WEBVTT - Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT 0:00:11.400 --> 0:00:14.840 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.960 --> 0:00:19.480 I'm Tracy Allaway and I'm Joe. Wisn't all Joe? Do 0:00:19.520 --> 0:00:23.840 you remember Game Stop? No? What was that? Tracy? I 0:00:23.880 --> 0:00:28.000 forgot game stuff? Sorry, not not familiar with it. You know, 0:00:28.120 --> 0:00:31.720 one of the most remarkable things about that whole episode 0:00:31.920 --> 0:00:36.159 was that, for a brief, glorious moment in time, everyone 0:00:36.280 --> 0:00:40.080 was talking about market structure and things like payment for 0:00:40.200 --> 0:00:45.360 order flow, dtc C collateral like that was a discussion 0:00:45.800 --> 0:00:49.520 that you could actually have in mainstream media and sort 0:00:49.560 --> 0:00:54.080 of with your average person on the street. Yes, but 0:00:55.240 --> 0:01:00.480 I mean those conversations were in many cases deeply missing formed. 0:01:01.080 --> 0:01:03.480 So it is true that there was a lot of 0:01:03.480 --> 0:01:06.720 talk about market structure and payment for order flow and 0:01:06.840 --> 0:01:10.039 the dtc C and all that, and I actually did 0:01:10.160 --> 0:01:13.160 learn stuff, but there was a lot of noise of 0:01:13.200 --> 0:01:17.080 people who, like you know, spinning conspiracy theories about all 0:01:17.120 --> 0:01:20.640 this stuff hyprequency trading, how it really worked. Um, So 0:01:20.720 --> 0:01:23.640 hopefully people learn something, But I also suspect a lot 0:01:23.640 --> 0:01:26.800 of people went away from that whole episode unless they 0:01:26.840 --> 0:01:30.199 listen to lots of course much less in form Look, 0:01:30.240 --> 0:01:31.840 I'll take what I can get when it comes to 0:01:31.880 --> 0:01:35.120 getting people like interested in market structure. But I think 0:01:35.120 --> 0:01:39.520 you're right. I think probably especially on the payment for 0:01:39.680 --> 0:01:44.240 order flow subject, because it sounds kind of nefarious. You know, 0:01:44.400 --> 0:01:47.560 why would someone pay you for trade order flow? They 0:01:47.640 --> 0:01:51.200 must want something, they must be doing something with the information. 0:01:51.760 --> 0:01:54.560 I think it tends to lead to you know, a 0:01:54.600 --> 0:01:59.000 lot of suspicion. Yeah, I think that term in particular, 0:01:59.800 --> 0:02:02.280 you nailed it. There's something about that term that like 0:02:02.760 --> 0:02:06.520 invites a lot of sort of conspiratorial thoughts. Yeah, exactly. 0:02:06.560 --> 0:02:09.600 And of course we saw that really ramp up during 0:02:09.840 --> 0:02:13.040 the game's top drama. We even saw Congress start to 0:02:13.400 --> 0:02:16.320 you know, they had an inquiry into payment for order flow. 0:02:16.800 --> 0:02:21.480 The concern is that high frequency traders are somehow profiting 0:02:21.600 --> 0:02:24.600 off of that order flow in a way that hurts 0:02:24.800 --> 0:02:28.960 retail investors. And of course Robin Hood uses Citadel as 0:02:28.960 --> 0:02:31.919 its market maker, so we saw Citadel in the news 0:02:32.000 --> 0:02:37.000 as well. Citadel is uh one of its market makers. Uh, 0:02:37.080 --> 0:02:40.240 I think, so, which is something we'll get into. It's 0:02:40.240 --> 0:02:42.000 like all these a lot. I mean, I've been sort 0:02:42.000 --> 0:02:44.399 of like spending the weekend looking at some of these 0:02:44.600 --> 0:02:47.840 stats that the brokers phase and I have lots of 0:02:47.919 --> 0:02:50.440 questions about that. Um, so who are what are we 0:02:50.480 --> 0:02:51.680 going to talk about? How are we going to get 0:02:51.720 --> 0:02:55.400 into this? Okay, so today we are going deep into 0:02:55.520 --> 0:02:58.560 the payment for order flow discussion, and we're also going 0:02:58.560 --> 0:03:01.680 to talk more broadly about what exactly a market maker 0:03:01.720 --> 0:03:05.320 actually does. We have the perfect person to talk about 0:03:05.360 --> 0:03:12.240 all this. We have the CEO of Virtue, Doug Si. Welcome, Duve. Hello, 0:03:12.280 --> 0:03:15.840 how are you guys