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On this episode of On The Tape On this bonus episode of “On The Tape,” Guy and Dan are joined by Peter Boockvar of The Boock Report to discuss the U.S. on a collision course with a recession (0:01:23), how Peter is playing his economic bearish view (0:11:44), and how the markets is playing a high stakes game of chicken with the Federal Reserve (0:15:07). Later, Peter goes “Off The Tape” with Doug Cifu, CEO of Virtu Financial, and they talk about his career (21:35), Virtu as a business (24:42), competition in the space (33:28), execution technology (37:29), cryptocurrencies (43:25), and being co-owner of the NHL’s Florida Panthers (46:56).
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Show Transcript:
Guy Adami: [00:00:28] CME ad. [00:00:28][0.0]
Guy Adami: [00:00:32] Welcome to a bonus episode of on the tape with us today Dan Nathan and I am fired up Peter Boockvar, the chief investment officer of Bleakley financial group. You know, Peter from the book report, you know him from his many CNBC appearances. You know him because both Dan and I think he’s a badass rock star. I think I can say that here. Peter, welcome on the tape. [00:00:57][24.9]
Peter Boockvar: [00:00:57] Thank you, Guy thank you Dan. [00:00:58][0.4]
Guy Adami: [00:00:59] By the way, you’re doing a great interview, looking forward to it with Doug Cifu, the CEO of Virtu Financial. So we have a lot going on here. We’re on the eve of Jackson Hole, lot to talk about. Germany, by the way, is melting down. Germany, the fifth largest economy last I look on the planet. So if you don’t think it’s consequential, think again. Welcome aboard, Peter. [00:01:22][23.2]
Peter Boockvar: [00:01:23] Thank you, guys. It’s a pleasure. [00:01:24][1.4]
Dan Nathan: [00:01:25] All right, Peter, you were on fast money earlier in the week. I think it was probably Tuesday. And the headline the producers love to tease out a big headline from your pre-game show notes was that the US is on a collision course I think something like that with the recession. Now we’ve been talking about the potential for a recession for months and months. And I guess what Guy and I try to figure out here and I think you do too for Bleakley customers is what does a recession mean for financial assets, right? What does it mean for market? So whatever you think the definition of a recession is, you know, two negative quarters of GDP growth, we kind of had that that’s been explained away a little bit. Talk to us a little bit about what a recession means. Like, what are some of the indicators that you’re looking at that would mean that we’d see a meaningful contraction in economic activity that would weigh on financial assets, on risk assets on the stock market. [00:02:17][52.4]
Peter Boockvar: [00:02:18] So the US economy is not just this light switch where you flip back and forth between expansion and contraction. There’s a lot of stuff that goes on in between and I’m more focused on the trajectory of economic growth rather than the semantics of what we’re going to call it. And when you think about the rise in interest rates, what did it first impact? It first impacted the interest rate, sensitive parts of the economy, housing and autos. Housing essentially is in a recession. And if you take housing all in, including remodeling, newbuilds, broker fees and so on, that’s about 15 to 18% of U.S. GDP. We saw a pretty awful New York manufacturing number for August and barely a positive one for Philly. So you could argue that manufacturing is on the door of we’re slightly in a recession. We’re seeing auto sales that are getting now negatively impacted by very high prices and the higher cost of funding. That is also another chunk of the U.S. economy. So to me, the direction is clear. And again, whether we call it that or not, it doesn’t really matter. Then, of course, what all this means for corporate earnings and as you said, how it ties into into the markets. And because I believe in a bear market, you study bear markets, they’re usually three phases of one. The first phase is a multiple reset where you take a lot of the initial froth out of the market. Then the next is the economic consequences of a slowdown, what that means for earnings. And I feel like we’re just on the cusp of that part two of this bear market. [00:03:56][98.0]
Guy Adami: [00:03:57] Peter, let me ask you a question. And this is not meant to be glib in any way. One of the first questions I’ve get over the last few months from people is, are we in a recession? I got it last night on a Twitter space. And quite frankly, one, I don’t know how to answer that question, but I think more importantly, two, what difference does it make? If my answer to those people is, yes, we are they going to go buy spam and ammunition and get into a bunker? Like, I don’t understand what changes if then it becomes an official thing because quite frankly, for many people I say it all the time, I would say for 12% of the country, forget about recession. They’re looking at 1930 stuff going on. So why does that title, official title matter? [00:04:40][43.6]
Peter Boockvar: [00:04:42] Well, to your point, first answer the first part and how I answer it is I say it’s a recession for some. Not so much right now for others. For those that are on the lower income spectrum that are obviously being suffocated by this jump in the cost of living relative to their wage gains. Certainly if you’re a homebuilder, you’re beginning to feel the beginnings of a recession and others, when you go out for dinner to a nice restaurant, there’s no necessary recession feel there. I think right now it’s sort of bifurcated. I think what will make that recession sort of metastasize to the upper income spectrum will be where stock prices go. The S&P 500, if it goes to 3000, I’m not saying it will, but if it does, you can call it a recession for the upper income part of the population. So again, to your point about whether you call it this or not, the trajectory of economic growth is slowing. That is what is most important here. [00:05:39][57.1]
