A top Wall Street executive is taking the Securities and Exchange Commission to task over an expected plan to upend the plumbing beneath how everyday investors’ stock trades are executed.
In an interview with Fortune, Virtu Financial CEO Doug Cifu called the recently floated idea of establishing an auction-based model for executing individual investors’ buy and sell orders “academically sophomoric,” warning that an elimination of the current wholesaling model that retail brokerages like Charles Schwab, Robinhood Markets, and others rely on is bound to lead back to a commission-fee-based trading regime in the U.S.
“Zero-commission trading will go the way of the dodo bird,” Cifu said on a call Monday.
Over the last year, Wall Street’s retail trading complex has been caught in the crosshairs of SEC Chair Gary Gensler. At issue is the decades-old structure used by many retail brokerages like Robinhood Markets and Charles Schwab, where customer orders are effectively offloaded to so-called wholesalers like Virtu and Citadel Securities to be executed. In some cases, the brokerages even charge the speedy Wall Street trading shops for the right to execute the order flow—a practice known as payment for order flow.
To market makers, retail brokerages, and others, the structure has helped unlock a new era of democratized finance in the form of commission-free trading—a long-awaited but once unthinkable landmark considering it was less than three years ago that a single stock trade online cost a $6.95 fee in some cases. But consumer and investor advocates have long questioned what the model means for execution quality and conflicts of interest—concerns that Gensler has become outspoken about since joining the SEC in 2021 on the heels of the GameStop saga that briefly ushered a set of equity market structure issues into the national discourse.
So, on June 8, the SEC chair outlined a series of sweeping reforms to the way U.S. stock trading works today—including, notably, one to install an auction-like structure for retail investors’ stock orders to create better “order by order competition,” something Gensler has been highlighting as a goal for months now. “The vast majority of retail marketable orders are flowing to wholesalers that pay for this order flow,” Gensler said at an industry conference. “What’s more, this segmentation means that institutional investors, such as pension funds, don’t get to interact directly with that order flow. This segmentation—which isolates retail orders—may not benefit the retail public as much as orders being exposed to order-by-order competition.”
While the SEC has not yet officially proposed a rule to create an auction structure in U.S. retail stock trading, Cifu and other Wall Street executives are already mounting an aggressive campaign against it—marking the opening salvos of what is bound to be a lengthy and contentious fight in Washington, D.C. over the future of what stock trading looks like in the U.S.
“For better or worse, I’m the self-anointed client guy on the issue,” Cifu said, adding that, if anything, the moves outlined by the SEC stand to be a windfall for Virtu rather than a complication. “I’m not afraid of being very vocal. I’ve never steered away from a fight in my life, and I’m not going to steer away from this fight. I just think the entire concept of it is ass backwards.”
Ultimately, Cifu is not expecting an auction proposal to “ever see the light of day,” he said. And if it did, the one-time Paul Weiss partner is confident that it would be bound for the courts. But the core issue, in Cifu’s eyes, is the fact that the SEC is trying to solve for something that doesn’t need to be solved.
Everyday Americans have been able to buy and sell stocks on brokerage apps without paying a commission fee for the last two-plus years—in large part because wholesalers have helped offset the hits that the likes of Charles Schwab and Morgan Stanley’s E*TRADE have felt in their businesses since going commission free in late 2019, the Virtu CEO said. The current system also allows investors to get better prices on their trades, the executive added.
An auction model, on the other hand, would likely result in a new set of fees that would be bound to be paid by retail customers in the form of commissions once again, Cifu said. The structure would also be “an absolute disaster” for thinly traded stocks, Cifu added, considering it would remove the incentive for a firm like Virtu to make a market in less popular stocks—meaning that spreads would be bound to widen, making capital formation for smaller companies more expensive.
“That is antithetical to one of the three tenants and three purposes of the SEC,” Cifu said, referring to the agency’s three-part mission to “protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.” “They would be materially impacting one of the fundamental purposes of the SEC, that’s how screwed up this proposal is.”
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