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Doug Cifu

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2021-03-29
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2021-03-29
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  1. “No, not at all, not at all. So the way it works is as I tried to articulate, they have a best execution committee, right? And they have their routing protocol. Again, it's 100% always based off of how much are we willing to improve off of that MBBO. So quote unquote price improvement. 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 set it.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “They make about four or five hundred million dollars a year. Justin consolidated tape revenue. That's one of the benefits to being exchange, right? Whereas an ATS is only charging a transaction fee 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. Again, always think what the great thing about our marketplace in the US and why it's so darn efficient and why it's so damn competitive and cheap is because you have this competition.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “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 an agency broker. If I get an order from a large asset manager to buy $100,000 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, right? 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 want a choices and that's why they created these ATSs. So an exchange has public displayed market data, right? It gets quoting revenue because of that.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “And so a long time ago, back when I was a lawyer, someone said, you know what 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 go on there. There was, you know, alleged criminal activity with the specialist. You can Google all that. So the exchanges weren't all that, let's put it that way, right? And 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, an ATS. 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 Virtu. You 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...”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “If I could do my life over again, I would have renamed all these things. But putting that aside, Virtu 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 US equities market and indeed the U.S. economy is competition.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Correct because that's the only difference between an exchange and a dark pool, the marketplace is terrible at naming things, right? A dark pool sounds like this nefarious thing.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “That the market maker is willing and able to improve the national best bid and best offer. Just to give you a statistic which is pretty compelling, in twenty twenty, the five or six of us, the market making firms, in the aggregate provided price improvement, so prices better than the MBBO in an aggregated amount of three point seven billion dollars. So that means a retail investor in general, right, is getting a price that is better than what they could get on a national securities exchange, right? And so that's why they rout us those orders, right? Payment waterfall is a separate thing. We'll talk about that in a 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? Do you want me to just keep going?”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “Tesla at that moment in time. 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 market maker 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 Vertu 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.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “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 Zeco Trade, A to Z 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. 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?”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “Yes, we're all competing for that order flow from roughly two hundred retail brokers, wealth managers, excuse me, aggregators of flow, et cetera.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “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, Robinhood, Fidelity, Schwab, E-Trade, which is now Morgan Stanley, but also Stiefel, Raymond James, JP Morgan 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 market maker. 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 to Sigma, UB.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “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...”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “Maybe you've heard of the CBOE stock exchange, but then there's 10 other ones, including the members exchange, which I help start at Virtu, 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 us 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”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Yeah, sure. So in U.S. equities, think of it where 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.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “Last year, we generated about $2.3 billion of net trading revenue, and that equated to roughly about $1,655 of EBITDA, so adjusted EBITDA. So we're a pretty large financial services firm. That's what we do.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “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 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 futures and in commodity products and 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 Virtu does. And we also threw 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. I'm the CEO of it. We got about 1,000 employees.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “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. He was a futures trader. And Vinny was smart enough to realize that 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 Virtu 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 know, 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 Virtu. 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.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “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 of the New York Mercantile Exchange. His name was Vinnie Viola. He was an old school market maker, stood in the middle of a pit, and a bunch of guys screamed orders at him and he tried to make.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “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 Feltmans, 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, to date, I have not had any negative comments.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “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 hockey fans for the most part are favorable nice people. But then you get the 5% of the keyboard warriors and they started to be abusive towards me. So I stopped tweeting about hockey to said, I don't know how 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.”

    2021-03-29 · Odd Lots · Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT · IDENTIFIED FROM THE TRANSCRIPT · source