doing? Hey, We're good. Thanks. Um, 0:03:15.880 --> 0:03:19.120 maybe to begin with, we should kind of go straight 0:03:19.160 --> 0:03:22.480 to the elephant in the room and talk about something 0:03:22.600 --> 0:03:26.079 very very serious. But what's up with the hot dogs? 0:03:26.120 --> 0:03:29.800 So on your Twitter account you seem to talk a 0:03:29.840 --> 0:03:34.720 lot about hot dogs? What's going on? Well, I resent 0:03:34.800 --> 0:03:37.640 the elephant in the room analogy. I'm a bigger guy 0:03:38.000 --> 0:03:42.120 and my Twitter handle is Dougie Large. So, against my 0:03:42.200 --> 0:03:44.920 better judgment, about ten years ago, I opened a Twitter 0:03:44.960 --> 0:03:47.600 account and then my partner I bought a hockey team 0:03:47.640 --> 0:03:50.160 and I started tweeting about hockey. And you know, hockey 0:03:50.200 --> 0:03:52.400 fans for the most part are favorable, nice people, but 0:03:52.440 --> 0:03:55.360 then you get to five percent of the keyboard warriors 0:03:55.400 --> 0:03:57.240 and it started to be abusive towards me. So I 0:03:57.280 --> 0:03:59.440 stopped tweeting about hockey to said, don't tell I'm talking 0:03:59.480 --> 0:04:01.760 about And I happen to run, as you say, a 0:04:01.840 --> 0:04:04.840 quote unquote high frequency trading firm. And in two thousand fourteen, 0:04:04.840 --> 0:04:06.760 there was this little book called flash Boys that came 0:04:06.760 --> 0:04:10.160 out and dark pools and all these nefarious sounding terms, 0:04:10.160 --> 0:04:12.680 and people started tweeting me like I was a criminal. 0:04:12.680 --> 0:04:14.280 And I said, okay, well that's not a good topic. 0:04:14.480 --> 0:04:17.120 I guess I'll stop doing that. And then I found 0:04:17.160 --> 0:04:19.920 the one universal in this country that nobody can say 0:04:19.960 --> 0:04:22.880 anything negative about. It's the great American hot dog. And 0:04:22.920 --> 0:04:25.479 there's a company called Feltman's which is founded by two 0:04:25.480 --> 0:04:29.679 great veterans from West Point, and they rediscovered the original 0:04:29.760 --> 0:04:32.159 cone Allan hot dog and they're fantastic. They've got the 0:04:32.200 --> 0:04:34.840 perfect mix of spices and they kind of pop when 0:04:34.839 --> 0:04:37.400 you eat them. And I decided, Okay, if I get 0:04:37.480 --> 0:04:39.719 behind these guys, I have no financial interest. I just 0:04:39.720 --> 0:04:41.520 love them. They're great Americans and they have a great 0:04:41.520 --> 0:04:44.039 hot dog. I said, there's not a chance people can 0:04:44.200 --> 0:04:46.880 give me grief about tweeting about hot dogs. And you know, 0:04:47.920 --> 0:04:51.640 I have not had any negative comments. These these look 0:04:51.760 --> 0:04:55.560 really good. I'm on their website right now, and I'm 0:04:55.600 --> 0:04:59.039 definitely going to mustard get the mustard. Also, trust me, 0:04:59.080 --> 0:05:00.800 when I tied the mustard better than like a sell, 0:05:00.880 --> 0:05:04.440 I put it on everything. I put on everything. I'm 0:05:04.440 --> 0:05:06.839 definitely gonna order or something. I know market making. I 0:05:06.880 --> 0:05:08.960 know market making and eating. Those are the two things 0:05:08.960 --> 0:05:11.839 I'm an expert in. Maybe we should also talk about 0:05:11.839 --> 0:05:15.920 market making though, if you insist, So what is H two? 0:05:16.000 --> 0:05:17.920 So I just give us the sort of brief version 0:05:18.000 --> 0:05:20.839 of its history and what how it fits into the 0:05:20.880 --> 0:05:23.960 sort of market ecosystem. Sure, sure, So we started in 0:05:24.160 --> 0:05:26.400 two thousand eight, Beril even or not. My partner was 0:05:26.760 --> 0:05:28.799 an old school market maker. He was in the pits, 0:05:28.839 --> 0:05:30.960 you know those trading pits, remember the movie Trading Places 0:05:31.520 --> 0:05:33.480 of the New York of the New York Mercantile Exchange. 