The deluge of trading activity in US equities and derivatives markets is expected to produce a windfall for the high-speed market makers that execute orders for brokers such as Robinhood and Charles Schwab.
Market makers including Virtu Financial, Citadel Securities, Susquehanna and Two Sigma look set to be among the enduring winners from the burst of activity driven by retail investors, even as the run-up in shares such as GameStop appears to be reversing.
Shares in Virtu, the only publicly traded US market maker, are up 11 per cent this year, compared with less than 2 per cent for the US equity market as a whole.
The emergence of a new generation of day trader last year swapping investment ideas on social media sites including Reddit culminated last week in a surge of trading activity never before seen in US financial markets. More than 93bn shares changed hands in the US over five sessions, including a record 24.4bn on Wednesday last week alone.
Those orders often make their way to high-speed trading firms, which have grown to account for a significant percentage of trading in US equities — cheered by some in the market for providing extra liquidity and cutting the costs of trading for ordinary investors.
The firms often pay brokers to route orders into their systems, and profit on the difference between bid and ask prices quoted on securities.
“This pace is pretty intense,” said Richard Repetto, an analyst at Piper Sandler. “The group of ‘Reddit tickers’ have displayed enormous volume with a far greater amount of volatility,” he said, in reference to stocks including GameStop, AMC and the former mobile phone behemoth BlackBerry.
The explosion in volumes in the country’s $43tn equity market has been accompanied by an increase in options trading. January had the highest volume in options trading on record, up 62 per cent compared to a year ago, according to data from the Options Clearing Corporation. More than 843m options contracts were cleared that month alone, the equity derivatives clearing house said.
Much of that activity has been fuelled by retail investors and day traders stuck at home during the pandemic who are sitting on high levels of savings. Roughly a fifth of the call options bought last week were small trades made up of 10 contracts or less, according to Susquehanna.
“The question is, how long does the retail buying stay in place once we are past this topping off of the stimulus cheques and the world reopens and people are not just sitting at home on their computers?” asked Saira Malik, head of global equities at Nuveen.
The trading bonanza has intensified interest in Virtu’s quarterly results next week. Analysts expect the company to report an adjusted profit of $1.06bn for last year, more than five-times higher than its full-year adjusted earnings in 2019.
“They are big beneficiaries of elevated retail volumes,” Alex Kramm, a research analyst at UBS, said of Virtu.
“Retail may be the tip of the spear that’s prodding the excitement in the market but it brings more investors to the table and as a market maker what else can we ask for?” a trader at one market maker said. “That’s what we thrive on.”
The value of the extra trading is widely shared. High-speed market makers typically pay online brokers to route orders to them, allowing brokers to offer free trading to clients. Robinhood released figures last month showing market makers paid $221.4m in the fourth quarter in return for it routing its clients’ transactions to them, including $91m in December. That put Robinhood on pace for annualised sales above $1bn.
Sean Horgan, an analyst with Rosenblatt Securities, noted that the uptick in trading activity would also lift other companies who manage the plumbing of US financial markets, including stock exchanges.