want to

17:43

esca follow up. You know, all

17:45

of the I was doing a little trying

17:47

to learn a little bit to prepare for the for

17:50

this discussion. And so I see

17:52

all of the brokerages are the retail brokerages

17:55

or I guess everyone follows the six files,

17:57

these Form six or six. We're

18:00

they talk about the market makers

18:02

to whom they're routing orders and they helpfully

18:04

sort of like basically break down

18:07

their market share and so for

18:09

eat, So for example, robin Hood in

18:12

the last quarter, it looked like almost their

18:14

shares went through Citadel Virtue

18:17

looks like got a little bit under. What

18:20

determines how a broker

18:23

allocates its routing

18:25

is it is every trade its

18:28

own discrete auction

18:31

of and you're all competing for it. There like, how does this

18:33

process work? No, not at all, not at all. So

18:35

the way it works is, as I try

18:37

to articulate, they have a best execution committee,

18:39

right, and they have their routing protocol.

18:42

Again, it's always

18:45

based off of how much are we willing

18:47

to improve off of that m B B oh so quote unquote

18:49

price improvement um. And so

18:52

in the beginning of the month. Quarter some

18:54

brokers do it weekly, but it's not daily, and

18:56

it's certainly not by symbol, right, there's just way

18:58

too many orders for every thing to be an individual

19:00

auction. So they said it in the beginning

19:03

of the week. Let's say at the beginning of the month. Every broker's

19:05

got their own rule and they say, okay, in

19:08

the prior period, right, so it's you know,

19:10

we're now in March. So in February, Virtue,

19:12

Citadel, Susquehanna too, Sigma.

19:15

I don't know who else is in you know, Ubs, Wolverine

19:18

right there, five or six firms we all bashed,

19:20

we bashed our heads against you know, each other, and

19:23

for you know, every broker's

19:25

got a different way of looking at it. But for the

19:27

top five hundred names that are

19:30

in the snph. Here's the aggrega

19:32

amount of price improvement. And Citadel came in first

19:34

place, right because they provided forty

19:37

two points of EQ. It's all measured off

19:39

of the mid of the mid So how much are you willing

19:41

to improve off of the midpoint between

19:43

the bid and the offer? And Virtue

19:46

came in second place, Susquehanna third, two

19:48

sigma, etcetera. So this therefore, in the

19:50

month of March, right, we're gonna give Citadel

19:53

for Virtue Susquehanna

19:56

twelve percent, etcetera. During the measurement

19:59

period, whether it's a eeker a month, we're

20:01

in constant dialogue with them. They will say, hey, look,

20:03

you're doing really well in the

20:05

top five indet names, but you're really doing poorly

20:08

in the bottom thousand names. Can you improve your

20:10

EQ? So they're always, you

20:12

know, trying to get us to frankly,

20:14

provide more value back to their their

20:17

clients. And if you watch

20:19

TV, and I'm not going to name the network because it's

20:21

a competing network, there's actually one of the really

20:24

really large brokers. There's two dudes sitting

20:26

having lunch and one guy shows

20:28

him his little iPhone and says, well, you know, look

20:30

at the execution quality I got, and

20:32

he buys, and he saved twelve dollars and ninety

20:34

three cents, and he pays for the grill cheese

20:37

sandwich at lunch. Right, they must be

20:39

in like not in New York because the grill cheese would cost

20:41

more. But that that's is literally that's

20:43

what we do, right, So think about how

20:45

important it is that an advertising

20:48

agency for one of the largest retail

20:50

brokers in the world. Right, that's

20:52

an American institution. I'm not going to name their

20:54

name. You can think of the commercial right, they

20:57

are spending money advertising

20:59

the word that Citadel, virtue,

21:01

sus behind, etcetera. Do I think about

21:04

how ingrained that is in the system,

21:06

and then juxtaposed that against the

21:09

frankly lunacy that people were articulating

21:11

about Robin Hood and Citadel. It's just, you

21:13

know, that's why I watched Late

21:16

January and my my job was like hitting

21:18

the table and thinking, my god, these people have no

21:20

idea what the hell they're talking about. You know, it's

21:22

such an important part of the ecosystem, and

21:25

it's so ingrained, and it's so valuable

21:28

that one of the largest American financial

21:30

institutions. You think so much

21:32

of it that it advertised it that this as as

21:34

like a service, right.

21:37

I apologize for my voice changing there,

21:39

but it's like the the the

21:41

juxtaposition of the two was just so amazing.

21:44

Here I am watching, you know, the anchors on that

21:46

network who don't have a clue what the hell they're

21:48

talking about. If you follow my Twitter

21:50

account, I actually tweeted one of them and told him that, and

21:52

then he had me on the I saw you you

21:54

tweeted your personal phone number. That seemed

21:57

kind of risky. Well not really, you

21:59

know, I got not and a hide and he was so

22:02

naive. I'll be nice about what he was saying.

22:04

It was it was embarrassing, I thought, and

22:06

I told him as much. Anyhow, so I

22:09

will get off my soapbox and allow you to continue.

22:12

Well, so why don't we get over to the GameStop

22:15

phenomenon, and maybe just to begin, I'll

22:17

ask a sort of broad question. So how

22:20

much did the shift to a

22:22

no commission trading model

22:24

and the sort of boom in retail stock

22:27

trading that we've seen over the past year, Like, how

22:30

much of a difference did that make for your business?

22:34

Yeah? Look, I mean, it was huge. I mean, and again thank

22:36

you for noting it really was the zero commission

22:38

phenomena and that that was a long time

22:41

coming. Right. There was a whole bunch of regulatory changes

22:43

in two thousand five, you know, decimalization,

22:46

right, so spreads narrowed, technological

22:49

advances, you know, give a lot of give

22:51

a shout out to all of the pioneers and guys

22:54

that started a merry trade and e trade in

22:56

etcetera, etcetera. Um Robin

22:58

Hood, Uh, you know, was the zero

23:00

commission broker. I believe

23:02

they started I think in two thousand fifteen,

23:05

and I knew at some point the incumbents,

23:08

obviously you know, Schwab, Fidelity, E Trade,

23:10

etcetera, would have to match that pricing,

23:13

and they did and that happened in November two right.

23:16

So that was like sort of the the Kuda

23:18

gra of a long period of technology

23:21

and evolution, you know. And then on top

23:23

of that, you know, the pandemic hits right, work

23:25

from home. You know, there's no sports

23:27

betting, you know what, the Tesla.

23:30

There's a whole bunch of other factors right that

23:33

led into it. It really was a zero commission phenomenon.

