Earlier this week, Virtu Financial chief executive officer Douglas Cifu tweeted his phone number.
He wanted to catch the attention of Andrew Ross Sorkin, CNBC’s “Squawk Box” co-anchor and New York Times business columnist. Cifu, who is also vice chairman of N.H.L team Florida Panthers, was upset about a segment that aired March 9 with Sorkin interviewing Interactive Brokers founder Thomas Peterffy.
Sorkin asked Peterffy whether investors would get better execution on price if they were routed through public exchanges, rather than through market makers. Peterffy’s short answer? Yes.
“I just got triggered,” Cifu said via a Zoom interview on March 10, the day after he tweeted his phone number. “[Sorkin] was suggesting market participants are engaged in illegal activities. I think it’s irresponsible.”
For a market maker like Virtu whose business model involves payment for order flow, the move was risky. The practice has been the subject of Congressional inquiries and the ire of the r/WallStreetBets crowd. If his phone number went viral, Cifu’s line would be ringing off the hook.
The ploy worked. Sorkin called Cifu, who said he used “some strong language” on the anchor. The two set up an interview, which aired on Squawk Box Thursday.
Sorkin wasn’t the only one to ring up Cifu, though.
Institutional Investor did, too. On the Zoom call, Cifu spoke about his views on market making, payment for order flow, and what changes he expects the Securities and Exchange Commission to enact following the GameStop craze that took place earlier this year.
To begin with, Cifu thinks that payment for order flow benefits retail investors.
The practice, which dates back to the 1980s, involves a broker like Robinhood routing investors’ orders to a market maker, like Virtu, which executes those trades.
Market makers match buy and sell orders through their internal system, rather than routing them to the public exchanges. Companies like Virtu pay brokers a pre-set fee (usually around a penny) per trade routed to them by a broker.
For Robinhood and other brokers, this practice covers costs, keeping retail trading fee-free for investors.
“They’re getting — for zero dollars — better execution than a professional trader can get and a better price than the institutional investor can get,” Cifu said of retail investors.
[II Deep Dive: Twitter Freaked Out Over Robinhood Selling Its Trade Flow. But the App — and Others — Have Been Doing It for Years.]
Questions have arisen about the practice in recent months, as investors, legislators, and the media realized that the prices market makers pay to brokers aren’t always the same. These folks wondered whether the differences in payment incentivize a broker to send trades to one market maker over another.
According to Cifu, this is the brokers’ responsibility. “Every single one of them has their own best-execution committee and are looking at pricing and execution quality,” he said. “Some are focused only on service and getting guaranteed execution for clients. Some are focused on getting the best price.”
He also noted that the SEC and Financial Industry Regulatory Authority regularly review how market makers trade to ensure that they are following rules that require them to offer investors “best execution.”
“It feels like we’re constantly being reviewed properly by somebody,” Cifu said. The firm has paid fines before, but in Cifu’s opinion, those fines are like speeding tickets.
Still, though, he thinks change may be on the horizon. Cifu said he’s had private conversations with Congress members about the topic.
“I think there will be changes around disclosures of payment for order flow to make it really transparent,” Cifu said. “It should be on everybody’s trade confirmation.” Brokers are already required by the SEC to disclose the payments they receive for order flow on a quarterly basis.
He also thinks there will be a review on what types of securities are suitable for retail investors, as well as enhanced reporting on short positions on a more consistent and regular basis.
He’s optimistic about what the SEC will settle on, noting that incoming chairman Gary Gensler is a “smart guy,” and that “those cats know what they’re doing.”
