Many are urging the SEC to consider changing the rules governing routing of order flow, enhancing disclosure requirements and reengineering a market participants’ get paid for the services they offer, according to Doug Cifu, CEO of Virtu Financial.
However, he expressed concerns that the growing intensity of calls for reform is not only based on “false narratives and factually unsupportable supportable conclusions, but also obscures the fact that the US equity markets are the most robust, transparent and fair in the world for all investors and for retail.”
On June 10, 2021, Cifu participated in a panel discussion hosted by the U.S. Securities and Exchange Commission (SEC) regarding wholesale market structure and payment for order flow (PFOF).
He argued: “The investor experience has never been better. Developments in market structure, advances in technology and the introduction of intense competition have resulted in vastly expanded service and product offerings to retail investors, low or no cost trading, and importantly, superior execution quality.”
Cifu said that the benefits of today’s market structure to retail investors are quantifiable and the supporting factual evidence is striking.
“Under the current model, wholesalers fill marketable orders at prices typically better than the NBBO. The combination of price and size improvement offered by wholesalers, which we refer to as real price improvement (real PI), translates to real dollar savings for retail investors in 2020,” he said.
“That real real PI benefited retail investors and it’s about three times more than what is reflected by the data collected under Rule 605,” he added.
According to Cifu, this demonstrates a significant understatement of the true benefits recognized by retail investors under the current market structure.
He added that another theory put forth by critics of the current market structure is that the bid-offer spreads are widened by the wholesale model and specifically the segmentation it has introduced, they posit that spreads would mythically narrow.
“If executions all took place on a lead exchange, we posit that the opposite is true, and real data from the Commission tick size pilot provides support for that thesis,” he said.
“If the current market structure is drastically altered, investors will pay more in implicit transaction costs and retail will lose much of the benefits they’ve realized on the current model,” he said.
Cifu further said that retail brokers have a legal obligation of best execution, which they meet by writing to venues that provide the best price and size execution, not the ones that offer the most payment for order flow.
He added that retail orders also benefit from intense broker competition promoted by the current market structure.
“It has led to lower no-cost trading because wholesalers, including Virtu absorb all of the lit exchange in ATS costs, which would otherwise be passed on to the retail investor. These costs are significant and service further evidence of the benefits of the wholesale model,” Cifu said
“In addition, broker dealers can leverage the risk management capabilities and economies of scale from wholesalers and pass on the benefits to their customers. The current construct also allows broker dealers to compete on other factors, research trading tools, investor education, trading interfaces and financing rates, among others,” he said.
“While we support data driven reform, we worry that a driven drastic overhaul of the current market structure could bring about unintended consequences that would actually harm retail investors,” he added.
Cifu believes that changes should be focused on updating Rule 605 by enhancing transparency, so that the existing benefits to retail investors are accurately reflected in the data that is reported by market participants.
“We believe that Rule 605 reports provide an incomplete picture of execution quality. We would support collection of more comprehensive data to reflect how wholesalers offer both price and size improvement and to more accurately reflect the benchmark of available visible liquidity,” he said.