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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn't all Joe? Do

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Speaker 1: you remember Game Stop? No? What was that? Tracy? I

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Speaker 1: forgot game stuff? Sorry, not not familiar with it. You know,

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Speaker 1: one of the most remarkable things about that whole episode

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Speaker 1: was that, for a brief, glorious moment in time, everyone

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Speaker 1: was talking about market structure and things like payment for

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Speaker 1: order flow, dtc C collateral like that was a discussion

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Speaker 1: that you could actually have in mainstream media and sort

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Speaker 1: of with your average person on the street. Yes, but

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Speaker 1: I mean those conversations were in many cases deeply missing formed.

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Speaker 1: So it is true that there was a lot of

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Speaker 1: talk about market structure and payment for order flow and

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Speaker 1: the dtc C and all that, and I actually did

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Speaker 1: learn stuff, but there was a lot of noise of

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Speaker 1: people who, like you know, spinning conspiracy theories about all

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Speaker 1: this stuff hyprequency trading, how it really worked. Um, So

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Speaker 1: hopefully people learn something, But I also suspect a lot

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Speaker 1: of people went away from that whole episode unless they

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Speaker 1: listen to lots of course much less in form Look,

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Speaker 1: I'll take what I can get when it comes to

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Speaker 1: getting people like interested in market structure. But I think

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Speaker 1: you're right. I think probably especially on the payment for

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Speaker 1: order flow subject, because it sounds kind of nefarious. You know,

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Speaker 1: why would someone pay you for trade order flow? They

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Speaker 1: must want something, they must be doing something with the information.

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Speaker 1: I think it tends to lead to you know, a

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Speaker 1: lot of suspicion. Yeah, I think that term in particular,

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Speaker 1: you nailed it. There's something about that term that like

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Speaker 1: invites a lot of sort of conspiratorial thoughts. Yeah, exactly.

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Speaker 1: And of course we saw that really ramp up during

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Speaker 1: the game's top drama. We even saw Congress start to

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Speaker 1: you know, they had an inquiry into payment for order flow.

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Speaker 1: The concern is that high frequency traders are somehow profiting

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Speaker 1: off of that order flow in a way that hurts

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Speaker 1: retail investors. And of course Robin Hood uses Citadel as

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Speaker 1: its market maker, so we saw Citadel in the news

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Speaker 1: as well. Citadel is uh one of its market makers. Uh,

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Speaker 1: I think, so, which is something we'll get into. It's

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Speaker 1: like all these a lot. I mean, I've been sort

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Speaker 1: of like spending the weekend looking at some of these

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Speaker 1: stats that the brokers phase and I have lots of

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Speaker 1: questions about that. Um, so who are what are we

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Speaker 1: going to talk about? How are we going to get

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Speaker 1: into this? Okay, so today we are going deep into

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Speaker 1: the payment for order flow discussion, and we're also going

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Speaker 1: to talk more broadly about what exactly a market maker

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Speaker 1: actually does. We have the perfect person to talk about

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Speaker 1: all this. We have the CEO of Virtue, Doug Si. Welcome, Duve. Hello,

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Speaker 1: how are you guys doing? Hey, We're good. Thanks. Um,

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Speaker 1: maybe to begin with, we should kind of go straight

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Speaker 1: to the elephant in the room and talk about something

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Speaker 1: very very serious. But what's up with the hot dogs?

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Speaker 1: So on your Twitter account you seem to talk a

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Speaker 1: lot about hot dogs? What's going on? Well, I resent

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Speaker 1: the elephant in the room analogy. I'm a bigger guy

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Speaker 1: and my Twitter handle is Dougie Large. So, against my

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Speaker 1: better judgment, about ten years ago, I opened a Twitter

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Speaker 1: account and then my partner I bought a hockey team

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Speaker 1: and I started tweeting about hockey. And you know, hockey

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Speaker 1: fans for the most part are favorable, nice people, but

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Speaker 1: then you get to five percent of the keyboard warriors

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Speaker 1: and it started to be abusive towards me. So I

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Speaker 1: stopped tweeting about hockey to said, don't tell I'm talking

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Speaker 1: about And I happen to run, as you say, a

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Speaker 1: quote unquote high frequency trading firm. And in two thousand fourteen,

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Speaker 1: there was this little book called flash Boys that came

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Speaker 1: out and dark pools and all these nefarious sounding terms,

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Speaker 1: and people started tweeting me like I was a criminal.

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Speaker 1: And I said, okay, well that's not a good topic.

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Speaker 1: I guess I'll stop doing that. And then I found

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Speaker 1: the one universal in this country that nobody can say

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Speaker 1: anything negative about. It's the great American hot dog. And

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Speaker 1: there's a company called Feltman's which is founded by two

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Speaker 1: great veterans from West Point, and they rediscovered the original

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Speaker 1: cone Allan hot dog and they're fantastic. They've got the

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Speaker 1: perfect mix of spices and they kind of pop when

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Speaker 1: you eat them. And I decided, Okay, if I get

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Speaker 1: behind these guys, I have no financial interest. I just

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Speaker 1: love them. They're great Americans and they have a great

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Speaker 1: hot dog. I said, there's not a chance people can

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Speaker 1: give me grief about tweeting about hot dogs. And you know,

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Speaker 1: I have not had any negative comments. These these look

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Speaker 1: really good. I'm on their website right now, and I'm

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Speaker 1: definitely going to mustard get the mustard. Also, trust me,

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Speaker 1: when I tied the mustard better than like a sell,

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Speaker 1: I put it on everything. I put on everything. I'm

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Speaker 1: definitely gonna order or something. I know market making. I

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Speaker 1: know market making and eating. Those are the two things

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Speaker 1: I'm an expert in. Maybe we should also talk about

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Speaker 1: market making though, if you insist, So what is H two?

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Speaker 1: So I just give us the sort of brief version

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Speaker 1: of its history and what how it fits into the

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Speaker 1: sort of market ecosystem. Sure, sure, So we started in

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Speaker 1: two thousand eight, Beril even or not. My partner was

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Speaker 1: an old school market maker. He was in the pits,

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Speaker 1: you know those trading pits, remember the movie Trading Places

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Speaker 1: of the New York of the New York Mercantile Exchange.

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Speaker 1: His name was Vinny Viola. He was an old school

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Speaker 1: market maker. Stood in the middle of the pit and

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Speaker 1: a bunch of guys screamed orders at him, and he

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Speaker 1: tried to make what is known as the bid offer,

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Speaker 1: spread the difference between what a willing buyer and a

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Speaker 1: willing seller we're willing to pay. In that in that pit,

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Speaker 1: he was trading mostly like crude and gasoline futures, right,

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Speaker 1: So he was a futures trader. And Vinny was smart

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Speaker 1: enough to realize that two odd guys standing in a

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Speaker 1: circular pit screaming at each other making funny hand signals

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Speaker 1: wasn't not going to be the end state of financial intermediation,

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Speaker 1: price discovery, trading, whatever you want to call it, and

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Speaker 1: that technology was going to evolve that process. And so

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Speaker 1: that was his thought behind forming Virtue Financial. I was

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Speaker 1: a lawyer, very happily at a l offer him in

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Speaker 1: Manhattan called Paul Weis. For eighteen years I was his lawyer,

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Speaker 1: and he said said to me one day, you know

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Speaker 1: you'd be a hell of a businessman. Do you ever

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Speaker 1: think about quitting being a lawyer? I said, not until now,

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Speaker 1: and then I quit and we started Virtue and our

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Speaker 1: idea was to be a very large scaled, automated financial

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Speaker 1: intermediary market making firm that would try to be the

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Speaker 1: best bid and the best offer in every electronic marketplace

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Speaker 1: in the world. We had a very ambitious goal and

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Speaker 1: obviously we're we're more well known as you guys indicated

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Speaker 1: in your lead in for US equities and being a

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Speaker 1: what's called a wholesale market maker, but we make markets

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Speaker 1: in over two d and fifty different marketplaces in the world,

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Speaker 1: in global equities, but also in f X, and in

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Speaker 1: treasury futures, and in commodity products and medals and corn, sugar, cocoa,

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Speaker 1: you name a product that is trade electronically in a

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Speaker 1: venue in the world. Frankly, where there's enough need for liquidity,

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Speaker 1: provider a market maker, and that's what Virtue does. And

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Speaker 1: we also, through an acquisition, have a very large agency

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Speaker 1: business where we act as an agent for clients that

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Speaker 1: want to access generally the global equities market. So it's

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Speaker 1: a pretty large scaled global financial services firm. On the

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Speaker 1: CEO of it, we've got about a thousand employees twelve

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Speaker 1: offices around the world and last year we generated about

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Speaker 1: two point three billion dollars of net trading revenue and

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Speaker 1: that equated to roughly about a billion six five of

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Speaker 1: of IBADA so adjusted EBADA. So we're pretty large financial

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Speaker 1: services firm. That's what we do. Not bad. Yeah, I

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Speaker 1: think your stock is up quite a lot as well.

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Speaker 1: And you're the only publicly traded market maker over in

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Speaker 1: the US, so you have that distinction too. That is correct.

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Speaker 1: Just on the market making business. Could you maybe talk

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Speaker 1: to us a little bit more about that. I think

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Speaker 1: we throw this term around quite a lot, like, oh,

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Speaker 1: they make markets and whatever, But can you talk to

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Speaker 1: us about what exactly that entails and why don't we

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Speaker 1: narrow it down to US equities? Yeah? Sure, so in

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Speaker 1: US equities, think of it. There's two forms of market making,

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Speaker 1: if you will, that we engage in. So right now,

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Speaker 1: believe it or not, there are fifteen national securities exchanges.

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Speaker 1: You you probably know NASDAC in New York, but there's

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Speaker 1: another thirteen i E actually may have heard of. Maybe

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Speaker 1: you've heard of the cbo E Stock Exchange. But then

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Speaker 1: there's you know a ten or other ones, including the

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Speaker 1: Members Exchange, which I helped start at Virtue, you know

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Speaker 1: those kinds of things. And so we are a firm

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Speaker 1: that does not really care about directional risk. In other words,

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Speaker 1: we're not a hedge fund. We're not speculating. We're not

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Speaker 1: buying Tesla at at six hundred hoping it goes to

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Speaker 1: eight hundred. Really, what we're trying to do is be

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Speaker 1: the guy that's on the inside that's willing to buy

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Speaker 1: from you and sell to you, right and sell to

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Speaker 1: somebody else to try to make that little penny spread

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Speaker 1: every single time. So are holding time in most of

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Speaker 1: the top five names of US equities you know will

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Speaker 1: be hopefully a few seconds or less than a second, right,

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Speaker 1: because the likelihood that a willing buyer and a willing

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Speaker 1: seller come together at exactly the same moment in time

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Speaker 1: is pretty diminimous. It's sort of like if you think

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Speaker 1: about the Civil War, the Revolution I wore two bullets

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Speaker 1: meeting in the middle of the air. It doesn't happen

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Speaker 1: all that often. So you need a company that is

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Speaker 1: willing enable, has the financial resources, but also understands those

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Speaker 1: The US equities market, with fifteen national securities exchanges and

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Speaker 1: forty different dark pools and a bunch of other brokers,

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Speaker 1: it's a very fragmented market. So stitching together that marketplace

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Speaker 1: takes a lot of financial technology and a lot of investment.

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Speaker 1: We invest hundreds of millions of dollars every year to

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Speaker 1: have technology that's able to understand and stitch that marketplace together.

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Speaker 1: But again, the difference between what we do and when

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Speaker 1: a lot of other other firms do, like quote unquote

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Speaker 1: high frequency trading firms, is that we are a passive

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Speaker 1: market maker. We're always entering the market by saying, here

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Speaker 1: we go. We're willing to sell you something at ten,

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Speaker 1: we're willing to buy it at nine, and there's a

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Speaker 1: penny spread in between, and we hope to collect that.

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Speaker 1: More often than not, a lot of times we get

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Speaker 1: run over and we lose money. You mentioned game stop before.

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Speaker 1: I'm sure we'll talk about that plenty. But in the

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Speaker 1: game stop situation, when the markets just crashing one way

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Speaker 1: or together, the market maker pretty much gets its face

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Speaker 1: ripped off right. It's on the train tracks, the trains coming,

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Speaker 1: and it can't get out of the way. The other

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Speaker 1: thing we do, which I'm sure you want to talk

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Speaker 1: a lot about, is what we call whole selling. So

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Speaker 1: there are these institutions called retail brokers, wealth managers. You

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Speaker 1: know robin Hood, Fidelity, Schwab e Trade which is now

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Speaker 1: Morgan Stanley, but also Stifle, Raymond, James, JP, Morgan Asset Management,

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Speaker 1: RBC Wealth Management. Think of any aggregator of high net

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Speaker 1: worth or professional trading flow. In the United States. We

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Speaker 1: have this unique structure that those institutions have a choice.

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Speaker 1: They can send their orders, their market orders right to

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Speaker 1: either in exchange to a dark pool, or they can

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Speaker 1: send it to a whole sell or a market maker.

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Speaker 1: Citadel is the largest retail market maker. We're number two.

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Speaker 1: They've got roughly the market we've got roughly. And then

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Speaker 1: there's a handful of other institutions, Susquehanna too, Sigma Ubs,

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Speaker 1: We're all competing for that order flow from roughly two

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Speaker 1: hundred retail brokers, wealth managements, wealth managers, excuse me, aggregators

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Speaker 1: of flow, etcetera. So you just named a bunch of

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Speaker 1: market makers that you compete with, and I'm wondering, when

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Speaker 1: it comes to something like market making, it sounds like

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Speaker 1: such a basic function. You know, you're matching up buyers

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Speaker 1: with sellers and you're taking a small cut of the transaction.

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Speaker 1: What is competing or what does competition actually look like

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Speaker 1: in that scenario? Like what what makes Virtuo special or

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Speaker 1: different to say Citadel or Susquehanna. Yeah, that's a great question.

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Speaker 1: So I should have actually, uh explained that better. So

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Speaker 1: let's go back to the two hundred institutions we we

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Speaker 1: we that I mentioned before, right, everybody from a Merror

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Speaker 1: trade to Zecho Trade eight Z and everybody in between.

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Speaker 1: Every single one of those institutions has the best Best

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Speaker 1: Execution committee, And what they're measuring is there's something called

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Speaker 1: a national best bid and best offers. So that's the

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Speaker 1: consolidated tape. You take those fifteen national securities exchanges and

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Speaker 1: you say, okay, at any moment in time, right, for

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Speaker 1: at least a hundred shairs, what's the what's the best

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Speaker 1: price that someone is willing to sell in the best

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Speaker 1: price that someone is willing to buy a particular security.