23:35

So if you think about retail trading as

23:38

the percentage of the US equities market, it went

23:40

from called it like fifteen percent. Two

23:43

is high on some days as like, So

23:45

that is a meaningful increase. It's kind of settled

23:48

somewhere between twenty two and of

23:51

the overall US equity market. But this is a

23:54

very important and as was

23:56

demonstrated in late January, a

23:58

powerful segment of the marketplace, and so

24:01

it needs to be understood and reckoned

24:04

with and the regulators obviously

24:06

we'll look at all this, but at the end of the day, you've seen

24:08

a systemic shift in the US

24:10

equity market. I will say, because

24:12

we're a global market maker, this is not unprecedented.

24:15

You know, if you travel over to Japan, where we

24:18

have we do a lot of business. You know, we

24:20

have a partnership with SBI Securities

24:23

where we do something similar in terms of being

24:25

a retail market maker, and over there, you

24:27

know, retail is a big part of market. You know

24:29

that people have their smartphones

24:31

and they're trading all the time, and not just equities.

24:34

I mean they're trading again futures they trade,

24:36

you know, the SMP futures, they trade, the Russell

24:39

you know. So this this shift

24:42

is important and systemic, but it's not without

24:44

global precedent. Can

25:00

we go back you you mentioned the

25:03

term payment for order flow, and it's

25:05

scary and people don't understand

25:07

it. It is an ominous sounding term andent.

25:09

But I do think it's like one of the things in this

25:11

whole game Stop story that people got super confused

25:14

about. Why would you pay

25:16

for order flow? What? What is it so value about

25:18

about my five tesla trade on robin

25:20

note that you'd pay for it? Yeah, exactly, We're waiting

25:23

for your trade, just tell me when it's coming. So

25:25

let let me take a step back. So before I mentioned there were

25:27

two hundred odd retail brokers, wealth managers,

25:29

etcetera. Right, and those are our clients, and

25:31

Citadel's got you know, a similar bunch. It's

25:34

not just US institutions, by the way, there's Canadian

25:36

and European wealth managers. They're sending us orders

25:39

and getting guaranteed execution along

25:41

the eCos you know, in the ecosystem I described

25:43

to you earlier. So of that two

25:46

hundred eye brokers, there's roughly

25:48

ten that's say, okay,

25:51

in addition, in addition, that's the key

25:53

to price improvement. We want you

25:55

to pay us a rebate, okay, and

25:58

so effectively, and

26:00

that rebate is going to be set. There's not an

26:02

auction right there, not routing flow because

26:05

Citadel is willing to pay a couple of

26:07

pennies more than virt two. It's set and

26:09

it's in stone. So there are some brokers.

26:11

Let's say give us ten mills, right, ten

26:13

ten cents per d. I don't want to be two technical. Others

26:16

say eighteen per hundred, whatever it is,

26:18

And that goes into our calculation

26:20

of how much value are we willing to provide

26:23

back to the broker from our perspective,

26:25

from the virtual perspective, I imagine City on the

26:27

other competitors look at it the same way. We're Switzerland.

26:30

There is value to us as

26:32

the market maker in extracting

26:35

the bidden offer. Really, what we're doing is,

26:37

you know, if Tesla is a nickel wide

26:40

in the marketplace, we think we can

26:42

narrow that spread, maybe by a

26:44

halfpenny, maybe by a penny. Right,

26:46

because we're really good, and we're really

26:48

good, We've invested a lot of money in it. And because

26:50

your order and literally the hundreds

26:53

of thousands of other orders that we're getting are

26:55

smaller in size, so they're not going to move the marketplace.

26:58

Right, they're not big institutional orders, and

27:00

they tend emphasis on the tend

27:03

not to be correlated with the remainder

27:05

of the marketplace. Right, because the theory

27:07

is, Hey, Joe is a retail investor.

27:09

He's gonna trade five times a day,

27:11

five times a month, whatever it is. He's going to buy

27:14

his hundred shares. He's gonna push his little

27:16

button. He's gonna want to buy a market

27:18

buy a hundred shares of Tesla at the market, and

27:21

he's gonna hold it for six months, a year,

27:23

three months, and whether he buys it at

27:26

you know, ten, or we're gonna slightly price improvement,

27:28

Joe doesn't really care, but we care

27:31

a lot. So you're not competing

27:33

with Virtue in Citadel, right. Virtue in Citadel

27:36

have this unique ability to

27:39

narrow the bid offer spread and extract

27:41

some value. Right. Joe

27:43

has a very different time, you know, a temporal

27:46

view of the world. Joe's thinking, all right, I'm

27:48

going to hold this thing for a week, a month, whatever

27:50

it is. We're trying to hold it literally for

27:53

you know, if we can ten milliseconds a second

27:55

because it's gonna be thrown into this

27:58

portfolio that we're managing, and we're gonna try to extract

28:00

that bid offer. And really, what the brokers have

28:02

done, they're smart. They realize there's value

28:05

two smaller non correlated markets,

28:08

two orders, excuse me, and they've gone to

28:10

the market makers over the last thirty years.

