Virtu Financial, one of the world’s largest market makers, has defended the practice of paying retail brokers to take their share deals, arguing there is no evidence that payment for order flow harms the market.
The comments, from Doug Cifu, chief executive, come as lawmakers in Washington prepare for hearings next week into the frenzied trading in stocks such as GameStop and AMC, made popular on the Reddit website.
The speed and depth of trading forced some online brokers to restrict trading in certain shares, angering clients and politicians, and putting a spotlight on the relationship between brokers, market makers and other players in the financial system.
Market makers including Virtu, Citadel Securities and Susquehanna paid retail brokers a total of $2.9bn last year to handle their trades, according to Bloomberg data. The market makers in return promise to execute the trade at or at better than current market prices.
On an earnings call with analysts, Cifu was asked about the effect on Virtu’s business if payment for order flow was “regulated out of existence”. In response, he called for more education of investors and more transparency.
“I think that’s really the solution, not just irrationally, you know, quote unquote banning something because we think it’s bad or it distorts the marketplace. I’ve never seen any shred of data that validates that assertion,” he said.
Virtu, which more than doubled its revenue in 2020, paid $315m to brokers for order flow on equities in 2020, with only Citadel Securities and Susquehanna paying more. In return, Virtu supplied $1.3bn in improved prices for retail investors, Cifu said.
Citadel Securities is expected to be among the companies asked to testify before a US House of Representatives panel next week about the “meme stock” mania, Reuters reported. Virtu executives did not say whether they were scheduled to testify as well.
For Virtu, banning payment for order flow wouldn’t cause “any change” to its business, Cifu said. He added, however, that he believed the practice was “important for innovation” in the industry, because it allowed brokerages to offer customers commission-free trades and “democratise” the marketplace.
Cifu also threatened to leave New York if local authorities began taxing stock transfers, as several state senators have proposed.
“I will tell you that the notion of a transaction tax in New York is — I’ll use the word foolish, because I know what we would do. We would just leave the state of New York. We would never pay a penny of the New York state transaction tax.”
Virtu’s adjusted net trading income for 2020 was up 133 per cent to $2.3bn, from $975m the previous year, the vast majority coming from equity trades. The group’s total revenues increased 114 per cent year over year, rising to $3.2bn.