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Speaker 1: That's called the n b B Okay. And so every

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Speaker 1: one of those retail brokers gets the same feed, right,

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Speaker 1: the same consolidated feed that we do, right, and they

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Speaker 1: all measuring at the time that they send us a

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Speaker 1: market order. Right, you want to buy a hundred shares

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Speaker 1: of Tesla, what was the national best offer for Tesla

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Speaker 1: at that moment in time? Okay. What we do as

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Speaker 1: marketmakers is we try to improve that national best bid

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Speaker 1: or best offer. That's called price improvement or e Q.

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Speaker 1: And as you mentioned in your in your lead in,

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Speaker 1: all of the statistics around price improvement are publicly available,

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Speaker 1: and so the brokers have their own routing statistics where

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Speaker 1: they measure our execution quality, the ability for the market

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Speaker 1: maker to improve off of the n b b O

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Speaker 1: and to the extent and to the amount we're willing

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Speaker 1: to do so, they will send us order flow. Now,

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Speaker 1: obviously they don't send their order flow to Citadel or

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Speaker 1: two vertuur to Susquehanna. But and they don't do it

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Speaker 1: all as one big bucket. Sometimes they do it by

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Speaker 1: different names, depending upon a DV, depending upon volume. They

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Speaker 1: all have their own unique routing methodologies. But every single

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Speaker 1: one of them is based off the the amount that

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Speaker 1: the market maker is willing and able to improve the

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Speaker 1: national best bid and best offer. Just to give you

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Speaker 1: some statistic which is pretty compelling, in two thousand and twenty,

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Speaker 1: the five or six of us the market making firms

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Speaker 1: in the aggregate provided price improvement, So prices better than

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Speaker 1: the n b b O in an aggregate amount of

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Speaker 1: three point seven billion dollars. Right, So that means a

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Speaker 1: retail investor in general, right, is getting a price that

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Speaker 1: is better than what they could get on a national

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Speaker 1: securities exchange. Right. And so that's the that's why they

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Speaker 1: rout us those orders. Right. Payment for wonder face a

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Speaker 1: separate thing. We'll talk about that in a second. But

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Speaker 1: two d Odd Brokers are saying, hey, you can provide

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Speaker 1: better execution quality than we can get on an exchange.

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Speaker 1: And the natural question you're about to ask me is

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Speaker 1: why would you like to ask that question? You want

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Speaker 1: me to just keep going. I just want to back

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Speaker 1: up real quickly. I just want one I got. I

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Speaker 1: got on a roll sometimes and I talked forever, so

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Speaker 1: I'll try to stop for you. Guys. This is great.

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Speaker 1: It's our job to stop you, but this is super helpful.

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Speaker 1: I just one. So the NBBO it's purely exchange price

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Speaker 1: correct because that's the only the difference between exchange and

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Speaker 1: a dark pool. Right. You know, the marketplace is terrible

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Speaker 1: at naming things, right, A dark pool sounds like this

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Speaker 1: nefarious thing, and also it's a flash trade. I know,

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Speaker 1: if I could do my life over again, I would

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Speaker 1: have renamed all these things. But putting that aside, virtue

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Speaker 1: is named for virtue, right, we try to be virtuous

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Speaker 1: to the market, so we at least have a nice name.

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Speaker 1: So what a dark pool is? It's actually technically it's

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Speaker 1: called an a t S or an alternative trading system,

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Speaker 1: the lynchpin of the U S equities market. And indeed,

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Speaker 1: you know, the U S economy is competition, right, and

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Speaker 1: so a long time ago, back when I was a lawyer,

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Speaker 1: if someone said, you know what these exchanges and it

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Speaker 1: was really just the New York Stock Exchange until let's

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Speaker 1: say the early nineties. They have a monopoly, they're really expensive.

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Speaker 1: Bad things go on there. There was you know, alleged

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Speaker 1: criminal activity with the specialist. You can google all that.

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Speaker 1: So the exchanges weren't all that, let's put it that way, right,

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Speaker 1: and they were, you know, it was kind of a

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Speaker 1: private boys club, if you will. And so a bunch

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Speaker 1: of banks and other broker said, we want to be

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Speaker 1: able to create an alternative trading system and a t S.

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Speaker 1: So the SEC has REGGAETS and it basically says, if

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Speaker 1: you want to be a place where people are sending orders, right,

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Speaker 1: as long as you don't have more than five of

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Speaker 1: the market in a particular name, you can do that.

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Speaker 1: You have to publish your rules. We run to a

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Speaker 1: t S is at Virtue. You've got to publish your rules,

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Speaker 1: but you cannot display market data. Okay, so it has

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Speaker 1: to be quote unquote dark. That's why people call them

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Speaker 1: dark pools. So people brokers right can rest orders in

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Speaker 1: an A T S with the safety and security that

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Speaker 1: they know that that they're not exposing large size to

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Speaker 1: the rest of the world. Why don't people like to

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Speaker 1: trade on exchanges is because the entire world knows, Like

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Speaker 1: you know, I'm an agency broker. If I get in

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Speaker 1: order from a large asset manager to buy a hundred

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Speaker 1: thousand shares a Tesla and I just post that on

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Speaker 1: an exchange. Now the entire world knows that there's a

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Speaker 1: giant whale out there that wants to buy a hundred

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Speaker 1: thousand shares a tesla. What's going to happen to the market? Right?

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Speaker 1: You can imagine people will change the risk that they

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Speaker 1: see in that market because they know that there's a

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Speaker 1: huge imbalance, right. And so that's one of the reasons

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Speaker 1: why investors, broker a smart folks in the marketplace wanted choices,

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Speaker 1: and that's why they created these A T s s. Right. So,

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Speaker 1: an exchange has public displayed market data, right, it gets

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Speaker 1: quoting revenue because of that they make it. They make

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Speaker 1: about four or five million dollars a year justin consolidated

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Speaker 1: tape revenue. That's one of the benefits to being exchange, right,

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Speaker 1: Whereas an a TS is only charging a transaction fee, right,

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Speaker 1: and orders etcetera are executed quote unquote in the dark,

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Speaker 1: and that's why people call them dark pools. There's nothing

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Speaker 1: to various about them. It's just an alternative method. Again,

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Speaker 1: always think what what the great thing about our marketplace

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Speaker 1: in the US and why it's it's so darn efficient

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Speaker 1: and why it's so damn competitive and cheap is because

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Speaker 1: you have this competition. So I want to esca follow up.

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Speaker 1: You know, all of the I was doing a little

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Speaker 1: trying to learn a little bit to prepare for the

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Speaker 1: for this discussion. And so I see all of the

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Speaker 1: brokerages are the retail brokerages or I guess everyone follows

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Speaker 1: the six files, these Form six or six. We're they

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Speaker 1: talk about the market makers to whom they're routing orders

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Speaker 1: and they helpfully sort of like basically break down their

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Speaker 1: market share and so for eat, So for example, robin

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Speaker 1: Hood in the last quarter, it looked like almost their

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Speaker 1: shares went through Citadel Virtue looks like got a little

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Speaker 1: bit under. What determines how a broker allocates its routing

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Speaker 1: is it is every trade its own discrete auction of

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Speaker 1: and you're all competing for it. There like, how does

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Speaker 1: this process work? No, not at all, not at all.

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Speaker 1: So the way it works is, as I try to articulate,

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Speaker 1: they have a best execution committee, right, and they have

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Speaker 1: their routing protocol. Again, it's always based off of how

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Speaker 1: much are we willing to improve off of that m

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Speaker 1: B B oh so quote unquote price improvement um. And

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Speaker 1: so in the beginning of the month. Quarter some brokers

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Speaker 1: do it weekly, but it's not daily, and it's certainly

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Speaker 1: not by symbol, right, there's just way too many orders

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Speaker 1: for every thing to be an individual auction. So they

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Speaker 1: said it in the beginning of the week. Let's say

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Speaker 1: at the beginning of the month. Every broker's got their

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Speaker 1: own rule and they say, okay, in the prior period, right,

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Speaker 1: so it's you know, we're now in March. So in February, Virtue, Citadel,

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Speaker 1: Susquehanna too, Sigma. I don't know who else is in

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Speaker 1: you know, Ubs, Wolverine right there, five or six firms

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Speaker 1: we all bashed, we bashed our heads against you know,

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Speaker 1: each other, and for you know, every broker's got a

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Speaker 1: different way of looking at it. But for the top

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Speaker 1: five hundred names that are in the snph. Here's the

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Speaker 1: aggrega amount of price improvement. And Citadel came in first place,

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Speaker 1: right because they provided forty two points of EQ. It's

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Speaker 1: all measured off of the mid of the mid So

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Speaker 1: how much are you willing to improve off of the

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Speaker 1: midpoint between the bid and the offer? And Virtue came

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Speaker 1: in second place, Susquehanna third, two sigma, etcetera. So this therefore,

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Speaker 1: in the month of March, right, we're gonna give Citadel

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Speaker 1: for Virtue Susquehanna twelve percent, etcetera. During the measurement period,

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Speaker 1: whether it's a eeker a month, we're in constant dialogue

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Speaker 1: with them. They will say, hey, look, you're doing really

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Speaker 1: well in the top five indet names, but you're really

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Speaker 1: doing poorly in the bottom thousand names. Can you improve

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Speaker 1: your EQ? So they're always, you know, trying to get

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Speaker 1: us to frankly, provide more value back to their their clients.

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Speaker 1: And if you watch TV, and I'm not going to

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Speaker 1: name the network because it's a competing network, there's actually

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Speaker 1: one of the really really large brokers. There's two dudes

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Speaker 1: sitting having lunch and one guy shows him his little

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Speaker 1: iPhone and says, well, you know, look at the execution

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Speaker 1: quality I got, and he buys, and he saved twelve

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Speaker 1: dollars and ninety three cents, and he pays for the

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Speaker 1: grill cheese sandwich at lunch. Right, they must be in

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Speaker 1: like not in New York because the grill cheese would

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Speaker 1: cost more. But that that's is literally that's what we do, right,

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Speaker 1: So think about how important it is that an advertising

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Speaker 1: agency for one of the largest retail brokers in the world. Right,

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Speaker 1: that's an American institution. I'm not going to name their name.

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Speaker 1: You can think of the commercial right, they are spending

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Speaker 1: money advertising the word that Citadel, virtue, sus behind, etcetera.

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Speaker 1: Do I think about how ingrained that is in the system,

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Speaker 1: and then juxtaposed that against the frankly lunacy that people

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Speaker 1: were articulating about Robin Hood and Citadel. It's just, you know,

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Speaker 1: that's why I watched Late January and my my job

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Speaker 1: was like hitting the table and thinking, my god, these

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Speaker 1: people have no idea what the hell they're talking about.

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Speaker 1: You know, it's such an important part of the ecosystem,

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Speaker 1: and it's so ingrained, and it's so valuable that one

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Speaker 1: of the largest American financial institutions. You think so much

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Speaker 1: of it that it advertised it that this as as

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Speaker 1: like a service, right. I apologize for my voice changing there,

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Speaker 1: but it's like the the the juxtaposition of the two

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Speaker 1: was just so amazing. Here I am watching, you know,

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Speaker 1: the anchors on that network who don't have a clue

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Speaker 1: what the hell they're talking about. If you follow my

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Speaker 1: Twitter account, I actually tweeted one of them and told

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Speaker 1: him that, and then he had me on the I

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Speaker 1: saw you you tweeted your personal phone number. That seemed

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Speaker 1: kind of risky. Well not really, you know, I got

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Speaker 1: not and a hide and he was so naive. I'll

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Speaker 1: be nice about what he was saying. It was it

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Speaker 1: was embarrassing, I thought, and I told him as much. Anyhow,

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Speaker 1: so I will get off my soapbox and allow you

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Speaker 1: to continue. Well, so why don't we get over to

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Speaker 1: the GameStop phenomenon, and maybe just to begin, I'll ask

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Speaker 1: a sort of broad question. So how much did the

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Speaker 1: shift to a no commission trading model and the sort

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Speaker 1: of boom in retail stock trading that we've seen over

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Speaker 1: the past year, Like, how much of a difference did

427
00:22:31,760 --> 00:22:35,040
Speaker 1: that make for your business? Yeah? Look, I mean, it

428
00:22:35,119 --> 00:22:37,200
Speaker 1: was huge. I mean, and again thank you for noting

429
00:22:37,280 --> 00:22:39,720
Speaker 1: it really was the zero commission phenomena and that that

430
00:22:39,880 --> 00:22:42,480
Speaker 1: was a long time coming. Right. There was a whole

431
00:22:42,520 --> 00:22:46,959
Speaker 1: bunch of regulatory changes in two thousand five, you know, decimalization, right,

432
00:22:47,040 --> 00:22:51,040
Speaker 1: so spreads narrowed, technological advances, you know, give a lot

433
00:22:51,119 --> 00:22:53,199
Speaker 1: of give a shout out to all of the pioneers

434
00:22:53,280 --> 00:22:56,040
Speaker 1: and guys that started a merry trade and e trade

435
00:22:56,080 --> 00:22:59,680
Speaker 1: in etcetera, etcetera. Um Robin Hood, Uh, you know, was

436
00:22:59,800 --> 00:23:03,640
Speaker 1: the zero commission broker. I believe they started I think

437
00:23:03,680 --> 00:23:06,480
Speaker 1: in two thousand fifteen, and I knew at some point

438
00:23:06,720 --> 00:23:11,000
Speaker 1: the incumbents, obviously you know, Schwab, Fidelity, E Trade, etcetera,

439
00:23:11,480 --> 00:23:13,680
Speaker 1: would have to match that pricing, and they did and

440
00:23:13,760 --> 00:23:16,560
Speaker 1: that happened in November two right. So that was like

441
00:23:16,680 --> 00:23:20,320
Speaker 1: sort of the the Kuda gra of a long period

442
00:23:20,359 --> 00:23:23,240
Speaker 1: of technology and evolution, you know. And then on top

443
00:23:23,280 --> 00:23:25,960
Speaker 1: of that, you know, the pandemic hits right, work from home.

444
00:23:26,280 --> 00:23:30,399
Speaker 1: You know, there's no sports betting, you know what, the Tesla.

445
00:23:30,640 --> 00:23:33,440
Speaker 1: There's a whole bunch of other factors right that led

446
00:23:33,480 --> 00:23:35,760
Speaker 1: into it. It really was a zero commission phenomenon. So

447
00:23:35,840 --> 00:23:39,080
Speaker 1: if you think about retail trading as the percentage of

448
00:23:39,119 --> 00:23:41,280
Speaker 1: the US equities market, it went from called it like

449
00:23:41,400 --> 00:23:44,639
Speaker 1: fifteen percent. Two is high on some days as like,

450
00:23:45,680 --> 00:23:48,080
Speaker 1: So that is a meaningful increase. It's kind of settled

451
00:23:48,560 --> 00:23:52,840
Speaker 1: somewhere between twenty two and of the overall US equity market.

