Virtu CEO slams Gensler reforms as Democratic plan to curb retail trading

By Chris Matthews

Gensler is a 'politician, not a regulator,' Virtu's Doug Cifu said

Securities and Exchange Commission Chairman Gary Gensler has embarked on a mission to fundamentally overhaul the structure of U.S. securities markets, and he's made a few enemies along the way.

Few are more vocal that Doug Cifu, CEO of Virtu Financial (VIRT), the second-largest securities wholesaler in the country, whose more than $2 billion in annual revenue could be threatened by market reforms proposed by Gensler and the SEC last December.

Market Extra:SEC votes to propose major overhaul of U.S. stock-trading rules

In an interview with MarketWatch, Cifu argued that Gensler has become a political tool of "elements in the Democratic Party that don't want to see self-directed trading and don't want retail traders to have unfettered access to capital markets."

An SEC spokesperson told MarketWatch that the agency "benefits from robust engagement from the public and will review all comments submitted during the open comment period. Generally, we respond to comments received as part of the final rulemaking and not beforehand."

In recent years, firms like Virtu, and its larger rival Citadel Securities, have carved out a place for themselves as the primary venues where retail stock brokers execute orders on behalf of their clients, rather stock exchanges like the Nasdaq (NDAQ) or Intercontinental Exchange Inc.'s (ICE) New York Stock Exchange.

See also: Main Street investors plan to keep pressure on Gensler as Citadel Securities fights auction reform

Gensler has cast a skeptical eye at the significant revenues earned by Virtu and others, who sometimes will pay brokers for the privilege of executing retail orders and earning the spread between the price at which they'll buy and sell a security.

The most controversial of the four regulations proposed in December, the order competition rule, would take aim at this model by requiring brokers to submit retail to an auction process.

The public comment period for the changes ended in March, and the SEC will review that input before voting on a final rule package, though the timeline for such a vote is uncertain.

"Today's markets are not as fair and competitive as possible for individual investors...in part because there isn't a level playing field between different parts on the market," Gensler said when the SEC unveiled the proposals in December.

"Right now, a concentrated group of wholesalers earns significant revenues from this market," Gensler added. "They're willing to pay for this order flow, but... investors may not be getting the benefit of full competition in this market."

Cifu disputes this characterization, noting that the current market structure has led to zero-commission trading and that brokers are already required to find the best available price for their clients.

He has taken heart in the industry reaction to the SEC proposals, particularly the order competition rule, which has been criticized even by groups that typically advocate for aggressive rule changes on behalf of retail investors.

Read more: Gensler's meme-stock reforms are meant to help retail traders. Some investor protection advocates aren't so sure

Cifu pointed to a comment letter submitted by Citadel Securities, the New York Stock Exchange, and Charles Schwab (SCHW) -- the largest wholesaler, U.S. exchange and retail broker, respectively -- arguing against the order competition rule.

"I was frankly shocked," he said. "It's almost unprecedented. Who would have thought you could have the exchanges, the market makers, the buy side and the sell side all agreeing on something ?"

Despite broad industry skepticism toward the rule, Cifu remains worried that Gensler has been overcome by political considerations rather than what is best for markets.

"Gary is being driven by the Elizabeth Warren wing of the party that I find repugnant," Cifu said, referring to the Democratic senator from Massachusetts.

That wing of the party wants "everybody putting their money into a 401(k), or using an adviser and that provides more political power to labor unions and 401(k) advisors and passive firms that tend to support woke policies," he said.

"When the masses are able to actually make their own investment decisions and vote their proxies the way they want, that provides less power to left-leaning organizations that have traditionally aggregated retirement accounts."

Cifu, a registered Democrat, said that he has donated more to Democrats than Republicans in the past, and declined to say whether the Gensler reforms would cause him to adjust his political giving or voting behavior going forward.

Nevertheless, he said he remains dismayed that the current debate over market structure has been deeply politicized. The SEC's plans for reform grew partly from the meme-stock craze of 2021, which culminated in retail brokers cutting customer orders for shares of GameStop (GME) and other meme stocks.

The SEC's report on the incident shot down conspiracy theories that market makers like Citadel Securities pressured retail brokers to cut off buy orders for meme stocks for self-interested reasons, but Cifu said that Gensler missed an opportunity to make that clear to the public, and instead stoked mistrust in the current market structure.

"Rather than take this report and say Robinhood (HOOD) did nothing wrong, Citadel did nothing wrong....he created this intentional obfuscation of the facts to serve his political agenda," Cifu said. "He started talking about payment for order flow that had nothing to do with what happened with GameStop."

Cifu noted that he is not the only Democrat with complaints about Gensler's performance of late, pointing to a recent interview with New York Rep. Ritchie Torres, in which he said Gensler was "a politician pretending to be a regulator."

"This is a rushed, political process driven by Gensler who is trying to score political points at the expense of potentially negatively impacting U.S. equities market structure," Cifu said. "That's not good policy, and it just demonstrates that he's a politician, not a regulator."

-Chris Matthews

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04-18-23 1616ET

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