28:12

This is not a new phenomenon. Said listen. We

28:14

know you guys are good, We know you guys

28:16

can make money off this. We know that this money

28:19

means, this value is

28:21

only there for the market makers. It's not there

28:23

for anybody else. We're not taking money from a

28:25

retail investor, but we the

28:27

retail brokers, we want you to pay

28:30

profit share some of that bid

28:32

offer back to us, and for

28:34

the most part, we're gonna return that to our clients

28:36

in the form of price improvement the ad I mentioned

28:38

before right there. And in

28:41

some cases the brokers have made a decision

28:43

which I don't care about, that they're going

28:45

to take that money and they're gonna use it to offset

28:47

their costs of providing their service so that

28:49

they can provide that service back to

28:51

their clients for zero commission. Right,

28:54

So think about it this way and then I'll stop my my

28:57

diet tribe, which is Joe

28:59

is a retail and Tesla is offered

29:01

on the market at ten. We're

29:04

willing to say, all right, Joe, we're gonna give

29:06

it to you a nine spot nine nine, so we're actually

29:08

gonna price improve it. So Joe is happy he

29:10

bought it actually at a better price than when

29:12

he saw it in exchange. The reason we're

29:14

willing to do that is because we think we can make

29:17

maybe there was a nickel, we can make maybe half a

29:19

penny. So Joe gets price improvement, virtue

29:22

makes a little bit of money, and Joe pays

29:24

literally zero. The alternative

29:26

would be, if there's not payment for the flow,

29:29

Robin Hood's gonna charge you four dollars you

29:32

portrayed. So you bought a hundred shares

29:34

and maybe we made half a penny and you've

29:36

got a penny of price improvement. You're not buying

29:39

that Tesla at ten because you think it's gonna

29:41

go to ten oh one and you're gonna sell it and you're gonna

29:43

make you know, a dollar, right, You're

29:45

buying it a ten because you think it's gonna go to you

29:48

know, thirty and you're gonna make twenty So

29:50

where the critics are just completely asked

29:53

backwards. Is there there's no value

29:55

that I'm taking out of your pocket. I'm taking value

29:58

out of the marketplace and in fact then profit

30:00

sharing it back to you. It's a win win

30:02

for everybody. The last point I'll make and then I promise

30:05

i'll shut up, is And the reason I got

30:07

so piste off at Sorkin was because

30:09

he sits there every time he says, well, it's like

30:11

Facebook, there's an information avenge. We're getting

30:13

client information, complete and utter

30:15

bullshit. Am I allowed to say that on this It's

30:18

complete, utter bullshit. Sorkin

30:20

is wrong about that. I told

30:22

him that. I'll say it publicly, round and

30:25

round again. This is not Facebook. If anything.

30:27

You know, there's six or seven firms

30:30

competing. Every single one of the orders

30:32

we get, we get millions of them per day, are

30:35

anonymous. We have no idea if it's Joe Sally

30:38

or if it's some institution behind it. Right,

30:40

So, the notion that there's some big, nefarious

30:43

Facebook thing going on here is just you

30:45

know, a concoction of people

30:48

that spend way too much time looking at Silicon

30:50

Valley companies. This is completely opposite. If

30:53

anything, the information asymmetry

30:55

is the opposite way. We have no idea if

30:58

everybody's going to send us a hunt with chairs to buy

31:00

Tesla at the same time, and we're gonna get our faces

31:02

ripped off, and we have no way of knowing that.

31:05

We don't have a clue. So this

31:07

is something I actually wanted to ask you. So you mentioned

31:10

this idea that retail orders

31:12

tend to be uncorrelated with the wider

31:14

market, and that makes them attractive

31:17

for various reasons. So what happens when

31:19

you do get a situation like game stop

31:21

where suddenly everyone is piling

31:23

in in one direction, we lose millions

31:25

of dollars. I sit in my office and

31:28

I'm sitting there grabbing the you know, my table,

31:31

and my knuckles are turning red on the

31:33

on whatever it was, January, whatever

31:35

it was, I forgot that day. When the market

31:37

rips in one direction and there's limit up, limit down.

31:40

I mean, it doesn't always happen. Sometimes we get

31:42

lucky because we're not flat at

31:45

all, right. We can be long or short, all

31:47

right, So sometimes we get lucky. More often than not,

31:49

you do not get lucky and you get your faces ripped

31:52

off and we lose millions of dollars.

31:54

Now, uh, you know that's why we trade

31:56

eight thousand names. That's why we have

31:58

a big firm that does a lot of other

32:00

things. This business is not profitable every day

32:03

retail market making. It's not the critics

32:05

think we just sit there and we collect the spread between

32:08

Joe and Sally and we collect pennies like we're

32:10

a toll toll bridge. If

32:12

that was the case, then literally

32:15

dozens of other institutions would come in. When industry

32:18

critics say, oh, this is an easy business. You know

32:20

what I say, compete, compete,

32:24

there's no barriered entry here. Get yourself.

32:26

You know, some investors spend hundreds

32:28

of millions of dollars in technology, like we have developed

32:31

the relationships and compete. This is a very

32:33

sharp elbowed, difficult business. And

32:35

when the market rips in one direction

32:38

in a particular name, more often than

32:40

not, we lose money. And there are days where I sit

32:42

in my office and we can be down

32:44

significant eight figure amounts. That's

32:47

like tens of millions of dollars right

32:49

for time periods. More often than

32:51

not, it reverts, and we've learned

32:53

over the years, and this business predates

32:56

me and Virtue because we bought it from a firm called

32:58

Night Capital that over twenty years,

33:00

right, it tends to make more money than not. But

33:03

it is not an easy business and the market

33:05

maker has zero, zero informational

33:07

advantage. That's the thing that really pissed me

33:09

off about when Sorkin was talking,

33:12

because he made it out like there was some informational

33:15

asymmetry for the market maker, and it's exact

33:17

exactly the opposite. We have no clue when

33:20

the Redded Army is going to strike. How the how would

33:22

we know? But on the other hand,

33:24

eventually at least robin Hood

33:27

and some of the other online brokerages

33:29

did start to curb trading

33:32

in Game Stop. So setting aside

33:34

the informational asymmetry that

33:37

gave rise to concerns, and as you just said,

33:39

when you have extreme and extreme

33:41

weird situations like in game

33:43

Stub, you start to lose money and

33:46

then suddenly, you know, the

33:48

the traded curbs kick in.

33:50

So doesn't that invite questions about,

33:53

oh, well, we're these curbs put in plays because

33:55

you were losing money? Sure

33:58

of course. Now I mean, look overall, we're

34:00

making money during that time period, right, and we we

34:02

didn't have any conversations with Robin, who had ordered

34:04

citadel Ken Griffin is a once in a lifetime

34:07

you know, a business builder, entrepreneur. He's

34:10

he's extremely ethical. Right, There's not a chance

34:12

in the world he would risk his billions

34:14

dollar empire, you know, to have some kind of

34:17

conversation with with Robin. I

34:19

knew immediately immediately. I don't want

34:21

to like sound like the guy. I mean, we are a self clearing

34:24

broker dealer. We know the folks of

34:26

the DTC very well. We know how the margin

34:28

rules work. I understand the plumbing of Wall Street,

34:30

so I knew immediately what their

34:33

issue was and that they had had a huge margin

34:35

call. Could the public relations and

34:37

the explanation of that been better, Yeah,

34:40

of course. I'm sure if Lad could go back and

34:42

redo his life, and he's an incredibly talented

34:44

guy, he probably would have, you

34:47

know, been more direct or more

34:49

a little more transparent. But you know, it's

34:51

not an easy thing to explain how margining

34:54

works in this country. I'm happy to do it. I'll put you guys

34:56

to sleep. I know it very well because I started this firm

34:59

and it was my money making the margin calls, right,

35:01

So when it's your own money, you tend to really know the

35:03

rules pretty well. But they got

35:05

one sided game stop because that's where their

35:07

clients were buying or selling. It's

35:10

an enormously volatile security,

35:12

and so the rules of the DTC

35:15

technically the n SCC are

35:17

that the variation margins of the variation

35:19

at risk of our margin if you will, for

35:21

that name, is going to be. So

35:24

when they had clients literally buying billions

35:26

of dollars, right, they're gonna get margin, and

35:29

the rules do not allow you to

35:31

use customer funds to meet that margin

35:33

call. Right. So this was literally, as

35:35

he said, a five or six sigma once

35:37

in a generation kind of event that happened.