452
00:23:52,880 --> 00:23:56,960
Speaker 1: But this is a very important and as was demonstrated

453
00:23:57,000 --> 00:24:00,800
Speaker 1: in late January, a powerful segment of the marketplace, and

454
00:24:01,200 --> 00:24:04,359
Speaker 1: so it needs to be understood and reckoned with and

455
00:24:05,240 --> 00:24:07,239
Speaker 1: the regulators obviously we'll look at all this, but at

456
00:24:07,280 --> 00:24:09,359
Speaker 1: the end of the day, you've seen a systemic shift

457
00:24:10,160 --> 00:24:13,000
Speaker 1: in the US equity market. I will say, because we're

458
00:24:13,000 --> 00:24:16,000
Speaker 1: a global market maker, this is not unprecedented. You know,

459
00:24:16,040 --> 00:24:18,280
Speaker 1: if you travel over to Japan, where we have we

460
00:24:18,359 --> 00:24:20,320
Speaker 1: do a lot of business. You know, we have a

461
00:24:20,359 --> 00:24:24,520
Speaker 1: partnership with SBI Securities where we do something similar in

462
00:24:24,680 --> 00:24:26,960
Speaker 1: terms of being a retail market maker, and over there,

463
00:24:27,520 --> 00:24:29,560
Speaker 1: you know, retail is a big part of market. You

464
00:24:29,600 --> 00:24:32,680
Speaker 1: know that people have their smartphones and they're trading all

465
00:24:32,760 --> 00:24:34,960
Speaker 1: the time, and not just equities. I mean they're trading

466
00:24:34,960 --> 00:24:38,600
Speaker 1: again futures they trade, you know, the SMP futures, they trade,

467
00:24:38,640 --> 00:24:42,960
Speaker 1: the Russell you know. So this this shift is important

468
00:24:42,960 --> 00:25:00,879
Speaker 1: and systemic, but it's not without global precedent. Can we

469
00:25:01,280 --> 00:25:04,680
Speaker 1: go back you you mentioned the term payment for order flow,

470
00:25:04,760 --> 00:25:08,280
Speaker 1: and it's scary and people don't understand it. It is

471
00:25:08,280 --> 00:25:10,360
Speaker 1: an ominous sounding term andent. But I do think it's

472
00:25:10,400 --> 00:25:12,360
Speaker 1: like one of the things in this whole game Stop

473
00:25:12,480 --> 00:25:15,560
Speaker 1: story that people got super confused about. Why would you

474
00:25:16,040 --> 00:25:18,120
Speaker 1: pay for order flow? What? What is it so value

475
00:25:18,160 --> 00:25:21,040
Speaker 1: about about my five tesla trade on robin note that

476
00:25:21,080 --> 00:25:23,600
Speaker 1: you'd pay for it? Yeah, exactly, We're waiting for your trade,

477
00:25:23,840 --> 00:25:25,800
Speaker 1: just tell me when it's coming. So let let me

478
00:25:25,840 --> 00:25:27,439
Speaker 1: take a step back. So before I mentioned there were

479
00:25:27,480 --> 00:25:30,560
Speaker 1: two hundred odd retail brokers, wealth managers, etcetera. Right, and

480
00:25:30,720 --> 00:25:32,960
Speaker 1: those are our clients, and Citadel's got you know, a

481
00:25:33,040 --> 00:25:35,600
Speaker 1: similar bunch. It's not just US institutions, by the way,

482
00:25:35,640 --> 00:25:39,000
Speaker 1: there's Canadian and European wealth managers. They're sending us orders

483
00:25:39,040 --> 00:25:42,600
Speaker 1: and getting guaranteed execution along the eCos you know, in

484
00:25:42,640 --> 00:25:45,399
Speaker 1: the ecosystem I described to you earlier. So of that

485
00:25:46,080 --> 00:25:50,879
Speaker 1: two hundred eye brokers, there's roughly ten that's say, okay,

486
00:25:51,520 --> 00:25:54,720
Speaker 1: in addition, in addition, that's the key to price improvement.

487
00:25:55,200 --> 00:25:58,040
Speaker 1: We want you to pay us a rebate, okay, and

488
00:25:58,240 --> 00:26:01,920
Speaker 1: so effectively, and that rebate is going to be set.

489
00:26:02,280 --> 00:26:05,080
Speaker 1: There's not an auction right there, not routing flow because

490
00:26:05,080 --> 00:26:07,600
Speaker 1: Citadel is willing to pay a couple of pennies more

491
00:26:07,640 --> 00:26:10,600
Speaker 1: than virt two. It's set and it's in stone. So

492
00:26:10,960 --> 00:26:13,639
Speaker 1: there are some brokers. Let's say give us ten mills, right,

493
00:26:13,720 --> 00:26:15,320
Speaker 1: ten ten cents per d. I don't want to be

494
00:26:15,359 --> 00:26:18,320
Speaker 1: two technical. Others say eighteen per hundred, whatever it is,

495
00:26:18,520 --> 00:26:21,800
Speaker 1: And that goes into our calculation of how much value

496
00:26:21,840 --> 00:26:24,640
Speaker 1: are we willing to provide back to the broker from

497
00:26:24,680 --> 00:26:27,320
Speaker 1: our perspective, from the virtual perspective, I imagine City on

498
00:26:27,400 --> 00:26:30,040
Speaker 1: the other competitors look at it the same way. We're Switzerland.

499
00:26:30,440 --> 00:26:34,240
Speaker 1: There is value to us as the market maker in

500
00:26:34,400 --> 00:26:37,879
Speaker 1: extracting the bidden offer. Really, what we're doing is, you know,

501
00:26:38,080 --> 00:26:41,399
Speaker 1: if Tesla is a nickel wide in the marketplace, we

502
00:26:41,600 --> 00:26:44,959
Speaker 1: think we can narrow that spread, maybe by a halfpenny,

503
00:26:45,000 --> 00:26:48,040
Speaker 1: maybe by a penny. Right, because we're really good, and

504
00:26:48,240 --> 00:26:50,280
Speaker 1: we're really good, We've invested a lot of money in it.

505
00:26:50,400 --> 00:26:54,000
Speaker 1: And because your order and literally the hundreds of thousands

506
00:26:54,040 --> 00:26:56,680
Speaker 1: of other orders that we're getting are smaller in size,

507
00:26:56,720 --> 00:26:58,800
Speaker 1: so they're not going to move the marketplace. Right, they're

508
00:26:58,800 --> 00:27:02,359
Speaker 1: not big institutional orders, and they tend emphasis on the

509
00:27:02,480 --> 00:27:06,679
Speaker 1: tend not to be correlated with the remainder of the marketplace. Right,

510
00:27:06,800 --> 00:27:09,760
Speaker 1: because the theory is, Hey, Joe is a retail investor.

511
00:27:09,840 --> 00:27:12,720
Speaker 1: He's gonna trade five times a day, five times a month,

512
00:27:12,840 --> 00:27:14,800
Speaker 1: whatever it is. He's going to buy his hundred shares.

513
00:27:15,160 --> 00:27:17,639
Speaker 1: He's gonna push his little button. He's gonna want to

514
00:27:17,680 --> 00:27:20,280
Speaker 1: buy a market buy a hundred shares of Tesla at

515
00:27:20,320 --> 00:27:22,840
Speaker 1: the market, and he's gonna hold it for six months,

516
00:27:22,880 --> 00:27:25,640
Speaker 1: a year, three months, and whether he buys it at

517
00:27:26,240 --> 00:27:28,959
Speaker 1: you know, ten, or we're gonna slightly price improvement, Joe

518
00:27:29,040 --> 00:27:32,880
Speaker 1: doesn't really care, but we care a lot. So you're

519
00:27:32,920 --> 00:27:35,800
Speaker 1: not competing with Virtue in Citadel, right. Virtue in Citadel

520
00:27:36,080 --> 00:27:40,560
Speaker 1: have this unique ability to narrow the bid offer spread

521
00:27:40,640 --> 00:27:44,760
Speaker 1: and extract some value. Right. Joe has a very different time,

522
00:27:44,960 --> 00:27:47,840
Speaker 1: you know, a temporal view of the world. Joe's thinking,

523
00:27:47,920 --> 00:27:49,520
Speaker 1: all right, I'm going to hold this thing for a week,

524
00:27:49,600 --> 00:27:51,760
Speaker 1: a month, whatever it is. We're trying to hold it

525
00:27:51,960 --> 00:27:55,080
Speaker 1: literally for you know, if we can ten milliseconds a

526
00:27:55,160 --> 00:27:58,760
Speaker 1: second because it's gonna be thrown into this portfolio that

527
00:27:58,800 --> 00:28:01,080
Speaker 1: we're managing, and we're gonna try to extract that bid offer.

528
00:28:01,440 --> 00:28:03,479
Speaker 1: And really, what the brokers have done, they're smart. They

529
00:28:03,600 --> 00:28:08,560
Speaker 1: realize there's value two smaller non correlated markets, two orders,

530
00:28:08,600 --> 00:28:11,080
Speaker 1: excuse me, and they've gone to the market makers over

531
00:28:11,160 --> 00:28:13,480
Speaker 1: the last thirty years. This is not a new phenomenon.

532
00:28:13,520 --> 00:28:16,119
Speaker 1: Said listen. We know you guys are good, We know

533
00:28:16,240 --> 00:28:18,200
Speaker 1: you guys can make money off this. We know that

534
00:28:18,520 --> 00:28:22,080
Speaker 1: this money means, this value is only there for the

535
00:28:22,119 --> 00:28:24,399
Speaker 1: market makers. It's not there for anybody else. We're not

536
00:28:24,520 --> 00:28:28,480
Speaker 1: taking money from a retail investor, but we the retail brokers,

537
00:28:28,760 --> 00:28:31,879
Speaker 1: we want you to pay profit share some of that

538
00:28:32,000 --> 00:28:34,960
Speaker 1: bid offer back to us, and for the most part,

539
00:28:35,000 --> 00:28:37,120
Speaker 1: we're gonna return that to our clients in the form

540
00:28:37,160 --> 00:28:40,400
Speaker 1: of price improvement the ad I mentioned before right there.

541
00:28:40,840 --> 00:28:43,160
Speaker 1: And in some cases the brokers have made a decision

542
00:28:43,480 --> 00:28:45,840
Speaker 1: which I don't care about, that they're going to take

543
00:28:45,880 --> 00:28:47,760
Speaker 1: that money and they're gonna use it to offset their

544
00:28:47,840 --> 00:28:50,360
Speaker 1: costs of providing their service so that they can provide

545
00:28:50,400 --> 00:28:54,640
Speaker 1: that service back to their clients for zero commission. Right,

546
00:28:54,720 --> 00:28:56,520
Speaker 1: So think about it this way and then I'll stop

547
00:28:56,600 --> 00:28:59,720
Speaker 1: my my diet tribe, which is Joe is a retail

548
00:28:59,720 --> 00:29:04,120
Speaker 1: and Tesla is offered on the market at ten. We're

549
00:29:04,160 --> 00:29:06,320
Speaker 1: willing to say, all right, Joe, we're gonna give it

550
00:29:06,320 --> 00:29:08,280
Speaker 1: to you a nine spot nine nine, so we're actually

551
00:29:08,320 --> 00:29:10,640
Speaker 1: gonna price improve it. So Joe is happy he bought

552
00:29:10,680 --> 00:29:12,920
Speaker 1: it actually at a better price than when he saw

553
00:29:12,960 --> 00:29:15,400
Speaker 1: it in exchange. The reason we're willing to do that

554
00:29:15,560 --> 00:29:17,880
Speaker 1: is because we think we can make maybe there was

555
00:29:17,920 --> 00:29:20,080
Speaker 1: a nickel, we can make maybe half a penny. So

556
00:29:20,240 --> 00:29:23,360
Speaker 1: Joe gets price improvement, virtue makes a little bit of money,

557
00:29:23,760 --> 00:29:27,880
Speaker 1: and Joe pays literally zero. The alternative would be, if

558
00:29:27,920 --> 00:29:30,560
Speaker 1: there's not payment for the flow, Robin Hood's gonna charge

559
00:29:30,560 --> 00:29:34,280
Speaker 1: you four dollars you portrayed. So you bought a hundred

560
00:29:34,320 --> 00:29:36,880
Speaker 1: shares and maybe we made half a penny and you've

561
00:29:36,880 --> 00:29:39,240
Speaker 1: got a penny of price improvement. You're not buying that

562
00:29:39,360 --> 00:29:41,480
Speaker 1: Tesla at ten because you think it's gonna go to

563
00:29:41,560 --> 00:29:43,240
Speaker 1: ten oh one and you're gonna sell it and you're

564
00:29:43,240 --> 00:29:45,960
Speaker 1: gonna make you know, a dollar, right, You're buying it

565
00:29:46,000 --> 00:29:48,040
Speaker 1: a ten because you think it's gonna go to you know,

566
00:29:48,200 --> 00:29:51,760
Speaker 1: thirty and you're gonna make twenty So where the critics

567
00:29:51,840 --> 00:29:55,840
Speaker 1: are just completely asked backwards. Is there there's no value

568
00:29:55,880 --> 00:29:58,200
Speaker 1: that I'm taking out of your pocket. I'm taking value

569
00:29:58,240 --> 00:30:00,880
Speaker 1: out of the marketplace and in fact then profit sharing

570
00:30:00,920 --> 00:30:03,400
Speaker 1: it back to you. It's a win win for everybody.

571
00:30:03,520 --> 00:30:05,239
Speaker 1: The last point I'll make and then I promise i'll

572
00:30:05,280 --> 00:30:07,640
Speaker 1: shut up, is And the reason I got so piste

573
00:30:07,640 --> 00:30:10,400
Speaker 1: off at Sorkin was because he sits there every time

574
00:30:10,440 --> 00:30:12,920
Speaker 1: he says, well, it's like Facebook, there's an information avenge.

575
00:30:12,960 --> 00:30:16,760
Speaker 1: We're getting client information, complete and utter bullshit. Am I

576
00:30:16,800 --> 00:30:20,040
Speaker 1: allowed to say that on this It's complete, utter bullshit.

577
00:30:20,160 --> 00:30:23,280
Speaker 1: Sorkin is wrong about that. I told him that. I'll

578
00:30:23,320 --> 00:30:26,600
Speaker 1: say it publicly, round and round again. This is not Facebook.

579
00:30:26,680 --> 00:30:30,520
Speaker 1: If anything. You know, there's six or seven firms competing.