0:05:33.520 --> 0:05:35.440 His name was Vinny Viola. He was an old school 0:05:35.480 --> 0:05:37.159 market maker. Stood in the middle of the pit and 0:05:37.560 --> 0:05:39.440 a bunch of guys screamed orders at him, and he 0:05:39.480 --> 0:05:41.640 tried to make what is known as the bid offer, 0:05:41.680 --> 0:05:43.680 spread the difference between what a willing buyer and a 0:05:43.720 --> 0:05:46.520 willing seller we're willing to pay. In that in that pit, 0:05:46.680 --> 0:05:49.520 he was trading mostly like crude and gasoline futures, right, 0:05:49.560 --> 0:05:52.360 So he was a futures trader. And Vinny was smart 0:05:52.440 --> 0:05:56.039 enough to realize that two odd guys standing in a 0:05:56.080 --> 0:05:59.040 circular pit screaming at each other making funny hand signals 0:05:59.760 --> 0:06:02.919 wasn't not going to be the end state of financial intermediation, 0:06:03.040 --> 0:06:05.719 price discovery, trading, whatever you want to call it, and 0:06:05.760 --> 0:06:09.520 that technology was going to evolve that process. And so 0:06:09.600 --> 0:06:13.000 that was his thought behind forming Virtue Financial. I was 0:06:13.040 --> 0:06:15.120 a lawyer, very happily at a l offer him in 0:06:15.160 --> 0:06:18.159 Manhattan called Paul Weis. For eighteen years I was his lawyer, 0:06:18.160 --> 0:06:20.520 and he said said to me one day, you know 0:06:20.560 --> 0:06:22.000 you'd be a hell of a businessman. Do you ever 0:06:22.000 --> 0:06:24.200 think about quitting being a lawyer? I said, not until now, 0:06:24.400 --> 0:06:26.880 and then I quit and we started Virtue and our 0:06:26.960 --> 0:06:31.400 idea was to be a very large scaled, automated financial 0:06:31.400 --> 0:06:34.560 intermediary market making firm that would try to be the 0:06:34.600 --> 0:06:37.480 best bid and the best offer in every electronic marketplace 0:06:37.800 --> 0:06:40.600 in the world. We had a very ambitious goal and 0:06:40.640 --> 0:06:43.839 obviously we're we're more well known as you guys indicated 0:06:43.839 --> 0:06:46.160 in your lead in for US equities and being a 0:06:46.200 --> 0:06:49.200 what's called a wholesale market maker, but we make markets 0:06:49.240 --> 0:06:52.359 in over two d and fifty different marketplaces in the world, 0:06:52.400 --> 0:06:55.320 in global equities, but also in f X, and in 0:06:55.400 --> 0:06:59.800 treasury futures, and in commodity products and medals and corn, sugar, cocoa, 0:07:00.680 --> 0:07:03.400 you name a product that is trade electronically in a 0:07:03.480 --> 0:07:08.560 venue in the world. Frankly, where there's enough need for liquidity, 0:07:08.560 --> 0:07:11.480 provider a market maker, and that's what Virtue does. And 0:07:11.560 --> 0:07:14.280 we also, through an acquisition, have a very large agency 0:07:14.320 --> 0:07:17.760 business where we act as an agent for clients that 0:07:17.840 --> 0:07:20.680 want to access generally the global equities market. So it's 0:07:20.680 --> 0:07:24.600 a pretty large scaled global financial services firm. On the 0:07:24.600 --> 0:07:26.800 CEO of it, we've got about a thousand employees twelve 0:07:26.880 --> 0:07:29.920 offices around the world and last year we generated about 0:07:29.920 --> 0:07:33.560 two point three billion dollars of net trading revenue and 0:07:33.600 --> 0:07:36.840 that equated to roughly about a billion six five of 0:07:36.840 --> 0:07:40.360 of IBADA so adjusted EBADA. So we're pretty large financial 0:07:40.400 --> 0:07:44.200 services firm. That's what we do. Not bad. Yeah, I 0:07:44.240 --> 0:07:46.480 think your stock is up quite a lot as well. 0:07:46.520 --> 0:07:50.120 And you're the only publicly traded market maker over in 0:07:50.160 --> 0:07:53.360 the US, so you have that distinction too. That is correct. 0:07:55.280 --> 0:07:58.400 Just on the market making business. Could you maybe talk 0:07:58.440 --> 0:08:00.800 to us a little bit more about that. I think 0:08:00.840 --> 0:08:03.240 we throw this term around quite a lot, like, oh, 0:08:03.400 --> 0:08:06.320 they make markets and whatever, But can you talk to 0:08:06.440 --> 0:08:10.040 us about what exactly that entails and why don't we 0:08:10.120 --> 0:08:13.520 narrow it down to US equities? Yeah? Sure, so in 0:08:13.600 --> 0:08:17.040 US equities, think of it. There's two forms of market making, 0:08:17.040 --> 0:08:19.440 if you will, that we engage in. So right now, 0:08:19.920 --> 0:08:22.880 believe it or not, there are fifteen national securities exchanges. 