35:40

Really, it was the rules of Wall Street that really

35:42

slowed this thing down. So the system worked exceptionally

35:45

well. We were in constant communication

35:47

with the n s c C because we wanted to

35:49

make sure that we could trade with Robin Hood.

35:52

Right, there are a counterparty of ours, we take risk,

35:54

and so the n SCC did a brilliant

35:56

job in risk managing what was otherwise

35:58

the situation that was, you know, getting

36:01

out of control. Right. They didn't do it

36:03

for any nefarious reason other

36:05

than to mitigate risk in the system,

36:08

because you had a broker that had gotten a little over

36:10

at ski tips. Right. Once they

36:12

did that, obviously, Robin Hood raised an

36:14

unbelievable amount of money. So there's some really smart

36:16

people that believe in the business model. I I

36:19

applaud that, and Robin Hood did

36:21

the only thing they could do, which was de risk

36:23

their portfolio and reduced their margin. I

36:25

would have done the exact same thing where

36:27

I in the in their situation, I

36:30

would have done a much much better job, I would

36:32

think explaining it because I know these

36:34

rules exceptionally well. So

36:37

since we're on the topic of you know what

36:40

people think might be nefarious behavior.

36:42

You talked about this idea of

36:44

information a symmetry. One

36:47

other criticism that I've seen, or that

36:50

people sometimes bring up, is the idea

36:52

that retail trades are somehow treated

36:54

differently to large institutional

36:57

trades. Can you talk a little bit about that, Like,

36:59

what does sitution actually look like? They are?

37:01

They get much better, they get much better execution.

37:04

That's the irony of this thing, right, we we have both

37:06

sides of the business. Okay, So

37:08

I'll give you an example. I'll

37:11

use a couple of names. You know, these are public

37:13

companies, right or they're large, So Fidelity

37:15

and Vanguard our giant companies.

37:18

Right. They both have retail

37:20

arms and they have institutional arms.

37:23

Right. Fidelity has got an asset management business, got a retail

37:25

business. Vanguards the same. They're both great

37:27

clients of the of ours. I love them dearly.

37:30

We have fantastic relationships with both them. I literally

37:32

have been to visit both of them, and

37:36

the retail and the institutional business our clients.

37:38

And they're in different buildings, right, And I

37:40

literally we get orders from the

37:43

institutional side, and they're paying us,

37:46

right, something less than a penny to share,

37:48

but more than zero. They can't tell you exactly

37:50

how much to route orders of Tesla, and

37:53

the notional size of that order,

37:55

and the way we trade it is really

37:58

not much different than what we do in the retail outside.

38:00

On the retail side, we get paid and

38:03

and and let me go back

38:05

to institutional order. We're not We're measured

38:07

not whether we can provide them the n B b

38:10

OH, but whether over the course of a day,

38:12

what the impact of their order is on the marketplace.

38:15

So as long as we beat a certain benchmark, right,

38:17

they're happy they haven't moved the market too much

38:19

with their order. Right. So that's kind of institutional

38:21

trading. One on one. We're getting paid a commission.

38:24

We're acting as an agent. We use our order

38:26

routing skills and our financial technology

38:29

in order to route those orders uh as

38:31

adroitly as we possibly can to minimize

38:33

impact to not move the n b B

38:36

out too much. Right now, you go

38:38

to the retail side, and what the

38:41

federal securities laws say is that every

38:43

order that is retail attested from

38:45

a broker that is less than nine

38:47

listen to this, nine thou shares

38:51

is eligible for those six or six reports. So

38:53

literally, I can get a thousand share

38:55

order of Tesla. I don't know what the hell Tesla is at

38:58

right now. It's let's say it's seven hundred, right, So can

39:00

do the math. That's a large order, right.

39:02

That order comes into the retail through

39:04

the retail pipes that we have, and

39:07

as soon as it hits our environment, regardless

39:10

of what the n b B O is in terms of size,

39:13

that hundred thousand share order or five

39:15

thousand share order, it gets

39:17

measured and we price it off of the n

39:19

b BA. So even if there's only

39:21

a hundred shares right at the inside,

39:24

I'm being very technical right now, where not only

39:26

are we price improving that, we're size improving

39:28

it. And in some instances,

39:31

like you know, for robin Hood, we're

39:33

actually paying for the privilege of doing that. And

39:36

there's some other brokers that take payment

39:38

forward to flow that are very large. Right, So think

39:41

about that juxtaposition. You've got a

39:43

retail tested order that

39:45

is, you know, could be hundreds of thousands of dollars

39:48

that's getting guaranteed execution

39:51

at or better than what they could get in exchange,

39:54

and and sometimes they're getting price improvement and the brokers

39:56

getting paid for it, whereas an institutional order

39:59

we're getting aid by the broker. Now,

40:01

look, I'm not screaming poverty. For the most part,

40:03

the orders aren't that size, right.

40:05

But if you if you talk to any institutional investor

40:08

that is I would say balanced

40:11

and even killed about how they explain themselves,

40:14

right, they will say that retail investors have an amazing

40:16

deal in this country. They would love to be able to

40:18

do that. Their jobs would be so much easier.

40:20

The institutional traders all they would

40:22

be doing would say here you go, virtue sit it will take

40:24

these orders it Unfortunately, it doesn't work that way.

40:27

So the ecosystem in the United States,

40:29

where you can get literally for no

40:32

money, a guaranteed fill

40:34

of a price that you see on your smartphone

40:36

or better, is by far the

40:39

best ecosystem in the world. Where in every

40:41

marketplace in Europe and in Asia, and

40:44

there's not a market structure

40:46

that is as beneficial to retail investors

40:49

as the United States. That's why I get

40:51

so like frustrated

40:53

when I see you know, folks on on

40:55

that other network, you know, sitting there like mixing

40:58

metaphors and and cast gating, you

41:00

know, an ecosystem that they have no clue about.

41:03

They don't have it, they don't even understand. I mean Stork

41:05

and sitting there talking about his grandmother. And

41:07

I went on TV and said, yeah, your grandmother can hold

41:09

up her smartphone, and then

41:12

he talked about his grandmother, not me, And for no

41:14

money can get a price that's better than what

41:17

t ro price can get. What the hell are

41:19

you complaining about. I

41:35

want to go back to the competition

41:38

that you guys are in with the Citadels

41:41

of the world or the two sigmas and so

41:44

forth. So what are the determinants

41:46

of who can deliver better

41:48

price? So I assume like technology is a

41:51

factor, your capital probably

41:53

presumably, let's do I don't know, take risks

41:55

here and there be willing to extend a

41:58

better offer speed, Like what

42:00

do you guys uh competing on?

