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High-speed traders profit from the boom in retail investors

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The deluge of trading activity in the US equity and derivatives markets is expected to produce a boon for high-speed market makers who execute orders for brokers such as Robinhood and Charles Schwab.

Market makers, including Virtu Financial, Citadel Securities, Susquehanna and Two Sigma, appear to be among the enduring winners of the explosion of activity driven by retail investors, even as the rise of stocks such as GameStop appears to be reversing.

Shares of Virtu, the only publicly traded US market maker, have risen 11% this year, compared to less than 2% for the overall US stock market.

The emergence of a new generation of day traders last year, who exchanged investment ideas on social media sites, including Reddit, culminated last week in a increased business activity never seen in the US financial markets. More than 93 billion shares changed hands in the United States in five sessions, including a record 24.4 billion on Wednesday last week alone.

These orders are often routed to high-speed trading firms, which have grown to represent a significant percentage of trades in US stocks – applauded by some in the market for providing additional liquidity and lowering trading costs for ordinary investors. .

Companies often pay brokers to route orders through their systems and profit from the difference between the bid and ask prices quoted on the securities.

“This pace is pretty intense,” said Richard Repetto, analyst at Piper Sandler. “The group of ‘Reddit tickers’ posted huge volume with much greater volatility,” he said, referring to stocks, in particular GameStop, AMC and the former BlackBerry mobile phone giant.

The explosion in volumes in the country’s $ 43 billion stock market has been accompanied by an increase in options trading. January saw the highest volume of options trading on record, up 62% from a year ago, according to data from the Options Clearing Corporation. More than 843 million options contracts were cleared in the month alone, the equity derivatives clearinghouse said.

Much of this activity has been fueled by individual investors and the day merchants stuck at home during the pandemic who are sitting on high levels of savings. According to Susquehanna, about a fifth of call options bought last week were small trades consisting of 10 contracts or less.

“The question is, how long does retail buying stay in place after we get past this stimulus check overrun and the world reopens and people aren’t just sitting at home on their computers? ” asked Saira Malik, head of global equities at Nuveen.

Column chart of the number of call options traded each week, by trade size (m) showing new day traders making their mark in the options markets

The business windfall has intensified interest in Virtu’s quarterly results next week. Analysts expect the company to report adjusted profit of $ 1.06 billion for last year, more than five times higher than its full-year adjusted profit in 2019.

“They are big beneficiaries of high retail volumes,” Alex Kramm, research analyst at UBS, said of Virtu.

“Retail may be the tip of the spear that gets the market excited, but it brings more investors to the table and as a market maker what else can we ask for?” said a trader of a market maker. “This is what we thrive on.”

The value of additional trading is widely shared. High-speed market makers typically pay online brokers to route orders to them, which allows brokers to offer free trades to clients. Robinhood released figures last month showing market makers paid $ 221.4 million in the fourth quarter in exchange for routing transactions from its customers to them, including $ 91 million in December. This put Robinhood on pace with annualized sales of over $ 1 billion.

Sean Horgan, analyst at Rosenblatt Securities, noted that the resumption of trading activity would also fall under other companies that handle the plumbing of US financial markets, including the stock exchanges.

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