0:08:22.880 --> 0:08:24.960 You you probably know NASDAC in New York, but there's 0:08:25.000 --> 0:08:27.840 another thirteen i E actually may have heard of. Maybe 0:08:27.840 --> 0:08:30.040 you've heard of the cbo E Stock Exchange. But then 0:08:30.080 --> 0:08:32.640 there's you know a ten or other ones, including the 0:08:32.640 --> 0:08:34.880 Members Exchange, which I helped start at Virtue, you know 0:08:34.920 --> 0:08:37.800 those kinds of things. And so we are a firm 0:08:37.920 --> 0:08:41.520 that does not really care about directional risk. In other words, 0:08:41.520 --> 0:08:44.720 we're not a hedge fund. We're not speculating. We're not 0:08:44.760 --> 0:08:47.960 buying Tesla at at six hundred hoping it goes to 0:08:48.000 --> 0:08:50.480 eight hundred. Really, what we're trying to do is be 0:08:51.640 --> 0:08:53.680 the guy that's on the inside that's willing to buy 0:08:53.720 --> 0:08:56.040 from you and sell to you, right and sell to 0:08:56.080 --> 0:08:58.520 somebody else to try to make that little penny spread 0:08:58.920 --> 0:09:02.120 every single time. So are holding time in most of 0:09:02.120 --> 0:09:04.840 the top five names of US equities you know will 0:09:04.840 --> 0:09:07.719 be hopefully a few seconds or less than a second, right, 0:09:07.760 --> 0:09:10.559 because the likelihood that a willing buyer and a willing 0:09:10.559 --> 0:09:13.800 seller come together at exactly the same moment in time 0:09:13.880 --> 0:09:16.079 is pretty diminimous. It's sort of like if you think 0:09:16.080 --> 0:09:18.440 about the Civil War, the Revolution I wore two bullets 0:09:18.800 --> 0:09:20.480 meeting in the middle of the air. It doesn't happen 0:09:20.520 --> 0:09:23.000 all that often. So you need a company that is 0:09:23.000 --> 0:09:27.079 willing enable, has the financial resources, but also understands those 0:09:27.640 --> 0:09:31.440 The US equities market, with fifteen national securities exchanges and 0:09:31.480 --> 0:09:33.800 forty different dark pools and a bunch of other brokers, 0:09:33.840 --> 0:09:37.520 it's a very fragmented market. So stitching together that marketplace 0:09:38.000 --> 0:09:41.760 takes a lot of financial technology and a lot of investment. 0:09:41.760 --> 0:09:44.120 We invest hundreds of millions of dollars every year to 0:09:44.240 --> 0:09:47.480 have technology that's able to understand and stitch that marketplace together. 0:09:47.840 --> 0:09:49.880 But again, the difference between what we do and when 0:09:49.920 --> 0:09:52.520 a lot of other other firms do, like quote unquote 0:09:52.559 --> 0:09:55.280 high frequency trading firms, is that we are a passive 0:09:55.320 --> 0:09:58.680 market maker. We're always entering the market by saying, here 0:09:58.720 --> 0:10:01.319 we go. We're willing to sell you something at ten, 0:10:01.360 --> 0:10:03.520 we're willing to buy it at nine, and there's a 0:10:03.559 --> 0:10:06.240 penny spread in between, and we hope to collect that. 0:10:06.280 --> 0:10:07.800 More often than not, a lot of times we get 0:10:07.880 --> 0:10:10.720 run over and we lose money. You mentioned game stop before. 0:10:10.760 --> 0:10:12.520 I'm sure we'll talk about that plenty. But in the 0:10:12.520 --> 0:10:15.800 game stop situation, when the markets just crashing one way 0:10:15.880 --> 0:10:18.400 or together, the market maker pretty much gets its face 0:10:18.440 --> 0:10:20.720 ripped off right. It's on the train tracks, the trains coming, 0:10:21.240 --> 0:10:23.440 and it can't get out of the way. The other 0:10:23.480 --> 0:10:25.200 thing we do, which I'm sure you want to talk 0:10:25.320 --> 0:10:27.520 a lot about, is what we call whole selling. So 0:10:27.559 --> 0:10:31.640 there are these institutions called retail brokers, wealth managers. You 0:10:31.640 --> 0:10:34.679 know robin Hood, Fidelity, Schwab e Trade which is now 0:10:34.679 --> 0:10:40.760 Morgan Stanley, but also Stifle, Raymond, James, JP, Morgan Asset Management, 0:10:41.920 --> 0:10:45.600 RBC Wealth Management. Think of any aggregator of high net 0:10:45.600 --> 0:10:48.760 worth or professional trading flow. In the United States. We 0:10:48.760 --> 0:10:52.400 have this unique structure that those institutions have a choice. 