42:02

And why is the market such that one

42:04

firm doesn't just swallow the whole thing by building

42:07

up sur multiple edge? Why is it always

42:09

competition? Yeah? What I what I

42:11

would say is it's not in The brokers

42:13

don't want there to be a monopoly,

42:16

right, So there's sort of like a natural

42:19

cap if you will, that any one of us

42:21

has over market share. If you look at if

42:23

you go through all those six or six reports, Yeah,

42:26

I mean maybe with some with some small exceptions,

42:29

you're never gonna see anybody really north

42:31

of certainly when it comes to marketable

42:34

orders maybe non marketable limit orders, it

42:36

might be higher. But so the brokers naturally

42:39

right, What would you do if you needed vendors,

42:41

right, and you could have people bash their heads together,

42:44

You'd like to keep two, three, and

42:46

sometimes four or five of us in competition. You

42:48

want to give us enough that we can

42:51

be profitable, right, and we can

42:53

make the investments in technology, and I'll come

42:55

back to why we make money. But you don't

42:57

want to be you know, dependent on

42:59

a single provider, right, So they want competition.

43:02

So that's why when analysts research analyst

43:04

asked me about market share, I said, well, it's really overcooked

43:07

because there's a natural cap. Really, the

43:09

way we make money is look, look. And

43:12

again this predated virtues. So

43:14

there was a firm called Night Capital that actually kind

43:17

of helped create this ecosystem. It

43:19

was called night because it was the Knights of the round Table. They

43:21

got all the retail brokers around a table

43:23

and said, hey, you guys are mad as hell at

43:26

the New York Stock Exchange. Essentially, why

43:28

don't you send your orders to us? And that

43:30

was you know, the genius of the pioneers of of

43:32

Night Capital. And so, starting

43:35

you know, twenty years ago, they built

43:37

a simulation environment of research

43:40

environment obviously that we now run. That cost

43:42

us a lot of money. We've got very

43:45

sophisticated algorithms and and strategies

43:48

right that that can internalize

43:50

that order flow and hopefully more often than

43:52

not make money on it. We've got you

43:55

know, dozens and dozens of really

43:57

really smart men and women you know,

43:59

that have PhD these and things that I vaguely

44:01

understand. I'm a liberal arts guy, right, so this is

44:03

not my area of expertise. That

44:05

literally spent you know, thousands

44:08

and thousands of people hours every year

44:10

trying to be better at UM And

44:13

you know what I what I'm good at, what Virtue is good

44:15

at is we run a very very lean, efficient

44:18

environment. So yeah, we trade an awful lot,

44:20

but we're not a big bank, right, So we have less

44:22

than a thousand employees and we

44:24

have a very large scale business that's

44:27

in over two hundred and fifty marketplaces. So what's

44:29

our competitive advantage. It's we've got

44:31

great relationships. We provide great service to those

44:34

retail brokers, right, because it's a guaranteed

44:36

execution. If we f up

44:38

and the market data is wrong, or if we have like

44:41

you know, the power goes out in our data center

44:43

something like that, it's still our execution.

44:46

We got it, we eat it, right, So if we have a

44:48

mistake, we eat it. Exchanges can't

44:50

do that. So it's a service we're providing.

44:53

And as I said, we've been doing this for

44:55

a long time and invested a lot of money, and we

44:57

do it really really efficiently. So if

44:59

you think of about like what's the margin

45:01

on this, like the margin on an individual

45:04

basis, like on a single name is

45:06

literally single digits and subpenny

45:09

And why are we so profitable and why is this business

45:11

work? Again? It comes back to scale, right.

45:14

We we trade twenty five thousand

45:16

different financial instruments and if

45:18

we you know, we try to make a couple hundred

45:21

bucks, a thousand bucks on them, that kind of thing,

45:23

and it adds up over the course of a day. And this

45:25

is a very you know, scale business,

45:28

which is why it's very difficult. You know, you

45:30

didn't notice, uh in the names

45:32

of competitors Goldman Sachs or JP Morgan

45:35

or Barkley's or Morgan Stanley, Right,

45:37

they all used to do this business right

45:39

there, but they had to get out of it. If you go look at the list

45:41

like UBS is in the business, they're probably

45:44

like number four or five, and they're kind of, you

45:46

know, not as competitive frankly,

45:49

because it's really hard to do

45:51

this business. If you've got a huge

45:53

global institution, you've gotta feed. You know, someday

45:56

I'll invite you to my office when the pandemics over.

45:58

It's not that pretty right. We don't spend money

46:00

on the on you know that kind

46:02

of thing. We have to spend money on the research environment

46:05

and the simulation environment and and

46:08

so that's why this business works for these

46:10

kinds of firms. And Citadel is

46:12

by far, you know, our biggest

46:14

competitor, and they're fantastic at it. And

46:17

you know, the notion that somehow, you know, they were mixed

46:19

up in this robin hood, you know, a conspiracy

46:22

theory, was just beyond comical

46:25

to me. So I mentioned

46:27

in the intro that one

46:29

of the big things about game Stop and robin

46:32

hood was that it kind of thrust this issue

46:34

into the spotlight, which you know can

46:36

be a bad thing. And we did see politicians

46:39

and d C take a sudden interest

46:41

in payment for order flow. What's

46:43

your read on how they

46:45

are thinking about it at the moment and

46:47

would you expect them to crack

46:50

down in some way on the business. And

46:52

actually, can I just add on, so in

46:55

the UK they don't have payment

46:57

for order flow um as far as I can

47:00

member, I think they banned it. So why has

47:02

the US gone ahead with this? But other jurisdictions

47:05

have you know, there's something about the

47:07

model that has turned them off.

