Virtu Financial Inc.’s decision to trumpet an almost unbroken string of profitable trading days didn’t work out as planned, according to the high-frequency trader’s chief executive officer.
“I thought it would be a good thing to disclose to the world that the firm was profitable every day,” Doug Cifu said at a Sandler O’Neill & Partners LP conference. “But boy, did that backfire in my face, so I take responsibility for that.”
The New York-based firm postponed its initial public offering in April amid growing criticism of its industry -- concern that was piqued in part by a disclosure in a government filing that it only lost money on one day in five years. Virtu was sent a letter of inquiry from New York Attorney General Eric Schneiderman’s office requesting information about its business, according to a person familiar with the matter.
Speaking in New York, Cifu addressed public relations problems in high-frequency trading, the catch-all term for automated strategies that buy and sell stocks and other securities thousands of times a second. Furor over the tactics came to a head with publication of Michael Lewis’s book “Flash Boys,” which said speed traders make tens of billions of dollars front-running individual investors.
Virtu, which considers itself a market maker, executes between 2.5 million and 3.5 million trades every day across all asset classes. Around 51 percent to 52 percent of those trades are profitable, Cifu said.
“Over a million times day, we’re not making money,” he said. “But when you add up the volume of instruments that we trade, the tens of thousands of strategies that we trade in all the different marketplaces, it’s simply the law of large numbers and as a result, yes we are profitable every day.”
Virtu has capitalized on two decades of regulatory reform and technology advances to become one of the industry’s biggest players. The firm provides quotes in more than 10,000 securities and contracts on more than 210 venues in 30 countries, according to regulatory filings. The company competes with firms such as KCG Holdings Inc. (KCG) as well as New York Stock Exchange market makers.
One way of drawing a line between predatory traders and firms that help maintain orderly markets in stocks and other assets would be for exchanges to write better rules defining market makers, Cifu said. If it were clearer to the public that firms such as his were bound by obligations to provide continuous quotes in large numbers of securities, they wouldn’t get lumped in with more aggressive counterparts.
Adopting requirements for market makers “might be an easy way for folks to differentiate different styles or business models,” Cifu said. Regarding market-making, Cifu said, “I think generally the world recognizes that that is a service and a provision that will continue and is a necessary part of the market.”
Cifu discussed another area of controversy, the large number of different orders customers can place on trading venues. Last month the New York Stock Exchange said it would abolish more than a dozen order types, a move that Jeffrey Sprecher, CEO of NYSE owner Intercontinental Exchange Inc. (ICE), said was a “first step toward making our markets less complex.”
Cifu said he could count on one hand the number of order types Virtu uses.
“We don’t prosper because there are 58 different order types, so simplify the market there as well,” Cifu said.
While the number of U.S. stock exchanges has recently fallen to 11 from 13, Cifu predicted there would be more reduction. He also said that fees charged by public venues should be reduced, echoing a suggestion made by Virtu chief operating officer Chris Concannon, who has said regulators should review enacting a blanket reduction of the fees.
Even as he called for improvements to U.S. equity markets, Cifu rejected some of the more extreme criticisms of recent weeks, calling them irresponsible.
“Michael Lewis is far from an expert on market structure,” Cifu said. “If you ask Warren Buffett how many national securities exchanges there are he will look at you probably and say ‘what’s a national securities exchange?’ The man’s a brilliant investor, I don’t pretend to tell him about Heinz Ketchup, he shouldn’t be talking about market structure.”
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