Virtu CEO: Fidelity Gets Better Execution Than Robinhood Because They Don’t Take Rebates

Another ugly layer of the ‘payment for order flow’ onion has been pulled back. The question is: was anybody paying attention? We were.

Perhaps trying to do a bit of proactive PR (and perhaps not anticipating the relatively serious questions he was met with), when Virtu Financial CEO Doug Cifu offered to explain to CNBC’s Andrew Ross Sorkin “how markets work” two days ago on Twitter…

Hey @andrewrsorkin I run Virtu. We get zero client data just a lot of orders we try hard to price improve. We also don’t front run anyone. Sorry to ruin your narrative. Let me know when you want to learn how markets work. 212-418-0111. Here all day

— Doug Cifu (@Dougielarge) March 9, 2021

…ARS took him up on the offer. 

Cifu took to CNBC early Wednesday morning to try and make his case for his firm and untangle the web of narratives about market making, high frequency trading and payment for order flow that have been tossed around since the GameStop chaos gripped markets last month.

In doing so, Cifu inadvertently admitted, on air, that customers who use brokerages who get paid for order flow don’t get the same quality execution as those who don’t get paid. 

First, the discussion was about whether or not customers were getting best execution and whether firms like Virtu were frontrunning trade. Cifu clearly had a PR strategy for this question, answering by saying: “We are providing a price that is at or better than the national best bidder–better than you can get on an exchange.”

“Every single broker including Robinhood is making those routing decisions with that in mind and only that in mind,” he continued. Yes, Doug, we’re sure economics have nothing to do with it. 

“We are providing a price that is at or better than the national best bidder–better than you can get on an exchange,” says @Dougielarge. “Every single broker including @RobinhoodApp is making those routing decision with that in mind and only that in mind.” pic.twitter.com/19dSvVYIiY

— Squawk Box (@SquawkCNBC) March 11, 2021

The fundamental purpose of wholesale orders, Cifu tried to explain away, was trying to find better execution prices for clients. “That’s the fundamental premise of wholesaling,” Cifu said. 

But the coup de grâce came when Cifu tried to explain how Virtu and Citadel make their money by capturing the bid/ask spread.

“We are sharing some of that profit back to the end user in the form of price improvement,” says @VirtuFinancial CEO @Dougielarge. “The market maker is profit sharing back to the retail broker. The retail investor is ultimately benefitting.” pic.twitter.com/4VkeSWRZUF

— Squawk Box (@SquawkCNBC) March 11, 2021

In a move that felt like taking a page out of a crisis PR handbook, Cifu hilariously tried to position his business as “sharing profit” back with retail brokers: “Effectively what we are doing is we are sharing some of that profit back to the end user in the form of price improvement,” he said. “The market maker is profit sharing back to the retail broker. The retail investor is ultimately benefitting.”

But Cifu then admitted that brokers who don’t take rebates wind up getting better execution. “Yes, in a number of cases, there is a number of retail brokers who take a rebate. Effectively, the market maker is profit sharing back to the retail broker,” Cifu said. 

“Is a retail investor that’s not dealing with PFOF at Fidelity ultimately getting a better price than a Robinhood investor?” Sorkin asked.

“Overall, through the course of a month, we will provide more price improvement for Fidelity than we do to Robinhood,” Cifu admitted. 

“Why providing better to Fidelity than to Robinhood customers?” ARS followed up.

“There’s only an aggregate amount of bid/offer spread in the universe,” Cifu said. “What we do every day is try to capture as much bid/offer spread that we can and it’s a negotiation with each of our clients to say ‘hey if we’re going to capture 100 units, we’re going to give you 70 units back’,” Cifu tried to explain. 

Social media was quick to notice the point he made:

He admitted that Fidelity customers/orders received better executions overall versus Robin Hood, because Fidelity doesn’t receive a rebate like RH does… yikes..Congress may want to get Vlad out again

— Ron Burgundy (@TheReal38691815) March 11, 2021

“Thank you @andrewrsorkin for having me on this morning and for some great questions. Market structure (US equities in particular) isn’t so simple but fundamentally US retail investors get superior execution for free…hard to argue w that,” Cifu wrote on Twitter after the interview. 

But as we’ve learned over the last month, Doug, nothing is “free”. And it’s hard to argue with that.