47:09

So why is that? Yeah,

47:11

what I would say is, look, I mean this is not

47:14

like some new Obviously people acted

47:16

like as this there was you know, a

47:18

new situation. Right, this has been you know,

47:20

this structure, this ecosystem has been going

47:23

on for thirty plus years. To answer

47:25

the first part of your question, which is, you

47:27

know, the SEC has looked at this five

47:30

or six times, the whole notion of wholesaling

47:32

and and payment for order flower rebates,

47:35

The SEC and Finraum

47:38

are always examining the

47:40

best execution statistics

47:42

and obligations of all the retail brokers

47:45

from Robin Hood to you know, z

47:47

Echo Trade, and of all the market

47:49

makers from Virtue, Cita, etcetera. Right, So this

47:51

is not like an area

47:53

that has not been looked at by

47:56

regulators because of some of

47:58

the hysteria I'll say it around down

48:00

these meme stocks and kind of the situation it

48:02

ended up in Congress, and

48:05

I will charitably say there was a lot of misinformation

48:08

at the hearing, and I felt kind of bad for Ken and

48:10

for Vlyde and for others who were basically you

48:12

know, you know they were pinionis for five and a half

48:14

hours, and I know how Washington works. It's great. I

48:17

have spoken to over half a dozen Congress

48:20

folks and more of their staff

48:22

to try to explain, Hey, this is when

48:24

you peel back the hysteria and peel

48:26

back the onion and look at it. It really

48:28

isn't that bad. And actually, if

48:31

you're a progressive, a Democrat, whatever you want to

48:33

say, you should be thrilled with

48:35

this ecosystem because the three hundred

48:37

five hundred dollar broker that used to rip

48:39

you off by making you pay you know, an

48:41

eighth or cents spread doesn't

48:44

exist anymore. So the old Wall Street

48:46

way of like really taking it to the

48:48

real retail investor has gone away. The

48:50

retail investor is totally empowered.

48:53

To use an overused word, there's been democratization

48:57

now in Europe. Right, everything isn't as

48:59

it's as it's seems. Right. What

49:01

the retail brokers do in Europe, which I think

49:03

is actually worked worse for the investors,

49:05

right, of course I'm biased, but worse with this, they just

49:08

mark up the trade so you get a worse price.

49:11

You get a worse price, so the bid offer

49:13

that we otherwise could extract

49:15

on our own right. The retail

49:18

brokers effectively are charging

49:21

more back to their clients, so you're getting

49:23

a worse price. So which environment are you're

49:25

worse in? Would you rather pay zero

49:27

commission and get the n b

49:29

BO or better or I know

49:32

there's a zero you know commission broker

49:34

or brokers in Europe? Would you rather get that or

49:36

get a price that is, instead of Joe's ten

49:39

dollars for Tesla, Joe's

49:41

now paying you know, ten oh one or ten oh two.

49:44

I would argue, you know, you

49:46

know, Joe's getting a worst deal in Europe than he is in the

49:48

United States. So you know, to me,

49:51

it's just you know, regular

49:53

regulators looking at this and kind of you know,

49:55

in a knee jerk reaction not acting

49:58

what in the best entrance of retail broke So

50:00

long and short of it, I think this will get thrown

50:02

back to the SEC. We have a

50:05

new chairman who is a brilliant

50:07

guy who I've worked with a little bit when he was at the CFTC.

50:10

There's some staff folks there that have been there

50:12

for a long time that know this ecosystem

50:15

exceptionally well. I think they'll look

50:17

at the data, and I'm very optimistic

50:19

they will conclude that this all makes sense. Wholesaling

50:21

for sure makes sense. I think

50:24

they will look at payment for word flow

50:26

or rebates and say, maybe we need more

50:28

transparency and disclosure around it, right,

50:30

so clients know. But at the end of the day, if

50:33

you don't want to trade with a broker that uses

50:35

that does payment for water flow, then

50:37

open up a new account, you know, go

50:40

to Fidelity. They don't charge payment for word

50:42

flow and they have good prices. So at the end

50:44

of the day, it's all about choices. I don't understand

50:47

this hysteria, particularly from

50:49

those that are on the left of the political spectrum,

50:51

because you think it actually would fit in nicely

50:55

with the whole notion of a progressive

50:57

that wants to empower the little guy. The little is

51:01

unbelievably empowered in this country, and

51:03

yet people look at the ecosystem

51:05

like somehow there's something the fairies going on.

51:08

So there's always questions

51:10

of power when it comes to I mean, especially

51:13

when you bring politics into it, and there's

51:15

like who has the power at any given

51:17

moment within existing market structure.

51:19

And you mentioned that the retail

51:21

brokerages that are your counterparties.

51:24

They want to maintain some leverage, so they'll never give

51:26

one of you guys too high market

51:28

share of their flow because they want

51:30

to pit you against each other. I want to go back

51:32

to something you mentioned very early in the conversation,

51:35

and that is the power that the exchanges

51:37

have over data and the data they sell.

51:39

And I know you said you're a backer of the members

51:42

exchange to one of the new like whatever

51:44

eighteen stock markets there are talk

51:47

to us about that power over data

51:49

because I'm my understanding is that that exchange

51:52

wants to sort of disrupt that a little

51:54

bit. And how do you see that, uh, that

51:56

aspect of the market potentially changing. Yeah,

51:58

I mean this was if go around and Google I

52:01

got you know, I was pretty vocal about this. I

52:03

don't know, five six years ago, I can't exactly remember,

52:05

because I got annoyed that you had

52:08

a duopoly effectively. You know, they had three

52:10

large exchange groups and between

52:13

what is called the the SIP

52:15

with a consolidated feed. Right,

52:17

that's roughly five million dollars of

52:20

quoting revenue that we all pay that gets disseminated

52:22

to those exchanges, right, and then on top

52:25

of that, the exchange is charged

52:27

for what they call a private data feed, right, which

52:29

we obviously have to buy because we're a low latency

52:32

market making firm. And then on top of that, they charge

52:34

you for physical connectivity.

52:36

So I actually went to the sec there's a article

52:39

about this, when I brought like a cable that I

52:41

had bought on Amazon that

52:44

we paid a hundred and seventy nine dollars for, right,

52:46

literally a physical Ethernet cable that connected

52:48

our server to the exchange server, and

52:51

NASDAC was charging us and being

52:53

a little hyperbolic, but really not that much. They

52:55

were charging us about a half a million dollars a year for that

52:57

because there was a monthly charge for quote unquote

52:59

connect ativity. And it literally was just an Ethernet cable

53:01

that you could buy. So I got Piste off

53:04

and said, okay, you know, uh, physical

53:06

connectivity and market data

53:09

are elements of an exchange and exchange

53:11

for your license from the government,

53:14

right, which gets you that market data

53:16

fee that I mentioned, the SIP revenue and everything like

53:18

that, and gives you immunity. Right, there's

53:20

a limited liability and the securities

53:22

laws, you know, you need to have the

53:25

SEC approved not only just

53:28

your order types, but your market data

53:30

fees, your connectivities fees. It's all part of the quote

53:32

unquote facilities of the exchange.

53:34

You said you wanted wank, I'm giving you full on work.

