Retail Frenzy Reflects ‘Broken’ US Stock Markets, Says XTX’s Gerko


According to the founder of one of the world’s largest trading companies, the surge in lagged stock trading is fooling inexperienced investors with high costs and a battle with Wall Street they can’t win.

Commission-free trading helps create the illusion that amateur investors have never had better, Alex Gerko, co-managing director of London-based XTX Markets, told the Financial Times in an interview.

But the way retail brokers sell on their clients’ orders and a “very poor benchmark” mean smaller investors collectively spend billions of dollars in hidden costs each year when buying or selling. US equities, he explained.

“The GameStop episode made it clear that the retail part of the market is particularly broken,” Gerko said, referring to the huge spike in console store chain shares in January. “The incentives are there to create a lot of churn in very illiquid stocks, which is exactly what we’re seeing this year.”

At first glance, the GameStop frenzy was an unprecedented victory for young amateur traders over professionals on Wall Street, including some hedge funds that had bet against the company. But Gerko thinks the reality is the opposite. “If you think of zero commission, on paper that sounds great – trading was expensive and now it’s free. This is obviously complete nonsense, ”he said.

Part of the appeal of retail platforms like Robinhood is that they offer commission-free exchanges. But Gerko said the fees are hidden in the difference between the buy and sell price, known as the spread, which means brokers and market makers want clients to trade stocks there. where this spread is greatest, as in illiquid stocks which are generally lightly traded.

“If a market maker earns a certain spread from the retail feed, then pays a certain percentage of that spread to the retail broker. . . you end up with a perverse incentive to have end clients trade stocks with very wide spreads, ”he said.

The criticism of the 41-year-old mathematician comes as shares of movie channel AMC Entertainment and other memes stocks, popular with retail investors in online forums such as Reddit, soar again. AMC shares have jumped more than 500% in the past month to reach last week’s highs before moderating, gaining new momentum after the company promised retail investors additional perks, including pop -corn free.

Gerko said that brokerages and other intermediaries were among the beneficiaries of these stock price increases, especially since retail brokers often sell their clients’ trades wholesale to market makers, who then target to guarantee favorable prices for customers. This practice, known as “payment for order flow” (PFOF), grossed US brokers $ 2.9 billion in 2020 without charging hobbyist investors a commission up front, and has attracted attention from regulators.

“In the current ecosystem, there are enough. . . [to] leave market makers with billions of dollars in revenue, ”he said. “So where does this money come from?” Individual investors. When people claim they provided $ 10 billion in price improvement last year, the question is, is this price improvement real? What if it’s something they should be proud of.

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

His company does not employ human traders but relies solely on computer models to buy and sell assets for the purpose of generating profit. It does not engage in payment for the order flow. The company is the third largest broker in the global currency markets and manages 13 percent of European stocks traded on the stock exchange. Since 2019, the company has also been present on the US stock markets.

A recent article by consulting firm BestX Research said that the improvement in prices on retail market orders was on average around 25% compared to the standard benchmark. But the newspaper added that in reality, this was equivalent to “getting a 30% discount on an item after the trader raises the price by 40%” because the benchmark only covers a small part of the price. market.

Broker Robinhood and the two largest US market makers, Citadel and Virtu, have defended the PFOF model, arguing that there is no evidence that paying for the flow of orders is harming investors. But the newly sworn-in Chairman of the Securities and Exchange Commission, Gary Gensler, has said he will make the PFOF model a focus of future work.

Gerko said one solution could be to remove PFOF from the process and pass orders from retail traders to exchanges where they compare themselves or where market makers compete to execute trades. He also dismisses criticism that his proposals are selfish, noting that XTX advocates changes in market structure in all markets, even where they already play a dominant role, such as currency markets.

Even with those kinds of changes, however, he doubts retail investors can emerge victorious from yet another battle with sophisticated trading companies. “Retail investors have succeeded in harming a hedge fund. I can assure you that in the long run it will not be the retailers who will win this game, it is just not possible.


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