0:10:52.600 --> 0:10:55.800 They can send their orders, their market orders right to 0:10:56.120 --> 0:10:59.319 either in exchange to a dark pool, or they can 0:10:59.320 --> 0:11:01.000 send it to a whole sell or a market maker. 0:11:01.080 --> 0:11:04.040 Citadel is the largest retail market maker. We're number two. 0:11:04.040 --> 0:11:07.840 They've got roughly the market we've got roughly. And then 0:11:07.880 --> 0:11:12.920 there's a handful of other institutions, Susquehanna too, Sigma Ubs, 0:11:13.160 --> 0:11:16.560 We're all competing for that order flow from roughly two 0:11:16.600 --> 0:11:21.240 hundred retail brokers, wealth managements, wealth managers, excuse me, aggregators 0:11:21.280 --> 0:11:26.320 of flow, etcetera. So you just named a bunch of 0:11:26.360 --> 0:11:28.840 market makers that you compete with, and I'm wondering, when 0:11:28.840 --> 0:11:31.160 it comes to something like market making, it sounds like 0:11:31.200 --> 0:11:34.160 such a basic function. You know, you're matching up buyers 0:11:34.200 --> 0:11:38.040 with sellers and you're taking a small cut of the transaction. 0:11:38.640 --> 0:11:42.040 What is competing or what does competition actually look like 0:11:42.160 --> 0:11:46.240 in that scenario? Like what what makes Virtuo special or 0:11:46.320 --> 0:11:50.680 different to say Citadel or Susquehanna. Yeah, that's a great question. 0:11:50.720 --> 0:11:54.680 So I should have actually, uh explained that better. So 0:11:55.200 --> 0:11:57.640 let's go back to the two hundred institutions we we 0:11:57.640 --> 0:12:00.640 we that I mentioned before, right, everybody from a Merror 0:12:00.720 --> 0:12:03.360 trade to Zecho Trade eight Z and everybody in between. 0:12:03.440 --> 0:12:05.840 Every single one of those institutions has the best Best 0:12:05.880 --> 0:12:09.120 Execution committee, And what they're measuring is there's something called 0:12:09.120 --> 0:12:11.360 a national best bid and best offers. So that's the 0:12:11.400 --> 0:12:15.920 consolidated tape. You take those fifteen national securities exchanges and 0:12:15.920 --> 0:12:19.120 you say, okay, at any moment in time, right, for 0:12:19.160 --> 0:12:21.440 at least a hundred shairs, what's the what's the best 0:12:21.520 --> 0:12:24.360 price that someone is willing to sell in the best 0:12:24.400 --> 0:12:27.000 price that someone is willing to buy a particular security. 0:12:27.040 --> 0:12:30.280 That's called the n b B Okay. And so every 0:12:30.280 --> 0:12:33.360 one of those retail brokers gets the same feed, right, 0:12:33.440 --> 0:12:36.360 the same consolidated feed that we do, right, and they 0:12:36.400 --> 0:12:38.640 all measuring at the time that they send us a 0:12:38.679 --> 0:12:40.880 market order. Right, you want to buy a hundred shares 0:12:40.880 --> 0:12:45.079 of Tesla, what was the national best offer for Tesla 0:12:45.120 --> 0:12:48.360 at that moment in time? Okay. What we do as 0:12:48.400 --> 0:12:51.560 marketmakers is we try to improve that national best bid 0:12:51.600 --> 0:12:54.400 or best offer. That's called price improvement or e Q. 0:12:54.800 --> 0:12:57.240 And as you mentioned in your in your lead in, 0:12:57.800 --> 0:13:01.679 all of the statistics around price improvement are publicly available, 0:13:01.920 --> 0:13:06.200 and so the brokers have their own routing statistics where 0:13:06.200 --> 0:13:09.800 they measure our execution quality, the ability for the market 0:13:09.880 --> 0:13:12.880 maker to improve off of the n b b O 0:13:13.840 --> 0:13:16.480 and to the extent and to the amount we're willing 0:13:16.520 --> 0:13:19.040 to do so, they will send us order flow. Now, 0:13:19.080 --> 0:13:23.040 obviously they don't send their order flow to Citadel or 0:13:23.080 --> 0:13:26.000 two vertuur to