Virtu CEO Doug Cifu Explains Payment for Order Flow and the Future of HFT

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

Joe, do you remember GameStop?

Joe Weisenthal (0:22)

No, what was that, Tracy? I forgot, GameStop? Sorry, not familiar with it.

Tracy Alloway (0:27)

You know, one of the most remarkable things about that whole episode was that for a brief, glorious moment in time, everyone was talking about market structure and things like payment for order flow, DTCC collateral, like that was a discussion that you could actually have in mainstream media and sort of with your average person on the street.

Joe Weisenthal (0:53)

Yes, but I mean, those conversations were in many cases deeply misinformed. So it is true that there was a lot of talk about market structure and payment for order flow and the DTCC and all that. And I actually did learn stuff, but there was a lot of noise of people who like, spinning conspiracy theories about what all this stuff, high frequency trading, how it really worked.

So hopefully people learn something, but I also suspect a lot of people went away from that whole episode, unless they listened to Odd Lots, of course, much less informed.

Tracy Alloway (1:29)

Look, I'll take what I can get when it comes to getting people interested in market structure. But I think you're right. I think probably, especially on the payment for order flow subject, because it sounds kind of nefarious, why would someone pay you for trade order flow? They must want something, they must be doing something with the information. I think it tends to lead to a lot of suspicion.

Joe Weisenthal (1:56)

Yeah, I think that term in particular, you nailed it. There's something about that term that invites a lot of sort of conspiratorial thought.

Tracy Alloway (2:05)

Yeah, exactly. And of course we saw that really ramp up during the GameStop drama. We even saw Congress start to, they had an inquiry into payment for order flow.

The concern is that high frequency traders are somehow profiting off of that order flow in a way that hurts retail investors. And of course, Robinhood uses Citadel as its market maker. So we saw Citadel in the news as well.

Joe Weisenthal (2:33)

Citadel is one of its market makers.

I think like, so, which is something we'll get into. It's like all these have a lot, I mean, I've been sort of like spending the weekend looking at some of these stats that the brokers face. And I have lots of questions about that. So wait, what are we gonna talk about? How are we gonna get into them?

Tracy Alloway (2:52)

Okay, so today we are going deep into the payment for order flow discussion. And we're also going to talk more broadly about what exactly a market maker actually does. We have the perfect person to talk about all this.

We have the CEO of Virtu, Doug Cifu. Welcome, Doug.

Doug Cifu (3:11)

Hello, how are you guys doing?

Tracy Alloway (3:13)

Hey, we're good, thanks.

Maybe to begin with, we should kind of go straight to the elephant in the room and talk about something very, very serious. But what's up with the hot dogs? So on your Twitter account, you seem to talk a lot about hot dogs. What's going on?

Doug Cifu (3:33)

Well, I resent the elephant in the room analogy. I'm a bigger guy and my Twitter handle is Dougie Large.

So against my better judgment about 10 years ago, I opened a Twitter account and then my partner and I bought a hockey team and I started tweeting about hockey and hockey fans for the most part are favorable, nice people, but then you get to 5% of the keyboard warriors and it started to be abusive towards me. So I stopped tweeting about hockey. They said, I don't know what the hell I'm talking about.

And I happened to run, as you say, a quote unquote high-frequency trading firm. And in 2014, there was this little book called Flash Boys that came out and dark pools and all these nefarious sounding terms. And people started tweeting me like I was a criminal. I said, okay, well, that's not a good topic. I guess I'll stop doing that.

And then I found the one universal in this country that nobody can say anything negative about. It's the great American hot dog. And there's a company called Feltman's, which is founded by two great veterans from West Point. And they rediscovered the original Coney Island hot dog and they're fantastic. They got the perfect mix of spices and they kind of pop when you eat them.