53:37

That's a define term in the Securities

53:39

Exchange Act. The nine four used to be a partner

53:41

Paul Wise. I researched this stuff, myself, read

53:43

all about it. So I went to the SEC

53:46

and created a star, put in a comment

53:48

letter and said, you know what, the exchanges

53:50

have been getting away with this for a long time. This should

53:53

be regulated, etcetera, etcetera. The

53:55

politics of the moment were good because Jay Clayton

53:57

and bred Redfern, who were the the chairman

53:59

and the head of trading markets at the time,

54:02

kind of had a similar view of the world as I did,

54:04

you know, on his way out the door, Clayton

54:07

and the commissioners. You know, but I think it was a five

54:09

zero vote and nothing in Washington happens unanimously

54:11

anymore. Kind of agreed with the argument

54:14

that I was starting to make a virtue was starting to make five

54:16

years ago, that those items

54:18

needed to be uh, they need to be

54:21

a cost benefit analysis, right, you couldn't just every

54:23

year keep charging us more and more and more without

54:25

any cost benefit. Because it

54:28

was part of the quote unquote facilities of a national

54:30

securities exchange that is now in

54:32

litigation. Because my friends at the exchanges,

54:34

who I get along great with, by the way, we're their biggest

54:36

customers, they kind of have to be nice to me. They

54:39

sued the sec to enjoy enforcement

54:41

if you will, that regulation. So that'll be in litigation

54:44

in the d C circuit probably for the next you

54:46

know, five years or so, given the

54:49

you know, the amount of money here at stakes. So there's a

54:52

and that that's a continuing kind

54:54

of kabuki dance between the

54:56

regulators SYTHEMA, which is the you

54:58

know, the banks and the broke is we're a member of SIFMA

55:01

and the exchanges. This is nothing that they've

55:03

been fighting over who controls

55:06

that data and who can charge for it, because if you think about

55:08

it, I'm creating the data, right, you

55:10

know, to get back to Facebook virtue sending

55:12

literally hundreds and hundreds and billions

55:15

of bids and offers every day, that's like important

55:17

value of information the exchanges. I'll

55:19

be a schmuck now, I'll say all they do is they take

55:22

it, repackage it kind of in a crappier

55:24

format, and then sell it back to us right

55:27

along, let's sit it another information at

55:29

a premium price. So that's what really pissed

55:31

me off. That in the cable really kind of pissed me off.

55:34

You're designated market maker for

55:36

the bitcoin et F that exists

55:39

in Canada. It just got started.

55:41

It's already from what I understand, like a huge hit

55:43

in Canada in terms of like how much money it's taken

55:46

in. We might get one at some point in the

55:48

in the U S. What have you learned about

55:50

that business? Like? How big and

55:52

how interesting is that whole space? Uh? For

55:55

you guys right now? Yeah.

55:57

I mean, for the record, I'm not like an expert

55:59

in crypto, a goodcoin or whatever it was. I'm

56:01

a market maker and so my determination

56:03

to get into it was okay. When I saw that

56:06

it was going to be recognized and regularized

56:09

if you will buy a regulator, we think

56:11

the world of right, We're a market maker up in kind

56:13

of big time. And so when

56:16

I Rock said that they could do this, that's the sec

56:18

up there, I was like, you know, done virtues

56:20

all over this because this plays right

56:22

into our wheelhouse. Right, it's a in e

56:25

t F with the underlying basket is a different

56:27

asset class, right, That's what we're good at, and

56:29

it's and there's also a future on

56:31

the CME. So there's various products

56:33

we can we can move back and forth.

56:35

And so I think as cryptocurrencies

56:38

like bitcoined get further regularized

56:42

and regulated, if you will end

56:45

institutions like e t F

56:47

issuers the u S securities market, future

56:49

houses like the CME recognize

56:52

that there's that this is a valuable asset class

56:54

and include them in products right

56:58

that represent the underlying coining.

57:00

You're going to see an explosion of interest because

57:02

then institutions get more comfortable. Right,

57:05

it's no longer the wild west of you

57:07

know, a hundred venues ninety

57:09

eight of which you haven't heard where you know,

57:11

we trade on coin base and Gemini because

57:14

we've done our diligence on them and there's

57:16

no central clearing there, right, So you're taking

57:18

counterparty risk against those institutions.

57:21

And so if it's you know, bitcoin

57:23

venue you've never heard of, add some you

57:26

know country far far away that

57:28

doesn't really fit our our risk parameters,

57:30

right, We're not We're not a hedge fund, we're not

57:33

day traders, right. So as it becomes

57:35

more i'll say systematized,

57:38

you're gonna need market making firms like Virtue

57:41

to you know, provide it spread

57:43

between the coin the future

57:45

and the e t F. I'm hopeful that

57:48

in this new administration you'll see the SEC

57:50

approven in the United States as well, and we'll be a big

57:53

market maker in those. A lot of people think this is

57:55

going to be the year you think it could be. I

57:57

think it will be. Yeah, I think there's just too much

58:00

know when you see it on TV and the price of

58:02

it, there's too much mainstreaming of it,

58:04

and when the institutions start buying it, and then on top

58:06

of that, you know, we've got a lot of

58:08

retail clients that have come to us and said,

58:10

hey, we want to make this available

58:13

to are a high high networks. Will you provide

58:15

a two sided price ind it. So when that happens,

58:17

when names you you know of and

58:19

you can read the articles, want to make

58:21

it available to their high networks, then it's

58:24

becoming more mainstream. And that's when obviously

58:26

we need to be there as a liquidity provider.

58:29

So since Joe brought

58:31

up something slightly different to payment for order

58:34

flow, I have one more question. Um, you mentioned

58:36

the administration there, and of course one of the big

58:38

proposals from the Democrats is this

58:41

idea of a financial transaction tax. How

58:44

much would that affect your business? You're

58:46

really trying to get me in trouble and say something really colossally

58:49

stupid and offensive about the administration,

58:51

aren't you. I want to hear your voice go high. I

58:53

guess yeah, you want to hear my voice go high. Okay, So

58:55

there's probably nothing, uh more

58:58

inane than a financial transit action tax.

59:00

I have studied this backwards and forwards.

59:03

I read about the Swedish transaction

59:05

tax of where

59:07

on Friday they closed at Reutina's market. On Monday

59:10

it moved to London. Uh. What

59:12

I have always said is liquidity is like

59:14

water. It finds its level. So if if

59:17

the folks in Washington see fit to an act

59:19

of financial transaction tax, and I don't think they will

59:21

because Chuck Schumer is in

59:24

my view of the smartest man in the Senate, and

59:27

he happens the majority leader. Smart thing.