Susquehanna. But and they don't do it 0:13:26.040 --> 0:13:28.520 all as one big bucket. Sometimes they do it by 0:13:28.520 --> 0:13:31.840 different names, depending upon a DV, depending upon volume. They 0:13:31.880 --> 0:13:36.120 all have their own unique routing methodologies. But every single 0:13:36.200 --> 0:13:39.840 one of them is based off the the amount that 0:13:39.960 --> 0:13:43.160 the market maker is willing and able to improve the 0:13:43.240 --> 0:13:45.880 national best bid and best offer. Just to give you 0:13:46.000 --> 0:13:49.160 some statistic which is pretty compelling, in two thousand and twenty, 0:13:49.679 --> 0:13:51.800 the five or six of us the market making firms 0:13:51.960 --> 0:13:56.640 in the aggregate provided price improvement, So prices better than 0:13:56.640 --> 0:13:58.960 the n b b O in an aggregate amount of 0:13:59.000 --> 0:14:01.839 three point seven billion dollars. Right, So that means a 0:14:01.880 --> 0:14:06.120 retail investor in general, right, is getting a price that 0:14:06.320 --> 0:14:09.240 is better than what they could get on a national 0:14:09.280 --> 0:14:13.480 securities exchange. Right. And so that's the that's why they 0:14:13.559 --> 0:14:15.839 rout us those orders. Right. Payment for wonder face a 0:14:15.880 --> 0:14:17.560 separate thing. We'll talk about that in a second. But 0:14:17.679 --> 0:14:21.320 two d Odd Brokers are saying, hey, you can provide 0:14:21.320 --> 0:14:23.960 better execution quality than we can get on an exchange. 0:14:24.040 --> 0:14:25.920 And the natural question you're about to ask me is 0:14:25.960 --> 0:14:27.600 why would you like to ask that question? You want 0:14:27.640 --> 0:14:29.480 me to just keep going. I just want to back 0:14:29.560 --> 0:14:32.080 up real quickly. I just want one I got. I 0:14:32.120 --> 0:14:34.080 got on a roll sometimes and I talked forever, so 0:14:34.120 --> 0:14:36.520 I'll try to stop for you. Guys. This is great. 0:14:36.560 --> 0:14:39.360 It's our job to stop you, but this is super helpful. 0:14:39.400 --> 0:14:44.680 I just one. So the NBBO it's purely exchange price 0:14:44.800 --> 0:14:47.840 correct because that's the only the difference between exchange and 0:14:47.880 --> 0:14:51.960 a dark pool. Right. You know, the marketplace is terrible 0:14:52.240 --> 0:14:54.440 at naming things, right, A dark pool sounds like this 0:14:54.520 --> 0:15:00.240 nefarious thing, and also it's a flash trade. I know, 0:15:00.480 --> 0:15:03.160 if I could do my life over again, I would 0:15:03.160 --> 0:15:05.520 have renamed all these things. But putting that aside, virtue 0:15:05.560 --> 0:15:07.400 is named for virtue, right, we try to be virtuous 0:15:07.440 --> 0:15:08.960 to the market, so we at least have a nice name. 0:15:09.400 --> 0:15:12.920 So what a dark pool is? It's actually technically it's 0:15:12.920 --> 0:15:15.960 called an a t S or an alternative trading system, 0:15:16.360 --> 0:15:18.920 the lynchpin of the U S equities market. And indeed, 0:15:19.080 --> 0:15:21.840 you know, the U S economy is competition, right, and 0:15:21.960 --> 0:15:24.560 so a long time ago, back when I was a lawyer, 0:15:24.600 --> 0:15:26.520 if someone said, you know what these exchanges and it 0:15:26.640 --> 0:15:29.360 was really just the New York Stock Exchange until let's 0:15:29.360 --> 0:15:32.800 say the early nineties. They have a monopoly, they're really expensive. 0:15:32.880 --> 0:15:35.440 Bad things go on there. There was you know, alleged 0:15:35.480 --> 0:15:37.960 criminal activity with the specialist. You can google all that. 0:15:38.080 --> 0:15:40.960 So the exchanges weren't all that, let's put it that way, right, 0:15:41.000 --> 0:15:42.520 and they were, you know, it was kind of a 0:15:42.600 --> 0:15:45.160 private boys club, if you will. And so a bunch 0:15:45.200 --> 0:15:47.240 of banks and other broker said, we want to be 0:15:47.320 --> 0:15:50.120 able to create an alternative trading system and a t S. 0:15:50.560 --> 0:15:54.280 So the SEC has REGGAETS and it basically says, if 0:15:54.320 --> 0:15:58.360 you want to be a place where