580
00:30:31,000 --> 00:30:33,000
Speaker 1: Every single one of the orders we get, we get

581
00:30:33,120 --> 00:30:36,440
Speaker 1: millions of them per day, are anonymous. We have no

582
00:30:36,560 --> 00:30:39,680
Speaker 1: idea if it's Joe Sally or if it's some institution

583
00:30:39,760 --> 00:30:42,520
Speaker 1: behind it. Right, So, the notion that there's some big,

584
00:30:42,640 --> 00:30:45,880
Speaker 1: nefarious Facebook thing going on here is just you know,

585
00:30:46,000 --> 00:30:49,440
Speaker 1: a concoction of people that spend way too much time

586
00:30:49,520 --> 00:30:53,520
Speaker 1: looking at Silicon Valley companies. This is completely opposite. If anything,

587
00:30:54,200 --> 00:30:56,960
Speaker 1: the information asymmetry is the opposite way. We have no

588
00:30:57,160 --> 00:31:00,080
Speaker 1: idea if everybody's going to send us a hunt with

589
00:31:00,200 --> 00:31:02,000
Speaker 1: chairs to buy Tesla at the same time, and we're

590
00:31:02,000 --> 00:31:04,160
Speaker 1: gonna get our faces ripped off, and we have no

591
00:31:04,280 --> 00:31:06,840
Speaker 1: way of knowing that. We don't have a clue. So

592
00:31:07,400 --> 00:31:09,360
Speaker 1: this is something I actually wanted to ask you. So

593
00:31:09,560 --> 00:31:12,840
Speaker 1: you mentioned this idea that retail orders tend to be

594
00:31:13,200 --> 00:31:17,000
Speaker 1: uncorrelated with the wider market, and that makes them attractive

595
00:31:17,080 --> 00:31:19,760
Speaker 1: for various reasons. So what happens when you do get

596
00:31:19,800 --> 00:31:23,640
Speaker 1: a situation like game stop where suddenly everyone is piling

597
00:31:23,720 --> 00:31:26,720
Speaker 1: in in one direction, we lose millions of dollars. I

598
00:31:26,800 --> 00:31:30,040
Speaker 1: sit in my office and I'm sitting there grabbing the

599
00:31:30,280 --> 00:31:32,520
Speaker 1: you know, my table, and my knuckles are turning red

600
00:31:33,040 --> 00:31:35,760
Speaker 1: on the on whatever it was, January, whatever it was,

601
00:31:35,880 --> 00:31:38,440
Speaker 1: I forgot that day. When the market rips in one

602
00:31:38,480 --> 00:31:41,280
Speaker 1: direction and there's limit up, limit down. I mean, it

603
00:31:41,360 --> 00:31:43,920
Speaker 1: doesn't always happen. Sometimes we get lucky because we're not

604
00:31:44,160 --> 00:31:46,840
Speaker 1: flat at all, right. We can be long or short,

605
00:31:47,480 --> 00:31:49,640
Speaker 1: all right, So sometimes we get lucky. More often than not,

606
00:31:49,800 --> 00:31:51,680
Speaker 1: you do not get lucky and you get your faces

607
00:31:51,760 --> 00:31:55,200
Speaker 1: ripped off and we lose millions of dollars. Now, uh,

608
00:31:55,360 --> 00:31:57,960
Speaker 1: you know that's why we trade eight thousand names. That's

609
00:31:58,000 --> 00:32:00,560
Speaker 1: why we have a big firm that does a lot

610
00:32:00,600 --> 00:32:03,120
Speaker 1: of other things. This business is not profitable every day

611
00:32:03,160 --> 00:32:06,080
Speaker 1: retail market making. It's not the critics think we just

612
00:32:06,160 --> 00:32:08,360
Speaker 1: sit there and we collect the spread between Joe and

613
00:32:08,440 --> 00:32:12,040
Speaker 1: Sally and we collect pennies like we're a toll toll bridge.

614
00:32:12,640 --> 00:32:16,080
Speaker 1: If that was the case, then literally dozens of other

615
00:32:16,160 --> 00:32:19,680
Speaker 1: institutions would come in. When industry critics say, oh, this

616
00:32:19,800 --> 00:32:23,320
Speaker 1: is an easy business. You know what I say, compete, compete,

617
00:32:24,200 --> 00:32:27,360
Speaker 1: there's no barriered entry here. Get yourself. You know, some

618
00:32:27,520 --> 00:32:30,080
Speaker 1: investors spend hundreds of millions of dollars in technology, like

619
00:32:30,200 --> 00:32:32,920
Speaker 1: we have developed the relationships and compete. This is a

620
00:32:33,120 --> 00:32:37,280
Speaker 1: very sharp elbowed, difficult business. And when the market rips

621
00:32:37,320 --> 00:32:40,320
Speaker 1: in one direction in a particular name, more often than not,

622
00:32:40,480 --> 00:32:42,400
Speaker 1: we lose money. And there are days where I sit

623
00:32:42,440 --> 00:32:45,840
Speaker 1: in my office and we can be down significant eight

624
00:32:45,960 --> 00:32:49,080
Speaker 1: figure amounts. That's like tens of millions of dollars right

625
00:32:49,200 --> 00:32:52,880
Speaker 1: for time periods. More often than not, it reverts, and

626
00:32:53,040 --> 00:32:56,200
Speaker 1: we've learned over the years, and this business predates me

627
00:32:56,360 --> 00:32:58,360
Speaker 1: and Virtue because we bought it from a firm called

628
00:32:58,440 --> 00:33:01,560
Speaker 1: Night Capital that over twenty years, right, it tends to

629
00:33:01,640 --> 00:33:03,719
Speaker 1: make more money than not. But it is not an

630
00:33:03,720 --> 00:33:08,360
Speaker 1: easy business and the market maker has zero, zero informational advantage.

631
00:33:08,560 --> 00:33:11,239
Speaker 1: That's the thing that really pissed me off about when

632
00:33:11,280 --> 00:33:13,760
Speaker 1: Sorkin was talking, because he made it out like there

633
00:33:13,840 --> 00:33:16,840
Speaker 1: was some informational asymmetry for the market maker, and it's

634
00:33:17,080 --> 00:33:20,160
Speaker 1: exact exactly the opposite. We have no clue when the

635
00:33:20,200 --> 00:33:22,120
Speaker 1: Redded Army is going to strike. How the how would

636
00:33:22,160 --> 00:33:26,360
Speaker 1: we know? But on the other hand, eventually at least

637
00:33:26,440 --> 00:33:29,800
Speaker 1: robin Hood and some of the other online brokerages did

638
00:33:29,920 --> 00:33:34,440
Speaker 1: start to curb trading in Game Stop. So setting aside

639
00:33:34,520 --> 00:33:38,760
Speaker 1: the informational asymmetry that gave rise to concerns, and as

640
00:33:38,840 --> 00:33:42,160
Speaker 1: you just said, when you have extreme and extreme weird

641
00:33:42,480 --> 00:33:45,640
Speaker 1: situations like in game Stub, you start to lose money

642
00:33:46,080 --> 00:33:50,720
Speaker 1: and then suddenly, you know, the the traded curbs kick in.

643
00:33:50,840 --> 00:33:54,080
Speaker 1: So doesn't that invite questions about, oh, well, we're these

644
00:33:54,120 --> 00:33:57,920
Speaker 1: curbs put in plays because you were losing money? Sure

645
00:33:58,120 --> 00:34:00,640
Speaker 1: of course. Now I mean, look overall, we're making money

646
00:34:00,720 --> 00:34:02,960
Speaker 1: during that time period, right, and we we didn't have

647
00:34:03,000 --> 00:34:05,680
Speaker 1: any conversations with Robin, who had ordered citadel Ken Griffin

648
00:34:05,760 --> 00:34:09,680
Speaker 1: is a once in a lifetime you know, a business builder, entrepreneur.

649
00:34:09,760 --> 00:34:12,279
Speaker 1: He's he's extremely ethical. Right, There's not a chance in

650
00:34:12,320 --> 00:34:16,120
Speaker 1: the world he would risk his billions dollar empire, you know,

651
00:34:16,239 --> 00:34:19,560
Speaker 1: to have some kind of conversation with with Robin. I

652
00:34:19,680 --> 00:34:22,320
Speaker 1: knew immediately immediately. I don't want to like sound like

653
00:34:22,400 --> 00:34:24,720
Speaker 1: the guy. I mean, we are a self clearing broker dealer.

654
00:34:25,200 --> 00:34:27,360
Speaker 1: We know the folks of the DTC very well. We

655
00:34:27,480 --> 00:34:29,960
Speaker 1: know how the margin rules work. I understand the plumbing

656
00:34:30,000 --> 00:34:33,320
Speaker 1: of Wall Street, so I knew immediately what their issue

657
00:34:33,520 --> 00:34:35,600
Speaker 1: was and that they had had a huge margin call.

658
00:34:35,960 --> 00:34:40,520
Speaker 1: Could the public relations and the explanation of that been better, Yeah,

659
00:34:40,680 --> 00:34:42,759
Speaker 1: of course. I'm sure if Lad could go back and

660
00:34:42,840 --> 00:34:45,640
Speaker 1: redo his life, and he's an incredibly talented guy, he

661
00:34:45,800 --> 00:34:49,360
Speaker 1: probably would have, you know, been more direct or more

662
00:34:49,360 --> 00:34:51,960
Speaker 1: a little more transparent. But you know, it's not an

663
00:34:52,000 --> 00:34:54,680
Speaker 1: easy thing to explain how margining works in this country.

664
00:34:54,719 --> 00:34:56,560
Speaker 1: I'm happy to do it. I'll put you guys to sleep.

665
00:34:56,600 --> 00:34:58,520
Speaker 1: I know it very well because I started this firm

666
00:34:59,080 --> 00:35:01,239
Speaker 1: and it was my money making the margin calls, right,

667
00:35:01,320 --> 00:35:03,160
Speaker 1: So when it's your own money, you tend to really

668
00:35:03,200 --> 00:35:06,520
Speaker 1: know the rules pretty well. But they got one sided

669
00:35:06,719 --> 00:35:09,160
Speaker 1: game stop because that's where their clients were buying or selling.

670
00:35:09,880 --> 00:35:14,120
Speaker 1: It's an enormously volatile security, and so the rules of

671
00:35:14,200 --> 00:35:18,320
Speaker 1: the DTC technically the n SCC are that the variation

672
00:35:18,440 --> 00:35:20,640
Speaker 1: margins of the variation at risk of our margin if

673
00:35:20,680 --> 00:35:23,759
Speaker 1: you will, for that name, is going to be. So

674
00:35:24,000 --> 00:35:27,360
Speaker 1: when they had clients literally buying billions of dollars, right,

675
00:35:27,400 --> 00:35:30,760
Speaker 1: they're gonna get margin, and the rules do not allow

676
00:35:30,880 --> 00:35:34,319
Speaker 1: you to use customer funds to meet that margin call. Right.

677
00:35:34,400 --> 00:35:36,239
Speaker 1: So this was literally, as he said, a five or

678
00:35:36,280 --> 00:35:40,560
Speaker 1: six sigma once in a generation kind of event that happened. Really,

679
00:35:40,680 --> 00:35:42,760
Speaker 1: it was the rules of Wall Street that really slowed

680
00:35:42,840 --> 00:35:46,080
Speaker 1: this thing down. So the system worked exceptionally well. We

681
00:35:46,160 --> 00:35:48,360
Speaker 1: were in constant communication with the n s c C

682
00:35:48,640 --> 00:35:51,200
Speaker 1: because we wanted to make sure that we could trade

683
00:35:51,239 --> 00:35:53,399
Speaker 1: with Robin Hood. Right, there are a counterparty of ours,

684
00:35:53,480 --> 00:35:55,759
Speaker 1: we take risk, and so the n SCC did a

685
00:35:55,840 --> 00:35:59,560
Speaker 1: brilliant job in risk managing what was otherwise the situation

686
00:36:00,080 --> 00:36:02,719
Speaker 1: that was, you know, getting out of control. Right. They

687
00:36:02,760 --> 00:36:06,040
Speaker 1: didn't do it for any nefarious reason other than to

688
00:36:06,239 --> 00:36:09,120
Speaker 1: mitigate risk in the system, because you had a broker

689
00:36:09,239 --> 00:36:11,480
Speaker 1: that had gotten a little over at ski tips. Right.

690
00:36:11,840 --> 00:36:15,319
Speaker 1: Once they did that, obviously, Robin Hood raised an unbelievable

691
00:36:15,360 --> 00:36:17,239
Speaker 1: amount of money. So there's some really smart people that

692
00:36:17,320 --> 00:36:20,360
Speaker 1: believe in the business model. I I applaud that, and

693
00:36:20,560 --> 00:36:22,759
Speaker 1: Robin Hood did the only thing they could do, which

694
00:36:22,880 --> 00:36:25,680
Speaker 1: was de risk their portfolio and reduced their margin. I

695
00:36:25,719 --> 00:36:28,120
Speaker 1: would have done the exact same thing where I in

696
00:36:28,200 --> 00:36:31,040
Speaker 1: the in their situation, I would have done a much

697
00:36:31,160 --> 00:36:34,239
Speaker 1: much better job, I would think explaining it because I

698
00:36:34,320 --> 00:36:38,279
Speaker 1: know these rules exceptionally well. So since we're on the

699
00:36:38,360 --> 00:36:42,400
Speaker 1: topic of you know what people think might be nefarious behavior.

700
00:36:42,520 --> 00:36:47,839
Speaker 1: You talked about this idea of information a symmetry. One

701
00:36:47,920 --> 00:36:52,040
Speaker 1: other criticism that I've seen, or that people sometimes bring up,

702
00:36:52,200 --> 00:36:55,320
Speaker 1: is the idea that retail trades are somehow treated differently

703
00:36:55,480 --> 00:36:58,840
Speaker 1: to large institutional trades. Can you talk a little bit

704
00:36:58,880 --> 00:37:01,600
Speaker 1: about that, Like, what does sitution actually look like? They are?

705
00:37:01,680 --> 00:37:04,440
Speaker 1: They get much better, they get much better execution. That's

706
00:37:04,480 --> 00:37:06,319
Speaker 1: the irony of this thing, right, we we have both

707
00:37:06,360 --> 00:37:10,200
Speaker 1: sides of the business. Okay, So I'll give you an example.

708
00:37:10,840 --> 00:37:12,759
Speaker 1: I'll use a couple of names. You know, these are

709
00:37:12,800 --> 00:37:16,560
Speaker 1: public companies, right or they're large, So Fidelity and Vanguard

710
00:37:16,960 --> 00:37:20,800
Speaker 1: our giant companies. Right. They both have retail arms and

711
00:37:20,880 --> 00:37:24,200
Speaker 1: they have institutional arms. Right. Fidelity has got an asset

712
00:37:24,239 --> 00:37:26,759
Speaker 1: management business, got a retail business. Vanguards the same. They're

713
00:37:26,800 --> 00:37:29,920
Speaker 1: both great clients of the of ours. I love them dearly.

