The retail trade frenzy reflects “wheeled” U.S. stock markets, says XTX’s Gerko


According to the founder of one of the largest trading companies in the world, the growth of equity trading deceives inexperienced investors at high costs and a battle with Wall Street that they can not win.

Zero-commission commission helps build an illusion that amateur investors have never had better, Alex Gerko, co-chief executive of London-based XTX Markets, told the Financial Times in an interview.

But the mode of sales intermediation sells to order of its customers and a “very poor benchmark” means that smaller investors share billions of dollars in hidden costs each year when they buy or sell U.S. stocks, he explained.

“The GameStop episode made it clear that the sales share of the market is particularly broken,” Gerko said, referring to the peak share of the console stores chain in January. “The incentives are here to create a lot of churn in very illiquid stock, which is exactly what we’re seeing this year.”

In light of this, GameStop’s frenzy has been an unprecedented victory for young amateur traders over Wall Street professionals including some hedge funds that had made a bet against the company. But Gerko thinks the reality is the opposite. “If you think about zero commissions, on paper it sounds great – the trade was expensive and now it’s free. It’s obviously complete nonsense,” he said.

Part of the attraction of sales platforms like Robinhood is that they provide trading at zero commissions. But Gerko said the charges lie in the difference between the buy and sell price, the so-called spread, meaning that brokers and market makers want clients to exchange shares where this gap is widest. , as in illiquid stocks which are generally exchanged finely.

“If a marketer earns a certain spread from the sales flow, and then pays a certain percentage of that spread to the retail broker … it ends up with a perverse incentive to ensure that end customers trade stock with very wide spreads,” he said. said.

Criticism of the 41-year-old mathematician comes when shares in the film chain AMC Entertainment and other stock memes, popular among retail investors in online forums like Reddit, fly again. AMC shares jumped more than 500 percent last month to last week’s highs before moderating, gaining a further boost after the company promised retail investors additional benefits – including free popcorn.

Gerko said brokerages and other intermediaries were one of the beneficiaries of these stock prices, especially when retail brokers often sell their clients ’trades to market makers, who then aimed to ensure favorable prices for them. customers. This practice, known as “payment for order flow“(PFOF), will earn US brokers $ 2.9 billion by 2020 without commissioning an amateur investor commission in advance, and has attracted attention from regulators.

“In today’s ecosystem there’s somehow enough… [to] it leaves producers in the market with billions of dollars in revenue, “he said.” So where does this money come from? The retail investors. When people say they provided $ X billion in price improvements last year, the question is whether any of that price improvement is true. And yes it’s something they should be proud of. ”

The British-born British citizen began his career as a currency trader at Deutsche Bank. In 2015, he created XTX Markets and built one of the largest order trading companies in the world. He kept a low profile while amassing more wealth than some family names. Last year he contributed more to the UK’s tax coffers than the Duke of Westminster, according to the Sunday Times, making him the 13th largest individual taxpayer in the country.

His company does not employ human traders but relies solely on computer models to buy and sell goods in a bid to generate profits. We do not charge for the flow of orders. The company is the third largest retailer in the world currency markets and manages 13 percent of European shares traded on stock exchanges. Since 2019, the company is also in the US stock markets.

A recent paper from the BestX Research consultancy stated that the improvement in prices on the order of the retail market is on average about 25 percent, compared to the reference standard. But the newspaper added that this was actually “similar to getting a 30 percent discount on an item after the trader raises the price by 40 percent,” because the benchmark covers only a small slice of the market.

Broker Robinhood and the two largest producers of the American markets, Citadel Securities and Virtu, have defense the PFOF model, arguing that there is no evidence that payment for the flow of orders hurts investors. But Gary Gensler, chairman of the Securities and Exchange Commission, swore he said he would make the PFOF model a focus of future work.

Gerko said a single solution could be to push PFOF out of the process, and instead nurture the order of retail traders in exchanges where they compete with each other or competing market producers to execute business. He also beats the criticisms that his proposals are self-sufficient, noting that XTX supports market structure changes in all markets, even where they play a dominant role already, such as currency markets.

Even with this kind of change, however, it is doubtful that retail investors can emerge victorious from another round of battles with sophisticated trading companies. “Retail investors have been able to cause some pain to a hedge fund. I can assure you in the long run that it won’t be the retail participants who win this game, it’s just impossible.”



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