people are sending orders, right, 0:15:58.440 --> 0:16:01.480 as long as you don't have more than five of 0:16:01.560 --> 0:16:04.120 the market in a particular name, you can do that. 0:16:04.320 --> 0:16:06.240 You have to publish your rules. We run to a 0:16:06.360 --> 0:16:08.520 t S is at Virtue. You've got to publish your rules, 0:16:08.880 --> 0:16:12.480 but you cannot display market data. Okay, so it has 0:16:12.520 --> 0:16:14.760 to be quote unquote dark. That's why people call them 0:16:14.840 --> 0:16:19.520 dark pools. So people brokers right can rest orders in 0:16:19.600 --> 0:16:23.120 an A T S with the safety and security that 0:16:23.280 --> 0:16:27.240 they know that that they're not exposing large size to 0:16:27.280 --> 0:16:29.440 the rest of the world. Why don't people like to 0:16:29.680 --> 0:16:32.960 trade on exchanges is because the entire world knows, Like 0:16:33.320 --> 0:16:35.240 you know, I'm an agency broker. If I get in 0:16:35.360 --> 0:16:38.520 order from a large asset manager to buy a hundred 0:16:38.560 --> 0:16:41.240 thousand shares a Tesla and I just post that on 0:16:41.360 --> 0:16:43.800 an exchange. Now the entire world knows that there's a 0:16:43.920 --> 0:16:46.880 giant whale out there that wants to buy a hundred 0:16:46.920 --> 0:16:49.640 thousand shares a tesla. What's going to happen to the market? Right? 0:16:49.720 --> 0:16:52.880 You can imagine people will change the risk that they 0:16:52.960 --> 0:16:54.680 see in that market because they know that there's a 0:16:55.040 --> 0:16:57.840 huge imbalance, right. And so that's one of the reasons 0:16:57.920 --> 0:17:02.520 why investors, broker a smart folks in the marketplace wanted choices, 0:17:02.560 --> 0:17:04.680 and that's why they created these A T s s. Right. So, 0:17:05.119 --> 0:17:09.680 an exchange has public displayed market data, right, it gets 0:17:10.040 --> 0:17:12.280 quoting revenue because of that they make it. They make 0:17:12.280 --> 0:17:15.680 about four or five million dollars a year justin consolidated 0:17:15.720 --> 0:17:18.639 tape revenue. That's one of the benefits to being exchange, right, 0:17:18.680 --> 0:17:22.320 Whereas an a TS is only charging a transaction fee, right, 0:17:22.440 --> 0:17:25.840 and orders etcetera are executed quote unquote in the dark, 0:17:25.920 --> 0:17:27.840 and that's why people call them dark pools. There's nothing 0:17:27.920 --> 0:17:31.399 to various about them. It's just an alternative method. Again, 0:17:31.480 --> 0:17:35.119 always think what what the great thing about our marketplace 0:17:35.160 --> 0:17:37.280 in the US and why it's it's so darn efficient 0:17:37.320 --> 0:17:40.119 and why it's so damn competitive and cheap is because 0:17:40.240 --> 0:17:44.040 you have this competition. So I want to esca follow up. 0:17:44.200 --> 0:17:46.800 You know, all of the I was doing a little 0:17:47.040 --> 0:17:48.879 trying to learn a little bit to prepare for the 0:17:50.400 --> 0:17:53.200 for this discussion. And so I see all of the 0:17:53.280 --> 0:17:56.199 brokerages are the retail brokerages or I guess everyone follows 0:17:56.320 --> 0:18:00.119 the six files, these Form six or six. We're they 0:18:00.200 --> 0:18:03.679 talk about the market makers to whom they're routing orders 0:18:03.760 --> 0:18:07.680 and they helpfully sort of like basically break down their 0:18:07.760 --> 0:18:11.040 market share and so for eat, So for example, robin 0:18:11.119 --> 0:18:14.680 Hood in the last quarter, it looked like almost their 0:18:14.720 --> 0:18:18.280 shares went through Citadel Virtue looks like got a little 0:18:18.320 --> 0:18:25.560 bit under. What determines how a broker allocates its routing 0:18:25.760 --> 0:18:31.240 is it is every trade its own discrete auction of 0:18:31.520 --> 0:18:33.120 and you're all competing for it. There like, how does 0:18:33.160 --> 0:18:35.200 this process work? No, not at all, not at all. 0:18:35.280 --> 0:18:38.240 So the way it works is, as I try to articulate, 0:18:38.280 --> 0:18:40.480 they have a best execution committee, right, and they have 0:18:40.680 --> 