Virtu Financial Inc is suing the SEC, alleging on Tuesday its primary regulator had not responded to a public records request.
Virtu, a market maker with a large equities business, said it submitted a Freedom of Information Act (FOIA) request in June to determine if the SEC had met legal requirements to evaluate potential investor harm and market risks while considering new rules for the handling and execution of retail stock orders.
The SEC declined to comment.
The FOIA request sought, among other things, communications between SEC Chair Gary Gensler and various stakeholders involved in retail stock trading.
“What we’re doing is exercising our rights as citizens … to understand what this Chair is looking at and who he’s meeting with,” Virtu Chief Executive Doug Cifu told Reuters.
“We think it’s important that there be clarity and transparency — that’s what the SEC requires of us as a listed company, so we’re just taking that same standard and saying, be transparent in how you’re dealing with potentially seismic changes to equity market structure,” he added.
Cifu has said Virtu may sue the SEC over other potential rule changes Gensler outlined in June.
What Does the Market Maker Fear?
Virtu SEC Lawsuit Update.
The industry has attacked the SEC as several plans to level the playing field for retail investors have been proposed, one being the ban of PFOF (payment for order flow).
Now it seems market makers such as Virtu want to know ahead of time what the SEC is up to in order to act now.
Virtu suing the SEC speaks volumes since majority of retail investors have doubted the SEC has true power to create any change in the market.
I’m curious to know what you think.
Leave your thoughts in the comment section down below.
Market News: SEC and IEX go after Citadel years after charges of misleading conduct.
In 2017, Citadel paid the SEC $22.6 million to settle charges that it misled customers about the way it priced trades.
The SEC found that between 2007 and 2010, Citadel used two algorithms to execute stock trades on customers’ behalf that gave investors a worse price for their trades, even when Citadel knew better prices existed elsewhere.
The SEC penalized Citadel for failing to disclose the use of those algorithms to clients.
“This affected millions of retail orders,” said Stephanie Avakian, the acting director of enforcement at the SEC at the time.
Citadel neither admitted nor denied the findings.
Today, Citadel has lost the court case against the IEX order type crippling its trading strategy, more on that down below.
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Citadel cheats retail investors
Citadel has been cheating retail investors for years now through a variety of loopholes the SEC has failed to stop.
The market maker is responsible for processing almost 50% of retail orders.
Citadel receives these orders by paying brokers such as Robinhood in what’s known as PFOF, or payment for order flow.
The problem arises when these orders are then traded through foreign exchanges allowing Citadel to pocket the best trading bid, essentially stealing from retail.
They accomplish this through HFT, or high frequency trading.
And because 90%-95% of retail orders are not executed through the lit exchange (NYSE), it gives Citadel’s short positions a massive advantage against retail investors going long.
This means only a small fraction of the demand is truly reflected in a company’s share price.
What is currently being done about the market manipulation?
The SEC has publicly discussed the possibility of banning PFOF for good, but the industry has lashed out.
In October of last year Citadel sued the SEC over the new D-Limit order that would protect displayed lit orders from being picked off by latency arbitrage players.
IEX is an exchange that relies heavily on the D-Limit order to outperform displayed order prices on other exchanges.
This means that predatory strategies such as market arbitrage, where high frequency firms profit from lower prices in foreign exchanges, will no longer be able to do so.
High frequency trading has been used against retail investors to not only gain better prices on stock from other ‘slow loading’ exchanges, but by also using this advantage to sell stock significantly cheaper.
So when you find an exchange that is showing lower prices, hedge funds betting against certain tickers may borrow high in another exchanges while benefiting the difference from selling the stock in those displaying lower prices.
The D-Limit order uses AI technology that provides more consistent and accurate data across all exchanges.
How will IEX affect Citadel?
In short, Citadel Securities and other high frequency trading firms will lose a lot of money.
The reason being is they are making money every second from using this high frequency trading technology to their benefit by getting better prices than anyone else in the market.
The IEX Exchange would put Citadel Securities in the same courtyard as retail investors, leveling the playfield.
IEX would create a foundation for a fairer market.
Citadel paid the SEC $22.6 million to settle charges on misleading conduct in 2017, but karma seems to be catching up for the hedge fund and market maker.
On July 29th, 2022, it was announced that Citadel has lost the court case against the IEX order type.
This is massive win for retail investors and a huge blow to the market maker and hedge fund.
But the SEC still has a lot of work ahead, especially if they’re looking to earn the trust of retail investors.
Only time will tell how significant this battle truly is.
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SEC Payment For Order Flow ban
Gary Gensler will be speaking on Wednesday in regard to best execution for market orders.
The SEC has been under heavy scrutiny by retail investors as the agency has not made any progress to level the playfield.
The government branch that’s supposed to protect retail investors has even gone as far as taunting investors for buying ‘meme stocks’ recently.
But industry participants have quietly been saying that Gensler will likely use a speech at the Piper Sandler Global Exchange Conference on Wednesday to float several proposals.
These may include best execution and payment for order flow according to CNBC.
Last year during the ‘meme stock’ frenzy, Citadel processed retail’s orders through Robinhood.
Citadel paid Robinhood to give them those orders (PFOF).
However, retail investors don’t want their orders going to Citadel since the market maker/hedge fund/dark pool are short on ‘meme stocks’.
90%-95% of retail’s orders are not processed though the lit exchange.
Citadel takes these orders and trades them at a bargain through foreign exchanges.
Although PFOF is an expense to them, they make a lot more money processing the orders.
If the SEC PFOF ban goes through, orders would not be processed by Virtu or Citadel.
Citadel fights back
A spokesperson for Citadel Securities released the following statement to CNBC:
“It is important to recognize that the current market structure has resulted in tighter spreads, greater transparency, and meaningfully reduced costs for retail investors. We look forward to reviewing the proposals and working with the SEC and the industry towards our longstanding objective of further improving competition and transparency.”
“You need to be very deliberate on that approach,” Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association (SIFMA) said.
“We have been calling for a review of market structure for some time, but let’s be careful not to try to fix things that may not be broken,” he said. “The retail investor is getting a better deal than they ever have.”
Would you pay small trading fee if it meant Citadel and Virtu no longer reroute your orders to benefit their pockets?
Leave a comment below.
The statement alone that retail is getting a better deal than ever before is such a dishonest thing to spew.
These institutions have been taking retail’s money, using it against them, all while taking no accountability for their actions.
It’s not clear yet whether the SEC PFOF ban will go through or not.
It is certainly something worth discussing though, don’t you think?
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