714
00:37:30,040 --> 00:37:32,560
Speaker 1: We have fantastic relationships with both them. I literally have

715
00:37:32,719 --> 00:37:37,279
Speaker 1: been to visit both of them, and the retail and

716
00:37:37,280 --> 00:37:40,080
Speaker 1: the institutional business our clients. And they're in different buildings, right,

717
00:37:40,560 --> 00:37:44,080
Speaker 1: And I literally we get orders from the institutional side,

718
00:37:44,160 --> 00:37:47,839
Speaker 1: and they're paying us, right, something less than a penny

719
00:37:47,880 --> 00:37:50,120
Speaker 1: to share, but more than zero. They can't tell you

720
00:37:50,160 --> 00:37:53,520
Speaker 1: exactly how much to route orders of Tesla, and the

721
00:37:54,040 --> 00:37:56,800
Speaker 1: notional size of that order, and the way we trade

722
00:37:56,880 --> 00:37:59,440
Speaker 1: it is really not much different than what we do

723
00:37:59,520 --> 00:38:02,239
Speaker 1: in the retail outside. On the retail side, we get

724
00:38:02,280 --> 00:38:06,040
Speaker 1: paid and and and let me go back to institutional order.

725
00:38:06,360 --> 00:38:09,319
Speaker 1: We're not We're measured not whether we can provide them

726
00:38:09,400 --> 00:38:11,520
Speaker 1: the n B b OH, but whether over the course

727
00:38:11,600 --> 00:38:14,239
Speaker 1: of a day, what the impact of their order is

728
00:38:14,320 --> 00:38:15,880
Speaker 1: on the marketplace. So as long as we beat a

729
00:38:15,960 --> 00:38:19,160
Speaker 1: certain benchmark, right, they're happy they haven't moved the market

730
00:38:19,200 --> 00:38:21,200
Speaker 1: too much with their order. Right. So that's kind of

731
00:38:21,280 --> 00:38:24,200
Speaker 1: institutional trading. One on one. We're getting paid a commission.

732
00:38:24,239 --> 00:38:26,799
Speaker 1: We're acting as an agent. We use our order routing

733
00:38:26,880 --> 00:38:30,000
Speaker 1: skills and our financial technology in order to route those

734
00:38:30,160 --> 00:38:33,920
Speaker 1: orders uh as adroitly as we possibly can to minimize

735
00:38:33,960 --> 00:38:36,600
Speaker 1: impact to not move the n b B out too much.

736
00:38:37,040 --> 00:38:40,000
Speaker 1: Right now, you go to the retail side, and what

737
00:38:40,280 --> 00:38:43,960
Speaker 1: the federal securities laws say is that every order that

738
00:38:44,160 --> 00:38:47,120
Speaker 1: is retail attested from a broker that is less than

739
00:38:47,440 --> 00:38:51,960
Speaker 1: nine listen to this, nine thou shares is eligible for

740
00:38:52,040 --> 00:38:54,480
Speaker 1: those six or six reports. So literally, I can get

741
00:38:54,840 --> 00:38:57,120
Speaker 1: a thousand share order of Tesla. I don't know what

742
00:38:57,200 --> 00:38:58,799
Speaker 1: the hell Tesla is at right now. It's let's say

743
00:38:58,800 --> 00:39:01,279
Speaker 1: it's seven hundred, right, So can do the math. That's

744
00:39:01,280 --> 00:39:04,360
Speaker 1: a large order, right. That order comes into the retail

745
00:39:04,760 --> 00:39:07,440
Speaker 1: through the retail pipes that we have, and as soon

746
00:39:07,480 --> 00:39:10,560
Speaker 1: as it hits our environment, regardless of what the n

747
00:39:10,640 --> 00:39:13,560
Speaker 1: b B O is in terms of size, that hundred

748
00:39:13,840 --> 00:39:17,399
Speaker 1: thousand share order or five thousand share order, it gets

749
00:39:17,520 --> 00:39:19,919
Speaker 1: measured and we price it off of the n b BA.

750
00:39:20,880 --> 00:39:23,560
Speaker 1: So even if there's only a hundred shares right at

751
00:39:23,600 --> 00:39:26,160
Speaker 1: the inside, I'm being very technical right now, where not

752
00:39:26,239 --> 00:39:28,640
Speaker 1: only are we price improving that, we're size improving it.

753
00:39:29,800 --> 00:39:33,279
Speaker 1: And in some instances, like you know, for robin Hood,

754
00:39:33,480 --> 00:39:36,279
Speaker 1: we're actually paying for the privilege of doing that. And

755
00:39:36,360 --> 00:39:39,120
Speaker 1: there's some other brokers that take payment forward to flow

756
00:39:39,160 --> 00:39:42,719
Speaker 1: that are very large. Right, So think about that juxtaposition.

757
00:39:42,760 --> 00:39:45,960
Speaker 1: You've got a retail tested order that is, you know,

758
00:39:46,080 --> 00:39:50,400
Speaker 1: could be hundreds of thousands of dollars that's getting guaranteed

759
00:39:50,480 --> 00:39:54,160
Speaker 1: execution at or better than what they could get in exchange,

760
00:39:54,600 --> 00:39:56,880
Speaker 1: and and sometimes they're getting price improvement and the brokers

761
00:39:56,880 --> 00:39:59,880
Speaker 1: getting paid for it, whereas an institutional order we're getting

762
00:40:00,000 --> 00:40:02,880
Speaker 1: aid by the broker. Now, look, I'm not screaming poverty.

763
00:40:03,000 --> 00:40:05,839
Speaker 1: For the most part, the orders aren't that size, right.

764
00:40:05,920 --> 00:40:08,320
Speaker 1: But if you if you talk to any institutional investor

765
00:40:08,400 --> 00:40:12,240
Speaker 1: that is I would say balanced and even killed about

766
00:40:12,280 --> 00:40:15,200
Speaker 1: how they explain themselves, right, they will say that retail

767
00:40:15,239 --> 00:40:17,839
Speaker 1: investors have an amazing deal in this country. They would

768
00:40:17,920 --> 00:40:19,879
Speaker 1: love to be able to do that. Their jobs would

769
00:40:19,920 --> 00:40:22,799
Speaker 1: be so much easier. The institutional traders all they would

770
00:40:22,840 --> 00:40:24,520
Speaker 1: be doing would say here you go, virtue sit it

771
00:40:24,560 --> 00:40:26,919
Speaker 1: will take these orders it Unfortunately, it doesn't work that way.

772
00:40:27,000 --> 00:40:30,200
Speaker 1: So the ecosystem in the United States, where you can

773
00:40:30,239 --> 00:40:34,719
Speaker 1: get literally for no money, a guaranteed fill of a

774
00:40:34,840 --> 00:40:37,840
Speaker 1: price that you see on your smartphone or better, is

775
00:40:38,000 --> 00:40:40,960
Speaker 1: by far the best ecosystem in the world. Where in

776
00:40:41,040 --> 00:40:44,400
Speaker 1: every marketplace in Europe and in Asia, and there's not

777
00:40:44,560 --> 00:40:49,160
Speaker 1: a market structure that is as beneficial to retail investors

778
00:40:49,200 --> 00:40:52,640
Speaker 1: as the United States. That's why I get so like

779
00:40:52,800 --> 00:40:55,800
Speaker 1: frustrated when I see you know, folks on on that

780
00:40:55,920 --> 00:40:59,160
Speaker 1: other network, you know, sitting there like mixing metaphors and

781
00:40:59,400 --> 00:41:02,200
Speaker 1: and cast gating, you know, an ecosystem that they have

782
00:41:02,320 --> 00:41:04,520
Speaker 1: no clue about. They don't have it, they don't even understand.

783
00:41:04,560 --> 00:41:06,759
Speaker 1: I mean Stork and sitting there talking about his grandmother.

784
00:41:07,239 --> 00:41:09,120
Speaker 1: And I went on TV and said, yeah, your grandmother

785
00:41:09,200 --> 00:41:13,120
Speaker 1: can hold up her smartphone, and then he talked about

786
00:41:13,120 --> 00:41:15,359
Speaker 1: his grandmother, not me, And for no money can get

787
00:41:15,400 --> 00:41:18,279
Speaker 1: a price that's better than what t ro price can get.

788
00:41:18,680 --> 00:41:36,200
Speaker 1: What the hell are you complaining about. I want to

789
00:41:36,280 --> 00:41:39,520
Speaker 1: go back to the competition that you guys are in

790
00:41:39,880 --> 00:41:42,800
Speaker 1: with the Citadels of the world or the two sigmas

791
00:41:43,000 --> 00:41:47,080
Speaker 1: and so forth. So what are the determinants of who

792
00:41:47,200 --> 00:41:50,920
Speaker 1: can deliver better price? So I assume like technology is

793
00:41:50,960 --> 00:41:55,000
Speaker 1: a factor, your capital probably presumably, let's do I don't know,

794
00:41:55,120 --> 00:41:57,920
Speaker 1: take risks here and there be willing to extend a

795
00:41:58,000 --> 00:42:02,279
Speaker 1: better offer speed, Like what do you guys uh competing on?

796
00:42:02,560 --> 00:42:05,440
Speaker 1: And why is the market such that one firm doesn't

797
00:42:05,480 --> 00:42:08,399
Speaker 1: just swallow the whole thing by building up sur multiple edge?

798
00:42:08,400 --> 00:42:11,239
Speaker 1: Why is it always competition? Yeah? What I what I

799
00:42:11,280 --> 00:42:14,440
Speaker 1: would say is it's not in The brokers don't want

800
00:42:14,640 --> 00:42:17,560
Speaker 1: there to be a monopoly, right, So there's sort of

801
00:42:17,640 --> 00:42:21,160
Speaker 1: like a natural cap if you will, that any one

802
00:42:21,239 --> 00:42:23,480
Speaker 1: of us has over market share. If you look at

803
00:42:23,760 --> 00:42:26,359
Speaker 1: if you go through all those six or six reports, Yeah,

804
00:42:26,560 --> 00:42:29,680
Speaker 1: I mean maybe with some with some small exceptions, you're

805
00:42:29,719 --> 00:42:33,080
Speaker 1: never gonna see anybody really north of certainly when it

806
00:42:33,120 --> 00:42:36,200
Speaker 1: comes to marketable orders maybe non marketable limit orders, it

807
00:42:36,320 --> 00:42:39,600
Speaker 1: might be higher. But so the brokers naturally right, What

808
00:42:39,680 --> 00:42:42,080
Speaker 1: would you do if you needed vendors, right, and you

809
00:42:42,120 --> 00:42:44,640
Speaker 1: could have people bash their heads together, You'd like to

810
00:42:44,760 --> 00:42:47,840
Speaker 1: keep two, three, and sometimes four or five of us

811
00:42:47,920 --> 00:42:50,640
Speaker 1: in competition. You want to give us enough that we

812
00:42:50,800 --> 00:42:54,480
Speaker 1: can be profitable, right, and we can make the investments

813
00:42:54,520 --> 00:42:56,680
Speaker 1: in technology, and I'll come back to why we make money.

814
00:42:57,000 --> 00:42:59,680
Speaker 1: But you don't want to be you know, dependent on

815
00:42:59,840 --> 00:43:03,120
Speaker 1: a single provider, right, So they want competition. So that's

816
00:43:03,120 --> 00:43:05,879
Speaker 1: why when analysts research analyst asked me about market share,

817
00:43:05,920 --> 00:43:09,759
Speaker 1: I said, well, it's really overcooked because there's a natural cap. Really,

818
00:43:09,800 --> 00:43:12,520
Speaker 1: the way we make money is look, look. And again

819
00:43:12,680 --> 00:43:15,160
Speaker 1: this predated virtues. So there was a firm called Night

820
00:43:15,200 --> 00:43:19,160
Speaker 1: Capital that actually kind of helped create this ecosystem. It

821
00:43:19,280 --> 00:43:20,759
Speaker 1: was called night because it was the Knights of the

822
00:43:20,800 --> 00:43:23,320
Speaker 1: round Table. They got all the retail brokers around a

823
00:43:23,400 --> 00:43:25,239
Speaker 1: table and said, hey, you guys are mad as hell

824
00:43:25,719 --> 00:43:28,719
Speaker 1: at the New York Stock Exchange. Essentially, why don't you

825
00:43:29,080 --> 00:43:30,880
Speaker 1: send your orders to us? And that was you know,

826
00:43:30,960 --> 00:43:34,440
Speaker 1: the genius of the pioneers of of Night Capital. And so,

827
00:43:34,920 --> 00:43:38,640
Speaker 1: starting you know, twenty years ago, they built a simulation

828
00:43:38,920 --> 00:43:42,440
Speaker 1: environment of research environment obviously that we now run. That

829
00:43:42,520 --> 00:43:45,839
Speaker 1: cost us a lot of money. We've got very sophisticated

830
00:43:45,920 --> 00:43:50,680
Speaker 1: algorithms and and strategies right that that can internalize that

831
00:43:50,800 --> 00:43:53,359
Speaker 1: order flow and hopefully more often than not make money

832
00:43:53,440 --> 00:43:56,600
Speaker 1: on it. We've got you know, dozens and dozens of

833
00:43:56,800 --> 00:43:59,400
Speaker 1: really really smart men and women you know, that have

834
00:43:59,520 --> 00:44:02,120
Speaker 1: PhD these and things that I vaguely understand. I'm a

835
00:44:02,160 --> 00:44:04,120
Speaker 1: liberal arts guy, right, so this is not my area

836
00:44:04,120 --> 00:44:08,560
Speaker 1: of expertise. That literally spent you know, thousands and thousands

837
00:44:08,640 --> 00:44:11,719
Speaker 1: of people hours every year trying to be better at

838
00:44:12,040 --> 00:44:14,520
Speaker 1: UM And you know what I what I'm good at,

839
00:44:14,600 --> 00:44:16,520
Speaker 1: what Virtue is good at is we run a very

840
00:44:16,680 --> 00:44:20,399
Speaker 1: very lean, efficient environment. So yeah, we trade an awful lot,

841
00:44:20,560 --> 00:44:22,360
Speaker 1: but we're not a big bank, right, So we have

842
00:44:22,520 --> 00:44:25,279
Speaker 1: less than a thousand employees and we have a very

843
00:44:25,400 --> 00:44:29,120
Speaker 1: large scale business that's in over two hundred and fifty marketplaces.

844
00:44:29,200 --> 00:44:32,759
Speaker 1: So what's our competitive advantage. It's we've got great relationships.