0:18:46.399 their routing protocol. Again, it's always based off of how 0:18:46.480 --> 0:18:48.240 much are we willing to improve off of that m 0:18:48.280 --> 0:18:51.520 B B oh so quote unquote price improvement um. And 0:18:51.680 --> 0:18:54.880 so in the beginning of the month. Quarter some brokers 0:18:54.920 --> 0:18:56.960 do it weekly, but it's not daily, and it's certainly 0:18:57.000 --> 0:18:59.600 not by symbol, right, there's just way too many orders 0:18:59.680 --> 0:19:01.520 for every thing to be an individual auction. So they 0:19:01.600 --> 0:19:03.919 said it in the beginning of the week. Let's say 0:19:03.920 --> 0:19:05.639 at the beginning of the month. Every broker's got their 0:19:05.640 --> 0:19:09.320 own rule and they say, okay, in the prior period, right, 0:19:09.400 --> 0:19:13.400 so it's you know, we're now in March. So in February, Virtue, Citadel, 0:19:13.480 --> 0:19:16.480 Susquehanna too, Sigma. I don't know who else is in 0:19:16.640 --> 0:19:19.480 you know, Ubs, Wolverine right there, five or six firms 0:19:19.800 --> 0:19:21.879 we all bashed, we bashed our heads against you know, 0:19:21.960 --> 0:19:25.720 each other, and for you know, every broker's got a 0:19:25.760 --> 0:19:28.160 different way of looking at it. But for the top 0:19:28.280 --> 0:19:32.000 five hundred names that are in the snph. Here's the 0:19:32.040 --> 0:19:34.960 aggrega amount of price improvement. And Citadel came in first place, 0:19:35.200 --> 0:19:38.360 right because they provided forty two points of EQ. It's 0:19:38.400 --> 0:19:40.399 all measured off of the mid of the mid So 0:19:40.480 --> 0:19:42.760 how much are you willing to improve off of the 0:19:42.800 --> 0:19:46.760 midpoint between the bid and the offer? And Virtue came 0:19:46.800 --> 0:19:50.440 in second place, Susquehanna third, two sigma, etcetera. So this therefore, 0:19:50.560 --> 0:19:53.520 in the month of March, right, we're gonna give Citadel 0:19:53.600 --> 0:19:59.400 for Virtue Susquehanna twelve percent, etcetera. During the measurement period, 0:19:59.440 --> 0:20:02.280 whether it's a eeker a month, we're in constant dialogue 0:20:02.320 --> 0:20:04.320 with them. They will say, hey, look, you're doing really 0:20:04.400 --> 0:20:07.280 well in the top five indet names, but you're really 0:20:07.359 --> 0:20:09.800 doing poorly in the bottom thousand names. Can you improve 0:20:09.880 --> 0:20:13.000 your EQ? So they're always, you know, trying to get 0:20:13.119 --> 0:20:17.600 us to frankly, provide more value back to their their clients. 0:20:18.200 --> 0:20:20.639 And if you watch TV, and I'm not going to 0:20:20.760 --> 0:20:23.280 name the network because it's a competing network, there's actually 0:20:23.320 --> 0:20:25.840 one of the really really large brokers. There's two dudes 0:20:25.880 --> 0:20:28.960 sitting having lunch and one guy shows him his little 0:20:29.040 --> 0:20:31.240 iPhone and says, well, you know, look at the execution 0:20:31.359 --> 0:20:34.120 quality I got, and he buys, and he saved twelve 0:20:34.160 --> 0:20:36.159 dollars and ninety three cents, and he pays for the 0:20:36.600 --> 0:20:39.280 grill cheese sandwich at lunch. Right, they must be in 0:20:39.400 --> 0:20:41.160 like not in New York because the grill cheese would 0:20:41.160 --> 0:20:44.959 cost more. But that that's is literally that's what we do, right, 0:20:45.040 --> 0:20:48.000 So think about how important it is that an advertising 0:20:48.040 --> 0:20:52.280 agency for one of the largest retail brokers in the world. Right, 0:20:52.520 --> 0:20:55.040 that's an American institution. I'm not going to name their name. 0:20:55.080 --> 0:20:57.760 You can think of the commercial right, they are spending 0:20:57.840 --> 0:21:02.880 money advertising the word that Citadel, virtue, sus behind, etcetera. 0:21:03.000 --> 0:21:06.479 Do I think about how ingrained that is in the system, 0:21:06.560 --> 0:21:10.640 and then juxtaposed that against the frankly lunacy that people 0:21:10.680 --> 0:21:13.680 were articulating about Robin Hood and Citadel. It's just, you know, 0:21:13.760 --> 0:21:17.480