59:29

Yeah, and uh, he happens to

59:32

represent New York. He happens to understand that Wall

59:34

Street and and Manhattan

59:36

depend on the financial services market,

59:38

and at financial transaction tax, it

59:40

wouldn't just impact virtue, right, it would

59:43

reduce volumes, the spreads would

59:45

widen, and Mr and Mrs

59:47

four oh one k would under paying the price, and the pension

59:49

plans would pay the price. So when I

59:52

see, like you know, unions, public

59:54

service unions advocating financial for

59:56

a financial transaction tax, I

59:58

say to myself, they've either been severely

1:00:01

misled by some Washington hack that's

1:00:03

trying to raise money, or they just don't understand

1:00:05

how markets work, because that's

1:00:08

just a friction in the market and what happens

1:00:10

to the market makers and to the financial communities.

1:00:12

We pass that cost on, right,

1:00:15

We're not gonna go out of business and make

1:00:17

markets, and you're gonna still need a market maker. So

1:00:19

we would just widen out and volumes

1:00:21

with decline, the exchanges would be impacted,

1:00:23

and ultimately you and I in our four

1:00:25

oh one ks and our pension plans would pay

1:00:27

that price. So as a policy matter, it

1:00:30

is a S and I. As a practical matter,

1:00:32

it has not worked in any jurisdiction the world

1:00:34

where it's ever been proposed and

1:00:36

implemented, and if

1:00:39

it ends up happy the United States, you

1:00:41

know folks up in Canada, Bermuda, Switzerland,

1:00:43

the UK, Singapore, they will

1:00:45

light up alternative exchanges and

1:00:48

all of the U S secreers will just trade on CFD

1:00:50

over there, and the Treasury will be deeply

1:00:52

disappointed that they won't collect bub Kiss.

1:00:55

How's that? That's

1:00:57

pretty good? Your voice cone higher, But I'll

1:01:00

I'll accept it. I can't say Bob.

1:01:02

I can't say bubb Kiss as a soprano. It does

1:01:04

not work. It doesn't work. That

1:01:07

doesn't work. It doesn't work. Bubb Kiss

1:01:09

is more of a baritone. Yes, Oh,

1:01:12

Doug, thank you so much for coming on all thoughts. That

1:01:15

was great. Thank you so much, guys, that

1:01:17

was great, dog, Thank you, I appreciate it. Cheers.

1:01:20

Nice to meet you, so,

1:01:39

Joe. I enjoyed that

1:01:41

conversation. Um, it's nice to talk to Doug,

1:01:44

and clearly he feels very

1:01:46

passionately about a

1:01:49

lot of these topics. One thing I was

1:01:51

thinking is just how much different

1:01:53

the conversation would be right now had

1:01:55

people decided not to name dark

1:01:58

pools dark pools or to name, you

1:02:00

know, payment for order flow, payment for order flow,

1:02:02

like imagine if you had a much

1:02:04

less evocative name. Yeah,

1:02:08

all of it very evocative,

1:02:11

and like, you know, I think like it was you

1:02:13

know, he talked about his dispute with a sworking

1:02:17

and just this whole idea. I mean, I think the

1:02:19

dominant storyline that a

1:02:21

lot or at least a lot of people came away with their the

1:02:23

idea in their heads that's like payment for order

1:02:25

flows, Like they're buying your order

1:02:27

flow because like they want some information and so

1:02:30

like the Facebook model is like, well, we want your information

1:02:32

and then we're gonna sell adds against it. Where people have

1:02:34

this idea is like Citadel is like gonna

1:02:36

buy your trade and then they're gonna like make their own

1:02:38

like side beds against the trade.

1:02:41

And I think like his description that basically

1:02:44

it's like they make a margin on a trade and so

1:02:46

the broker demands or could

1:02:49

like pursue a rebate on it. It's not sexy,

1:02:52

but I think it, Uh, it makes it makes a lot of sense

1:02:54

as he describes it. Yeah, and also,

1:02:56

I mean we did a whole episode on this before.

1:02:59

But the margin requirements for trades

1:03:01

and the idea, the idea that if

1:03:03

trade flow is going all in one direction,

1:03:06

then that kind of leaves the

1:03:08

broker at risk, and for that reason

1:03:11

they would have to stop out the game

1:03:13

stock trades, for instance. I thought that was a

1:03:15

pretty clear explanation. Yeah,

1:03:17

totally. And just beside, you know, it's like obviously

1:03:20

on any given trade, they don't, you

1:03:22

know, any specific trade, they don't make much money.

1:03:24

And so like if if trading

1:03:27

is sort of noisy and uncorrelated and

1:03:29

just one like random people doing whatever, then

1:03:32

you know that's a pretty good environment. But something

1:03:34

like Game stop. It was just I mean, that story

1:03:37

took over the whole world for like a week, that's all anyone

1:03:39

was talking about. And then so it's

1:03:41

like you said this, like and that doesn't happen

1:03:44

with a single stock trade very often,

1:03:46

Like we're sort of used to crash a certain use

1:03:48

to rallies. I don't can't think of any other

1:03:51

time we're like a single stock trade captured

1:03:53

that much attention. But you could see then how

1:03:56

like all of these sort of like the algorithms

1:03:58

that they used to like put forward a price on the

1:04:00

trade kind of got complete, would

1:04:02

get completely busted. Yeah, and

1:04:05

obviously that's sort of attention. It can

1:04:07

be a good thing for businesses, you

1:04:09

know, market making businesses, um because

1:04:11

it attracts additional retail trading.

1:04:14

Or it could be a bad thing because

1:04:16

it attracts political scrutiny

1:04:18

and we get regulators who start to take

1:04:20

a look at this and decide they don't like it for

1:04:22

whatever reason. So definitely something

1:04:25

to watch. Sounds good. I'm

1:04:27

continuing to look forward to seeing where this guest.

1:04:30

I got to check out the hot dogs as

1:04:32

well. They sound good, dude, this

1:04:34

whole to be honest, the whole time during the discussion,

1:04:37

I've just been scrolling the hot dog all

1:04:39

right, Um, this has been

1:04:41

another episode of the All Thoughts Podcast.

1:04:44

I'm Tracy Alloway. You can follow me on

1:04:46

Twitter at Tracy Alloway and

1:04:48

I'm Joe Why Isn't Though. You can follow me on

1:04:51

Twitter at the Stalwart. Follow

1:04:53

our guest Doug Seafood on Twitter. He

1:04:55

is at Dougie Large and really most

1:04:57

of his tweets are about hot dogs, but maybe sometimes

1:04:59

you'll so tweet about electronic

1:05:01

market making. Follow our producer

1:05:03

Laura Carlson. She's at Laura M.

1:05:06

Carlson. Followed the Bloomberg Head of

1:05:08

Podcasts, Francesco Levi at Francesco

1:05:10

Today, and check out all of our podcasts

1:05:13

at Bloomberg under the handle at

1:05:15

podcast Thanks for listening.