845
00:44:32,840 --> 00:44:35,520
Speaker 1: We provide great service to those retail brokers, right, because

846
00:44:35,560 --> 00:44:39,160
Speaker 1: it's a guaranteed execution. If we f up and the

847
00:44:39,239 --> 00:44:41,400
Speaker 1: market data is wrong, or if we have like you know,

848
00:44:41,480 --> 00:44:43,960
Speaker 1: the power goes out in our data center something like that,

849
00:44:44,600 --> 00:44:47,440
Speaker 1: it's still our execution. We got it, we eat it, right,

850
00:44:47,480 --> 00:44:50,000
Speaker 1: So if we have a mistake, we eat it. Exchanges

851
00:44:50,040 --> 00:44:53,080
Speaker 1: can't do that. So it's a service we're providing. And

852
00:44:53,640 --> 00:44:55,480
Speaker 1: as I said, we've been doing this for a long

853
00:44:55,600 --> 00:44:57,480
Speaker 1: time and invested a lot of money, and we do

854
00:44:57,600 --> 00:45:00,239
Speaker 1: it really really efficiently. So if you think of about

855
00:45:00,360 --> 00:45:03,520
Speaker 1: like what's the margin on this, like the margin on

856
00:45:03,600 --> 00:45:07,320
Speaker 1: an individual basis, like on a single name is literally

857
00:45:07,480 --> 00:45:10,920
Speaker 1: single digits and subpenny And why are we so profitable

858
00:45:10,960 --> 00:45:13,000
Speaker 1: and why is this business work? Again? It comes back

859
00:45:13,120 --> 00:45:16,760
Speaker 1: to scale, right. We we trade twenty five thousand different

860
00:45:16,800 --> 00:45:19,600
Speaker 1: financial instruments and if we you know, we try to

861
00:45:19,680 --> 00:45:22,400
Speaker 1: make a couple hundred bucks, a thousand bucks on them,

862
00:45:22,480 --> 00:45:24,200
Speaker 1: that kind of thing, and it adds up over the

863
00:45:24,280 --> 00:45:26,759
Speaker 1: course of a day. And this is a very you know,

864
00:45:26,920 --> 00:45:30,000
Speaker 1: scale business, which is why it's very difficult. You know,

865
00:45:30,280 --> 00:45:33,600
Speaker 1: you didn't notice, uh in the names of competitors Goldman

866
00:45:33,640 --> 00:45:37,040
Speaker 1: Sachs or JP Morgan or Barkley's or Morgan Stanley, Right,

867
00:45:37,200 --> 00:45:39,759
Speaker 1: they all used to do this business right there, but

868
00:45:39,800 --> 00:45:40,920
Speaker 1: they had to get out of it. If you go

869
00:45:41,080 --> 00:45:43,120
Speaker 1: look at the list like UBS is in the business,

870
00:45:43,520 --> 00:45:46,080
Speaker 1: they're probably like number four or five, and they're kind of,

871
00:45:46,760 --> 00:45:50,759
Speaker 1: you know, not as competitive frankly, because it's really hard

872
00:45:51,000 --> 00:45:54,680
Speaker 1: to do this business. If you've got a huge global institution,

873
00:45:54,719 --> 00:45:56,680
Speaker 1: you've gotta feed. You know, someday I'll invite you to

874
00:45:56,760 --> 00:45:59,759
Speaker 1: my office when the pandemics over. It's not that pretty right.

875
00:45:59,840 --> 00:46:02,600
Speaker 1: We don't spend money on the on you know that

876
00:46:02,760 --> 00:46:04,239
Speaker 1: kind of thing. We have to spend money on the

877
00:46:04,320 --> 00:46:08,640
Speaker 1: research environment and the simulation environment and and so that's

878
00:46:08,800 --> 00:46:11,320
Speaker 1: why this business works for these kinds of firms. And

879
00:46:11,400 --> 00:46:15,520
Speaker 1: Citadel is by far, you know, our biggest competitor, and

880
00:46:15,560 --> 00:46:18,880
Speaker 1: they're fantastic at it. And you know, the notion that somehow,

881
00:46:19,040 --> 00:46:20,839
Speaker 1: you know, they were mixed up in this robin hood,

882
00:46:21,360 --> 00:46:25,239
Speaker 1: you know, a conspiracy theory, was just beyond comical to me.

883
00:46:26,160 --> 00:46:29,960
Speaker 1: So I mentioned in the intro that one of the

884
00:46:30,000 --> 00:46:32,520
Speaker 1: big things about game Stop and robin hood was that

885
00:46:32,600 --> 00:46:35,520
Speaker 1: it kind of thrust this issue into the spotlight, which

886
00:46:35,960 --> 00:46:38,000
Speaker 1: you know can be a bad thing. And we did

887
00:46:38,080 --> 00:46:41,480
Speaker 1: see politicians and d C take a sudden interest in

888
00:46:41,560 --> 00:46:45,680
Speaker 1: payment for order flow. What's your read on how they

889
00:46:45,760 --> 00:46:48,320
Speaker 1: are thinking about it at the moment and would you

890
00:46:48,440 --> 00:46:52,120
Speaker 1: expect them to crack down in some way on the business.

891
00:46:52,719 --> 00:46:55,239
Speaker 1: And actually, can I just add on, so in the

892
00:46:55,480 --> 00:46:59,279
Speaker 1: UK they don't have payment for order flow um as

893
00:46:59,320 --> 00:47:01,000
Speaker 1: far as I can member, I think they banned it.

894
00:47:01,160 --> 00:47:03,520
Speaker 1: So why has the US gone ahead with this? But

895
00:47:03,680 --> 00:47:07,760
Speaker 1: other jurisdictions have you know, there's something about the model

896
00:47:08,000 --> 00:47:11,839
Speaker 1: that has turned them off. So why is that? Yeah,

897
00:47:11,880 --> 00:47:13,800
Speaker 1: what I would say is, look, I mean this is

898
00:47:13,880 --> 00:47:16,880
Speaker 1: not like some new Obviously people acted like as this

899
00:47:16,960 --> 00:47:20,279
Speaker 1: there was you know, a new situation. Right, this has

900
00:47:20,280 --> 00:47:23,000
Speaker 1: been you know, this structure, this ecosystem has been going

901
00:47:23,040 --> 00:47:25,839
Speaker 1: on for thirty plus years. To answer the first part

902
00:47:25,920 --> 00:47:28,520
Speaker 1: of your question, which is, you know, the SEC has

903
00:47:28,560 --> 00:47:31,759
Speaker 1: looked at this five or six times, the whole notion

904
00:47:31,840 --> 00:47:35,920
Speaker 1: of wholesaling and and payment for order flower rebates, The

905
00:47:36,120 --> 00:47:42,719
Speaker 1: SEC and Finraum are always examining the best execution statistics

906
00:47:42,800 --> 00:47:45,839
Speaker 1: and obligations of all the retail brokers from Robin Hood

907
00:47:45,920 --> 00:47:48,960
Speaker 1: to you know, z Echo Trade, and of all the

908
00:47:49,040 --> 00:47:51,680
Speaker 1: market makers from Virtue, Cita, etcetera. Right, So this is

909
00:47:51,719 --> 00:47:55,719
Speaker 1: not like an area that has not been looked at

910
00:47:55,800 --> 00:47:59,600
Speaker 1: by regulators because of some of the hysteria I'll say

911
00:47:59,640 --> 00:48:01,759
Speaker 1: it around down these meme stocks and kind of the

912
00:48:01,800 --> 00:48:06,719
Speaker 1: situation it ended up in Congress, and I will charitably

913
00:48:06,760 --> 00:48:08,719
Speaker 1: say there was a lot of misinformation at the hearing,

914
00:48:08,760 --> 00:48:10,480
Speaker 1: and I felt kind of bad for Ken and for

915
00:48:10,640 --> 00:48:13,279
Speaker 1: Vlyde and for others who were basically you know, you

916
00:48:13,320 --> 00:48:15,040
Speaker 1: know they were pinionis for five and a half hours,

917
00:48:15,080 --> 00:48:17,320
Speaker 1: and I know how Washington works. It's great. I have

918
00:48:17,400 --> 00:48:21,440
Speaker 1: spoken to over half a dozen Congress folks and more

919
00:48:21,520 --> 00:48:23,680
Speaker 1: of their staff to try to explain, Hey, this is

920
00:48:24,280 --> 00:48:26,759
Speaker 1: when you peel back the hysteria and peel back the

921
00:48:26,840 --> 00:48:29,359
Speaker 1: onion and look at it. It really isn't that bad.

922
00:48:29,440 --> 00:48:32,800
Speaker 1: And actually, if you're a progressive, a Democrat, whatever you

923
00:48:32,840 --> 00:48:36,040
Speaker 1: want to say, you should be thrilled with this ecosystem

924
00:48:36,080 --> 00:48:39,319
Speaker 1: because the three hundred five hundred dollar broker that used

925
00:48:39,360 --> 00:48:41,600
Speaker 1: to rip you off by making you pay you know,

926
00:48:41,680 --> 00:48:45,279
Speaker 1: an eighth or cents spread doesn't exist anymore. So the

927
00:48:45,360 --> 00:48:48,160
Speaker 1: old Wall Street way of like really taking it to

928
00:48:48,280 --> 00:48:51,800
Speaker 1: the real retail investor has gone away. The retail investor

929
00:48:52,360 --> 00:48:55,359
Speaker 1: is totally empowered. To use an overused word, there's been

930
00:48:55,440 --> 00:48:59,520
Speaker 1: democratization now in Europe. Right, everything isn't as it's as

931
00:48:59,560 --> 00:49:02,920
Speaker 1: it's seems. Right. What the retail brokers do in Europe,

932
00:49:02,960 --> 00:49:06,040
Speaker 1: which I think is actually worked worse for the investors, right,

933
00:49:06,160 --> 00:49:08,000
Speaker 1: of course I'm biased, but worse with this, they just

934
00:49:08,120 --> 00:49:10,279
Speaker 1: mark up the trade so you get a worse price.

935
00:49:11,200 --> 00:49:13,560
Speaker 1: You get a worse price, so the bid offer that

936
00:49:13,640 --> 00:49:18,000
Speaker 1: we otherwise could extract on our own right. The retail

937
00:49:18,120 --> 00:49:23,080
Speaker 1: brokers effectively are charging more back to their clients, so

938
00:49:23,120 --> 00:49:25,640
Speaker 1: you're getting a worse price. So which environment are you're

939
00:49:25,640 --> 00:49:29,399
Speaker 1: worse in? Would you rather pay zero commission and get

940
00:49:29,480 --> 00:49:32,200
Speaker 1: the n b BO or better or I know there's

941
00:49:32,200 --> 00:49:35,359
Speaker 1: a zero you know commission broker or brokers in Europe?

942
00:49:35,440 --> 00:49:37,560
Speaker 1: Would you rather get that or get a price that is,

943
00:49:37,600 --> 00:49:41,760
Speaker 1: instead of Joe's ten dollars for Tesla, Joe's now paying

944
00:49:41,880 --> 00:49:44,120
Speaker 1: you know, ten oh one or ten oh two. I

945
00:49:44,160 --> 00:49:47,520
Speaker 1: would argue, you know, you know, Joe's getting a worst

946
00:49:47,560 --> 00:49:49,280
Speaker 1: deal in Europe than he is in the United States.

947
00:49:49,760 --> 00:49:53,280
Speaker 1: So you know, to me, it's just you know, regular

948
00:49:53,360 --> 00:49:55,520
Speaker 1: regulators looking at this and kind of you know, in

949
00:49:55,600 --> 00:49:58,960
Speaker 1: a knee jerk reaction not acting what in the best

950
00:49:59,120 --> 00:50:01,600
Speaker 1: entrance of retail broke So long and short of it,

951
00:50:01,680 --> 00:50:03,680
Speaker 1: I think this will get thrown back to the SEC.

952
00:50:04,640 --> 00:50:07,640
Speaker 1: We have a new chairman who is a brilliant guy

953
00:50:07,719 --> 00:50:09,160
Speaker 1: who I've worked with a little bit when he was

954
00:50:09,200 --> 00:50:12,200
Speaker 1: at the CFTC. There's some staff folks there that have

955
00:50:12,320 --> 00:50:15,000
Speaker 1: been there for a long time that know this ecosystem

956
00:50:15,080 --> 00:50:18,000
Speaker 1: exceptionally well. I think they'll look at the data, and

957
00:50:18,160 --> 00:50:21,200
Speaker 1: I'm very optimistic they will conclude that this all makes sense.

958
00:50:21,239 --> 00:50:24,680
Speaker 1: Wholesaling for sure makes sense. I think they will look

959
00:50:24,760 --> 00:50:27,919
Speaker 1: at payment for word flow or rebates and say, maybe

960
00:50:28,000 --> 00:50:30,719
Speaker 1: we need more transparency and disclosure around it, right, so

961
00:50:30,920 --> 00:50:33,359
Speaker 1: clients know. But at the end of the day, if

962
00:50:33,440 --> 00:50:35,600
Speaker 1: you don't want to trade with a broker that uses

963
00:50:35,760 --> 00:50:38,320
Speaker 1: that does payment for water flow, then open up a

964
00:50:38,360 --> 00:50:41,640
Speaker 1: new account, you know, go to Fidelity. They don't charge

965
00:50:41,640 --> 00:50:43,880
Speaker 1: payment for word flow and they have good prices. So

966
00:50:44,040 --> 00:50:45,800
Speaker 1: at the end of the day, it's all about choices.

967
00:50:45,840 --> 00:50:50,359
Speaker 1: I don't understand this hysteria, particularly from those that are

968
00:50:50,400 --> 00:50:52,480
Speaker 1: on the left of the political spectrum, because you think

969
00:50:52,520 --> 00:50:57,000
Speaker 1: it actually would fit in nicely with the whole notion

970
00:50:57,080 --> 00:50:59,480
Speaker 1: of a progressive that wants to empower the little guy.

971
00:50:59,560 --> 00:51:03,359
Speaker 1: The little is unbelievably empowered in this country, and yet

972
00:51:03,920 --> 00:51:06,520
Speaker 1: people look at the ecosystem like somehow there's something the

973
00:51:06,600 --> 00:51:11,399
Speaker 1: fairies going on. So there's always questions of power when

974
00:51:11,480 --> 00:51:14,480
Speaker 1: it comes to I mean, especially when you bring politics

975
00:51:14,600 --> 00:51:16,839
Speaker 1: into it, and there's like who has the power at

976
00:51:16,880 --> 00:51:20,240
Speaker 1: any given moment within existing market structure. And you mentioned

977
00:51:21,000 --> 00:51:24,319
Speaker 1: that the retail brokerages that are your counterparties. They want

978
00:51:24,360 --> 00:51:26,360
Speaker 1: to maintain some leverage, so they'll never give one of

979
00:51:26,400 --> 00:51:29,960
Speaker 1: you guys too high market share of their flow because

980
00:51:30,040 --> 00:51:32,040
Speaker 1: they want to pit you against each other. I want

981
00:51:32,080 --> 00:51:33,800
Speaker 1: to go back to something you mentioned very early in

982
00:51:33,880 --> 00:51:37,600
Speaker 1: the conversation, and that is the power that the exchanges

983
00:51:37,719 --> 00:51:40,120
Speaker 1: have over data and the data they sell. And I

984
00:51:40,200 --> 00:51:42,920
Speaker 1: know you said you're a backer of the members exchange

985
00:51:43,239 --> 00:51:45,880
Speaker 1: to one of the new like whatever eighteen stock markets

986
00:51:46,160 --> 00:51:49,440
Speaker 1: there are talk to us about that power over data

987
00:51:49,480 --> 00:51:52,400
Speaker 1: because I'm my understanding is that that exchange wants to

988
00:51:52,440 --> 00:51:54,719
Speaker 1: sort of disrupt that a little bit. And how do

989
00:51:54,800 --> 00:51:58,839
Speaker 1: you see that, uh, that aspect of the market potentially changing. Yeah,

990
00:51:58,920 --> 00:52:00,920
Speaker 1: I mean this was if go around and Google I

991
00:52:01,000 --> 00:52:03,120
Speaker 1: got you know, I was pretty vocal about this. I

992
00:52:03,160 --> 00:52:05,560
Speaker 1: don't know, five six years ago, I can't exactly remember,

993
00:52:05,840 --> 00:52:09,320
Speaker 1: because I got annoyed that you had a duopoly effectively.

994
00:52:09,440 --> 00:52:13,040
Speaker 1: You know, they had three large exchange groups and between

995
00:52:13,160 --> 00:52:17,480
Speaker 1: what is called the the SIP with a consolidated feed. Right,

996
00:52:17,600 --> 00:52:21,120
Speaker 1: that's roughly five million dollars of quoting revenue that we

997
00:52:21,239 --> 00:52:24,360
Speaker 1: all pay that gets disseminated to those exchanges, right, and

998
00:52:24,440 --> 00:52:27,680
Speaker 1: then on top of that, the exchange is charged for

999
00:52:27,840 --> 00:52:29,800
Speaker 1: what they call a private data feed, right, which we

1000
00:52:29,880 --> 00:52:32,640
Speaker 1: obviously have to buy because we're a low latency market

1001
00:52:32,680 --> 00:52:34,680
Speaker 1: making firm. And then on top of that, they charge

1002
00:52:34,719 --> 00:52:37,680
Speaker 1: you for physical connectivity. So I actually went to the

1003
00:52:37,840 --> 00:52:40,880
Speaker 1: sec there's a article about this, when I brought like

1004
00:52:40,960 --> 00:52:44,120
Speaker 1: a cable that I had bought on Amazon that we

1005
00:52:44,200 --> 00:52:46,480
Speaker 1: paid a hundred and seventy nine dollars for, right, literally

1006
00:52:46,480 --> 00:52:49,520
Speaker 1: a physical Ethernet cable that connected our server to the

1007
00:52:49,600 --> 00:52:53,320
Speaker 1: exchange server, and NASDAC was charging us and being a

1008
00:52:53,360 --> 00:52:55,840
Speaker 1: little hyperbolic, but really not that much. They were charging

1009
00:52:55,920 --> 00:52:57,360
Speaker 1: us about a half a million dollars a year for

1010
00:52:57,400 --> 00:52:59,720
Speaker 1: that because there was a monthly charge for quote unquote

1011
00:52:59,719 --> 00:53:01,919
Speaker 1: connect ativity. And it literally was just an Ethernet cable

1012
00:53:01,960 --> 00:53:04,960
Speaker 1: that you could buy. So I got Piste off and said, okay,

1013
00:53:05,480 --> 00:53:10,160
Speaker 1: you know, uh, physical connectivity and market data are elements

1014
00:53:10,239 --> 00:53:14,160
Speaker 1: of an exchange and exchange for your license from the government, right,

1015
00:53:14,200 --> 00:53:16,960
Speaker 1: which gets you that market data fee that I mentioned,

1016
00:53:17,000 --> 00:53:20,040
Speaker 1: the SIP revenue and everything like that, and gives you immunity. Right,

1017
00:53:20,120 --> 00:53:23,640
Speaker 1: there's a limited liability and the securities laws, you know,

1018
00:53:23,800 --> 00:53:27,719
Speaker 1: you need to have the SEC approved not only just

1019
00:53:28,000 --> 00:53:31,640
Speaker 1: your order types, but your market data fees, your connectivities fees.

1020
00:53:31,680 --> 00:53:34,640
Speaker 1: It's all part of the quote unquote facilities of the exchange.

1021
00:53:34,719 --> 00:53:36,879
Speaker 1: You said you wanted wank, I'm giving you full on work.

1022
00:53:37,000 --> 00:53:40,080
Speaker 1: That's a define term in the Securities Exchange Act. The

1023
00:53:40,120 --> 00:53:42,160
Speaker 1: nine four used to be a partner Paul Wise. I

1024
00:53:42,239 --> 00:53:45,000
Speaker 1: researched this stuff, myself, read all about it. So I

1025
00:53:45,120 --> 00:53:47,880
Speaker 1: went to the SEC and created a star, put in

1026
00:53:47,960 --> 00:53:50,840
Speaker 1: a comment letter and said, you know what, the exchanges

1027
00:53:50,840 --> 00:53:52,560
Speaker 1: have been getting away with this for a long time.

1028
00:53:52,760 --> 00:53:55,920
Speaker 1: This should be regulated, etcetera, etcetera. The politics of the

1029
00:53:56,000 --> 00:53:58,520
Speaker 1: moment were good because Jay Clayton and bred Redfern, who

1030
00:53:58,560 --> 00:54:01,360
Speaker 1: were the the chairman and the head of trading markets

1031
00:54:01,360 --> 00:54:03,360
Speaker 1: at the time, kind of had a similar view of

1032
00:54:03,400 --> 00:54:05,480
Speaker 1: the world as I did, you know, on his way

1033
00:54:05,520 --> 00:54:08,480
Speaker 1: out the door, Clayton and the commissioners. You know, but

1034
00:54:08,520 --> 00:54:10,279
Speaker 1: I think it was a five zero vote and nothing

1035
00:54:10,400 --> 00:54:13,640
Speaker 1: in Washington happens unanimously anymore. Kind of agreed with the

1036
00:54:13,800 --> 00:54:15,680
Speaker 1: argument that I was starting to make a virtue was

1037
00:54:15,680 --> 00:54:19,240
Speaker 1: starting to make five years ago, that those items needed

1038
00:54:19,280 --> 00:54:22,480
Speaker 1: to be uh, they need to be a cost benefit analysis, right,

1039
00:54:22,520 --> 00:54:24,520
Speaker 1: you couldn't just every year keep charging us more and

1040
00:54:24,600 --> 00:54:28,040
Speaker 1: more and more without any cost benefit. Because it was

1041
00:54:28,120 --> 00:54:30,719
Speaker 1: part of the quote unquote facilities of a national securities

1042
00:54:30,719 --> 00:54:33,960
Speaker 1: exchange that is now in litigation. Because my friends at

1043
00:54:34,000 --> 00:54:36,040
Speaker 1: the exchanges, who I get along great with, by the way,

1044
00:54:36,080 --> 00:54:38,040
Speaker 1: we're their biggest customers, they kind of have to be

1045
00:54:38,160 --> 00:54:41,920
Speaker 1: nice to me. They sued the sec to enjoy enforcement

1046
00:54:41,920 --> 00:54:44,120
Speaker 1: if you will, that regulation. So that'll be in litigation

1047
00:54:44,200 --> 00:54:46,880
Speaker 1: in the d C circuit probably for the next you know,

1048
00:54:47,040 --> 00:54:50,280
Speaker 1: five years or so, given the you know, the amount

1049
00:54:50,280 --> 00:54:52,239
Speaker 1: of money here at stakes. So there's a and that

1050
00:54:52,400 --> 00:54:57,880
Speaker 1: that's a continuing kind of kabuki dance between the regulators SYTHEMA,

1051
00:54:58,000 --> 00:54:59,879
Speaker 1: which is the you know, the banks and the broke

1052
00:55:00,120 --> 00:55:02,680
Speaker 1: is we're a member of SIFMA and the exchanges. This

1053
00:55:02,840 --> 00:55:06,200
Speaker 1: is nothing that they've been fighting over who controls that

1054
00:55:06,320 --> 00:55:07,960
Speaker 1: data and who can charge for it, because if you

1055
00:55:08,000 --> 00:55:10,520
Speaker 1: think about it, I'm creating the data, right, you know,

1056
00:55:10,640 --> 00:55:14,400
Speaker 1: to get back to Facebook virtue sending literally hundreds and

1057
00:55:14,480 --> 00:55:16,680
Speaker 1: hundreds and billions of bids and offers every day, that's

1058
00:55:16,760 --> 00:55:20,040
Speaker 1: like important value of information the exchanges. I'll be a

1059
00:55:20,080 --> 00:55:22,200
Speaker 1: schmuck now, I'll say all they do is they take it,

1060
00:55:22,719 --> 00:55:25,120
Speaker 1: repackage it kind of in a crappier format, and then

1061
00:55:25,200 --> 00:55:28,040
Speaker 1: sell it back to us right along, let's sit it

1062
00:55:28,120 --> 00:55:31,319
Speaker 1: another information at a premium price. So that's what really

1063
00:55:31,360 --> 00:55:33,120
Speaker 1: pissed me off. That in the cable really kind of

1064
00:55:33,160 --> 00:55:37,560
Speaker 1: pissed me off. You're designated market maker for the bitcoin

1065
00:55:37,760 --> 00:55:41,240
Speaker 1: et F that exists in Canada. It just got started.

1066
00:55:41,560 --> 00:55:43,719
Speaker 1: It's already from what I understand, like a huge hit

1067
00:55:43,880 --> 00:55:45,719
Speaker 1: in Canada in terms of like how much money it's

1068
00:55:45,719 --> 00:55:47,840
Speaker 1: taken in. We might get one at some point in

1069
00:55:48,000 --> 00:55:50,600
Speaker 1: the in the U S. What have you learned about

1070
00:55:50,680 --> 00:55:53,719
Speaker 1: that business? Like? How big and how interesting is that

1071
00:55:53,800 --> 00:55:57,600
Speaker 1: whole space? Uh? For you guys right now? Yeah. I mean,

1072
00:55:57,640 --> 00:55:59,920
Speaker 1: for the record, I'm not like an expert in crypto,

1073
00:56:00,000 --> 00:56:02,200
Speaker 1: a goodcoin or whatever it was. I'm a market maker

1074
00:56:02,280 --> 00:56:04,799
Speaker 1: and so my determination to get into it was okay.

1075
00:56:04,840 --> 00:56:08,200
Speaker 1: When I saw that it was going to be recognized

1076
00:56:08,280 --> 00:56:11,680
Speaker 1: and regularized if you will buy a regulator, we think

1077
00:56:11,760 --> 00:56:13,640
Speaker 1: the world of right, We're a market maker up in

1078
00:56:13,719 --> 00:56:16,719
Speaker 1: kind of big time. And so when I Rock said

1079
00:56:16,760 --> 00:56:18,879
Speaker 1: that they could do this, that's the sec up there,

1080
00:56:18,920 --> 00:56:21,080
Speaker 1: I was like, you know, done virtues all over this

1081
00:56:21,239 --> 00:56:24,239
Speaker 1: because this plays right into our wheelhouse. Right, it's a

1082
00:56:24,719 --> 00:56:26,880
Speaker 1: in e t F with the underlying basket is a

1083
00:56:26,920 --> 00:56:29,279
Speaker 1: different asset class, right, That's what we're good at, and

1084
00:56:29,400 --> 00:56:32,120
Speaker 1: it's and there's also a future on the CME. So

1085
00:56:32,200 --> 00:56:35,680
Speaker 1: there's various products we can we can move back and forth.

1086
00:56:35,760 --> 00:56:40,799
Speaker 1: And so I think as cryptocurrencies like bitcoined get further

1087
00:56:41,000 --> 00:56:46,759
Speaker 1: regularized and regulated, if you will end institutions like e

1088
00:56:46,920 --> 00:56:50,080
Speaker 1: t F issuers the u S securities market, future houses

1089
00:56:50,160 --> 00:56:53,560
Speaker 1: like the CME recognize that there's that this is a

1090
00:56:53,680 --> 00:56:58,160
Speaker 1: valuable asset class and include them in products right that

1091
00:56:58,400 --> 00:57:01,760
Speaker 1: represent the underlying coining. You're going to see an explosion

1092
00:57:01,800 --> 00:57:05,480
Speaker 1: of interest because then institutions get more comfortable. Right, it's

1093
00:57:05,520 --> 00:57:08,360
Speaker 1: no longer the wild west of you know, a hundred

1094
00:57:08,840 --> 00:57:11,800
Speaker 1: venues ninety eight of which you haven't heard where you know,

1095
00:57:11,880 --> 00:57:14,879
Speaker 1: we trade on coin base and Gemini because we've done

1096
00:57:14,880 --> 00:57:17,920
Speaker 1: our diligence on them and there's no central clearing there, right,

1097
00:57:17,960 --> 00:57:21,800
Speaker 1: So you're taking counterparty risk against those institutions. And so

1098
00:57:21,960 --> 00:57:25,080
Speaker 1: if it's you know, bitcoin venue you've never heard of,

1099
00:57:25,160 --> 00:57:28,720
Speaker 1: add some you know country far far away that doesn't

1100
00:57:28,760 --> 00:57:31,960
Speaker 1: really fit our our risk parameters, right, We're not We're

1101
00:57:32,000 --> 00:57:34,480
Speaker 1: not a hedge fund, we're not day traders, right. So

1102
00:57:34,640 --> 00:57:39,120
Speaker 1: as it becomes more i'll say systematized, you're gonna need

1103
00:57:39,240 --> 00:57:42,680
Speaker 1: market making firms like Virtue to you know, provide it

1104
00:57:42,760 --> 00:57:46,160
Speaker 1: spread between the coin the future and the e t F.

1105
00:57:46,600 --> 00:57:50,280
Speaker 1: I'm hopeful that in this new administration you'll see the

1106
00:57:50,360 --> 00:57:52,400
Speaker 1: SEC approven in the United States as well, and we'll

1107
00:57:52,440 --> 00:57:54,680
Speaker 1: be a big market maker in those. A lot of

1108
00:57:54,720 --> 00:57:56,280
Speaker 1: people think this is going to be the year you

1109
00:57:56,320 --> 00:57:58,520
Speaker 1: think it could be. I think it will be. Yeah,

1110
00:57:58,560 --> 00:58:00,640
Speaker 1: I think there's just too much know when you see

1111
00:58:00,640 --> 00:58:03,040
Speaker 1: it on TV and the price of it, there's too

1112
00:58:03,120 --> 00:58:05,840
Speaker 1: much mainstreaming of it, and when the institutions start buying it,

1113
00:58:05,840 --> 00:58:08,200
Speaker 1: and then on top of that, you know, we've got

1114
00:58:08,240 --> 00:58:10,320
Speaker 1: a lot of retail clients that have come to us

1115
00:58:10,360 --> 00:58:13,520
Speaker 1: and said, hey, we want to make this available to

1116
00:58:13,640 --> 00:58:15,800
Speaker 1: are a high high networks. Will you provide a two

1117
00:58:15,840 --> 00:58:18,640
Speaker 1: sided price ind it. So when that happens, when names

1118
00:58:18,680 --> 00:58:20,960
Speaker 1: you you know of and you can read the articles,

1119
00:58:21,480 --> 00:58:23,840
Speaker 1: want to make it available to their high networks, then

1120
00:58:23,920 --> 00:58:26,920
Speaker 1: it's becoming more mainstream. And that's when obviously we need

1121
00:58:27,000 --> 00:58:31,400
Speaker 1: to be there as a liquidity provider. So since Joe

1122
00:58:31,480 --> 00:58:34,280
Speaker 1: brought up something slightly different to payment for order flow,

1123
00:58:34,320 --> 00:58:37,200
Speaker 1: I have one more question. Um, you mentioned the administration there,

1124
00:58:37,240 --> 00:58:39,520
Speaker 1: and of course one of the big proposals from the

1125
00:58:39,600 --> 00:58:43,960
Speaker 1: Democrats is this idea of a financial transaction tax. How

1126
00:58:44,080 --> 00:58:47,000
Speaker 1: much would that affect your business? You're really trying to

1127
00:58:47,040 --> 00:58:49,640
Speaker 1: get me in trouble and say something really colossally stupid

1128
00:58:49,720 --> 00:58:52,040
Speaker 1: and offensive about the administration, aren't you. I want to

1129
00:58:52,080 --> 00:58:54,000
Speaker 1: hear your voice go high. I guess yeah, you want

1130
00:58:54,040 --> 00:58:56,840
Speaker 1: to hear my voice go high. Okay, So there's probably nothing,

1131
00:58:57,320 --> 00:59:00,640
Speaker 1: uh more inane than a financial transit action tax. I

1132
00:59:01,000 --> 00:59:04,400
Speaker 1: have studied this backwards and forwards. I read about the

1133
00:59:04,440 --> 00:59:08,880
Speaker 1: Swedish transaction tax of where on Friday they closed at

1134
00:59:08,960 --> 00:59:12,280
Speaker 1: Reutina's market. On Monday it moved to London. Uh. What

1135
00:59:12,440 --> 00:59:14,920
Speaker 1: I have always said is liquidity is like water. It

1136
00:59:15,000 --> 00:59:18,520
Speaker 1: finds its level. So if if the folks in Washington

1137
00:59:18,640 --> 00:59:20,920
Speaker 1: see fit to an act of financial transaction tax, and

1138
00:59:20,960 --> 00:59:24,520
Speaker 1: I don't think they will because Chuck Schumer is in

1139
00:59:24,640 --> 00:59:26,720
Speaker 1: my view of the smartest man in the Senate, and

1140
00:59:27,040 --> 00:59:31,120
Speaker 1: he happens the majority leader. Smart thing. Yeah, and uh,

1141
00:59:31,400 --> 00:59:33,960
Speaker 1: he happens to represent New York. He happens to understand

1142
00:59:34,000 --> 00:59:37,680
Speaker 1: that Wall Street and and Manhattan depend on the financial

1143
00:59:37,800 --> 00:59:41,360
Speaker 1: services market, and at financial transaction tax, it wouldn't just

1144
00:59:41,440 --> 00:59:45,640
Speaker 1: impact virtue, right, it would reduce volumes, the spreads would widen,

1145
00:59:46,120 --> 00:59:48,800
Speaker 1: and Mr and Mrs four oh one k would under

1146
00:59:48,800 --> 00:59:50,960
Speaker 1: paying the price, and the pension plans would pay the price.

1147
00:59:51,560 --> 00:59:54,520
Speaker 1: So when I see, like you know, unions, public service

1148
00:59:54,640 --> 00:59:58,960
Speaker 1: unions advocating financial for a financial transaction tax, I say

1149
00:59:59,000 --> 01:00:02,960
Speaker 1: to myself, they've either been severely misled by some Washington

1150
01:00:03,040 --> 01:00:05,160
Speaker 1: hack that's trying to raise money, or they just don't

1151
01:00:05,240 --> 01:00:09,040
Speaker 1: understand how markets work, because that's just a friction in

1152
01:00:09,120 --> 01:00:11,360
Speaker 1: the market and what happens to the market makers and

1153
01:00:11,400 --> 01:00:15,040
Speaker 1: to the financial communities. We pass that cost on, right,

1154
01:00:15,080 --> 01:00:17,560
Speaker 1: We're not gonna go out of business and make markets,

1155
01:00:17,720 --> 01:00:19,360
Speaker 1: and you're gonna still need a market maker. So we

1156
01:00:19,400 --> 01:00:22,480
Speaker 1: would just widen out and volumes with decline, the exchanges

1157
01:00:22,520 --> 01:00:25,520
Speaker 1: would be impacted, and ultimately you and I in our

1158
01:00:25,560 --> 01:00:27,880
Speaker 1: four oh one ks and our pension plans would pay

1159
01:00:27,920 --> 01:00:30,560
Speaker 1: that price. So as a policy matter, it is a

1160
01:00:30,680 --> 01:00:33,000
Speaker 1: S and I. As a practical matter, it has not

1161
01:00:33,120 --> 01:00:35,600
Speaker 1: worked in any jurisdiction the world where it's ever been

1162
01:00:36,160 --> 01:00:39,960
Speaker 1: proposed and implemented, and if it ends up happy the

1163
01:00:40,040 --> 01:00:43,640
Speaker 1: United States, you know folks up in Canada, Bermuda, Switzerland,

1164
01:00:43,720 --> 01:00:48,040
Speaker 1: the UK, Singapore, they will light up alternative exchanges and

1165
01:00:48,200 --> 01:00:49,920
Speaker 1: all of the U S secreers will just trade on

1166
01:00:50,000 --> 01:00:53,200
Speaker 1: CFD over there, and the Treasury will be deeply disappointed

1167
01:00:53,240 --> 01:00:58,160
Speaker 1: that they won't collect bub Kiss. How's that? That's pretty good?

1168
01:00:58,280 --> 01:01:01,400
Speaker 1: Your voice cone higher, But I'll I'll accept it. I

1169
01:01:01,480 --> 01:01:03,920
Speaker 1: can't say Bob. I can't say bubb Kiss as a soprano.

1170
01:01:04,040 --> 01:01:08,000
Speaker 1: It does not work. It doesn't work. That doesn't work.

1171
01:01:08,240 --> 01:01:13,160
Speaker 1: It doesn't work. Bubb Kiss is more of a baritone. Yes, Oh, Doug,

1172
01:01:13,280 --> 01:01:15,040
Speaker 1: thank you so much for coming on all thoughts. That

1173
01:01:15,160 --> 01:01:18,120
Speaker 1: was great. Thank you so much, guys, that was great, dog,

1174
01:01:18,160 --> 01:01:39,880
Speaker 1: Thank you, I appreciate it. Cheers. Nice to meet you, so, Joe.

1175
01:01:41,080 --> 01:01:44,360
Speaker 1: I enjoyed that conversation. Um, it's nice to talk to Doug,

1176
01:01:44,560 --> 01:01:49,360
Speaker 1: and clearly he feels very passionately about a lot of

1177
01:01:49,440 --> 01:01:52,560
Speaker 1: these topics. One thing I was thinking is just how

1178
01:01:52,680 --> 01:01:56,080
Speaker 1: much different the conversation would be right now had people

1179
01:01:56,280 --> 01:01:59,919
Speaker 1: decided not to name dark pools dark pools or to name,

1180
01:02:00,240 --> 01:02:02,520
Speaker 1: you know, payment for order flow, payment for order flow,

1181
01:02:02,640 --> 01:02:08,080
Speaker 1: like imagine if you had a much less evocative name. Yeah,

1182
01:02:08,520 --> 01:02:11,760
Speaker 1: all of it very evocative, and like, you know, I

1183
01:02:11,880 --> 01:02:14,120
Speaker 1: think like it was you know, he talked about his

1184
01:02:14,240 --> 01:02:18,600
Speaker 1: dispute with a sworking and just this whole idea. I mean,

1185
01:02:18,760 --> 01:02:21,680
Speaker 1: I think the dominant storyline that a lot or at

1186
01:02:21,760 --> 01:02:23,360
Speaker 1: least a lot of people came away with their the

1187
01:02:23,440 --> 01:02:25,880
Speaker 1: idea in their heads that's like payment for order flows,

1188
01:02:25,960 --> 01:02:28,760
Speaker 1: Like they're buying your order flow because like they want

1189
01:02:28,840 --> 01:02:31,560
Speaker 1: some information and so like the Facebook model is like, well,

1190
01:02:31,600 --> 01:02:33,360
Speaker 1: we want your information and then we're gonna sell adds

1191
01:02:33,360 --> 01:02:35,640
Speaker 1: against it. Where people have this idea is like Citadel

1192
01:02:35,840 --> 01:02:37,959
Speaker 1: is like gonna buy your trade and then they're gonna

1193
01:02:38,000 --> 01:02:40,640
Speaker 1: like make their own like side beds against the trade.

1194
01:02:41,240 --> 01:02:44,680
Speaker 1: And I think like his description that basically it's like

1195
01:02:44,800 --> 01:02:46,840
Speaker 1: they make a margin on a trade and so the

1196
01:02:46,920 --> 01:02:50,400
Speaker 1: broker demands or could like pursue a rebate on it.

1197
01:02:50,720 --> 01:02:53,560
Speaker 1: It's not sexy, but I think it, Uh, it makes

1198
01:02:53,640 --> 01:02:55,800
Speaker 1: it makes a lot of sense as he describes it. Yeah,

1199
01:02:55,960 --> 01:02:58,360
Speaker 1: and also, I mean we did a whole episode on

1200
01:02:58,440 --> 01:03:01,680
Speaker 1: this before. But the margin requirements for trades and the idea,

1201
01:03:02,000 --> 01:03:05,600
Speaker 1: the idea that if trade flow is going all in

1202
01:03:05,720 --> 01:03:09,880
Speaker 1: one direction, then that kind of leaves the broker at risk,

1203
01:03:10,080 --> 01:03:12,760
Speaker 1: and for that reason they would have to stop out

1204
01:03:13,000 --> 01:03:15,360
Speaker 1: the game stock trades, for instance. I thought that was

1205
01:03:15,400 --> 01:03:19,160
Speaker 1: a pretty clear explanation. Yeah, totally. And just beside, you know,

1206
01:03:19,240 --> 01:03:22,640
Speaker 1: it's like obviously on any given trade, they don't, you know,

1207
01:03:22,760 --> 01:03:25,080
Speaker 1: any specific trade, they don't make much money. And so

1208
01:03:25,280 --> 01:03:29,040
Speaker 1: like if if trading is sort of noisy and uncorrelated

1209
01:03:29,080 --> 01:03:32,400
Speaker 1: and just one like random people doing whatever, then you

1210
01:03:32,480 --> 01:03:35,680
Speaker 1: know that's a pretty good environment. But something like Game stop.

1211
01:03:35,680 --> 01:03:37,600
Speaker 1: It was just I mean, that story took over the

1212
01:03:37,680 --> 01:03:39,760
Speaker 1: whole world for like a week, that's all anyone was

1213
01:03:39,840 --> 01:03:42,680
Speaker 1: talking about. And then so it's like you said this,

1214
01:03:42,800 --> 01:03:45,200
Speaker 1: like and that doesn't happen with a single stock trade

1215
01:03:45,680 --> 01:03:48,240
Speaker 1: very often, Like we're sort of used to crash a

1216
01:03:48,320 --> 01:03:50,760
Speaker 1: certain use to rallies. I don't can't think of any

1217
01:03:50,800 --> 01:03:53,960
Speaker 1: other time we're like a single stock trade captured that

1218
01:03:54,160 --> 01:03:56,720
Speaker 1: much attention. But you could see then how like all

1219
01:03:56,800 --> 01:03:59,080
Speaker 1: of these sort of like the algorithms that they used

1220
01:03:59,120 --> 01:04:01,840
Speaker 1: to like put forward a price on the trade kind

1221
01:04:01,880 --> 01:04:05,560
Speaker 1: of got complete, would get completely busted. Yeah, and obviously

1222
01:04:05,640 --> 01:04:07,840
Speaker 1: that's sort of attention. It can be a good thing

1223
01:04:08,120 --> 01:04:11,560
Speaker 1: for businesses, you know, market making businesses, um because it

1224
01:04:11,600 --> 01:04:15,520
Speaker 1: attracts additional retail trading. Or it could be a bad

1225
01:04:15,600 --> 01:04:20,000
Speaker 1: thing because it attracts political scrutiny and we get regulators

1226
01:04:20,040 --> 01:04:22,040
Speaker 1: who start to take a look at this and decide

1227
01:04:22,040 --> 01:04:25,040
Speaker 1: they don't like it for whatever reason. So definitely something

1228
01:04:25,120 --> 01:04:28,680
Speaker 1: to watch. Sounds good. I'm continuing to look forward to

1229
01:04:28,920 --> 01:04:31,240
Speaker 1: seeing where this guest. I got to check out the

1230
01:04:31,320 --> 01:04:34,720
Speaker 1: hot dogs as well. They sound good, dude, this whole

1231
01:04:34,960 --> 01:04:37,240
Speaker 1: to be honest, the whole time during the discussion, I've

1232
01:04:37,280 --> 01:04:40,840
Speaker 1: just been scrolling the hot dog all right, Um, this

1233
01:04:41,040 --> 01:04:44,320
Speaker 1: has been another episode of the All Thoughts Podcast. I'm

1234
01:04:44,400 --> 01:04:47,400
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy

1235
01:04:47,440 --> 01:04:50,600
Speaker 1: Alloway and I'm Joe Why Isn't Though. You can follow

1236
01:04:50,640 --> 01:04:54,160
Speaker 1: me on Twitter at the Stalwart. Follow our guest Doug

1237
01:04:54,240 --> 01:04:57,200
Speaker 1: Seafood on Twitter. He is at Dougie Large and really

1238
01:04:57,320 --> 01:04:59,240
Speaker 1: most of his tweets are about hot dogs, but maybe

1239
01:04:59,320 --> 01:05:03,360
Speaker 1: sometimes you'll so tweet about electronic market making. Follow our

1240
01:05:03,400 --> 01:05:07,440
Speaker 1: producer Laura Carlson. She's at Laura M. Carlson. Followed the

1241
01:05:07,440 --> 01:05:11,400
Speaker 1: Bloomberg Head of Podcasts, Francesco Levi at Francesco Today, and

1242
01:05:11,680 --> 01:05:14,360
Speaker 1: check out all of our podcasts at Bloomberg under the

1243
01:05:14,440 --> 01:05:17,000
Speaker 1: handle at podcast Thanks for listening.