Dan Nathan: [00:05:39] Yeah, and I would say one really important point there, Peter, you mentioned S&P earnings. Okay. So when S&P earnings are trending lower and companies have visibility about it, it’s their actions that they take to kind of defend margins, defend market share. And that’s really has this potential for it to snowball lower. So the idea if it’s planted all over the financial media, but it makes its way to Main Street and that causes consumer behavior to pull back then that’s when corporate spending slows down and then you have this earnings recession and then you have to start thinking about valuations. And so I guess the negative wealth effect you just mentioned housing rolling over the stock market right now. If you look at the S&P 500 down 10% on the year, given everything that we know that’s going on over the last couple of years and the Fed raising right now doesn’t seem to encapsulate what we think the risks are, the three of us that is collectively. But I want to point out to some of the data. So Ryan Detrick, he’s a prolific tweeter about financial data. He said the S&P 500 recovered half of its bear market losses. It’s a very good sign as stocks have never moved back to new lows after this happened. In fact, a year later, higher every time and up 19.3% on average as well. Amanda, we’ll throw that in the show notes and I guess I bring that point up is that Guy and I had been sort of steadfast for months that the S&P should hit 3400 because we were assigning basically a multiple on the S&P and where we thought S&P earnings would be at some point midyear for 2022, well, the S&P got to 3600. We haven’t seen major earnings revisions down to those levels. We’re seeing the multiple somewhere in the 17, 18 times. So we’re still waiting on the earnings part of this equation to happen. So my question, Peter, now, will we see a retest you just said, could we see the S&P 500 at 3000, the pre-pandemic high was 3400 in February of 2020 here. Talk to me about all of that in the data. When you see a data set like Ryan just put forth. [00:07:47][128.5]
Peter Boockvar: [00:07:48] So Ryan, I know he’s an amazing data miner and is very good at looking at seasonals and historical relationships between this data point and markets. My pushback to that right now is up until ten years ago and 4000 years of financial history, never had negative interest rates. Had QE starting with Japan happened a while back, but never before have we seen it like we’ve seen it and we’ve seen QT once and that was the fourth quarter 2018, and we’re now in the second iteration of QT. So this is somewhat unprecedented. So to to think that in historical market relationship is somehow going to hold in this new world of things that we’ve really never seen. I’m not going to draw that. To me, that’s dangerous. In terms of earnings. When you look at the very sharp increase in cost pressures that a lot of companies have dealt over the past couple of years, whether it was labor or materials, transportation costs and so on, it takes some time to get that lost margin back. But if you get to a point where it can no longer raise prices and they’ve cut costs, non-Labor costs to where they can, then you start getting into cutting labor costs, then that starts to negatively impact the labor market and if they can recapture that loss margin, then you start to see a degradation in overall profit margins and that’s what’s going to weigh on earnings. At the same time, if the trajectory of economic growth still continues to deteriorate, then you have to start questioning that top line because inflation has been the biggest booster to revenue. If inflation starts to slow down, then revenue growth starts to slow down and if companies are dealing with very high labor costs. They’re not going to be able to recapture that margin. And then you get gross profit margin declines and more revenue slowdown and then possibly a more notable decline in earnings estimates. [00:09:40][111.9]
Guy Adami: [00:09:41] My question was somewhat rhetorical about recessions, but not really. I think I sort of understand it. And Dan talked about behavioral finance, behavioral economics. So what’s interesting to me, and I absolutely believe this, the answer to that question that I asked is people could be going or along their lives are going on trips, going to restaurants, and then they pick up the newspaper. To the extent that people do that or they watch the news and here we are in a recession, then they look at their spouse, they look at their partner and say, Oh my God, we’re in a recession, maybe we shouldn’t go on that trip. Nothing changed in their life. However, their mindset changed and that starts to feed on itself. And as we know, 60 something percent of this economy is driven by people buying stuff or doing things. So when that behavior changes based on a title, that really doesn’t affect the. One way or another. That’s when this thing starts to spiral. And I think that’s where we are. So when the consumer starts to ratchet back, by the way, credit card debt now north of $1 trillion, this becomes extraordinarily problematic, which is why I think they’re so hell bent on not putting that title out. Does that make sense? [00:10:49][67.8]
Peter Boockvar: [00:10:49] It does. Like I said, there’s a recession for some, maybe not for others. And we’re kind of in this bizarro world, too, with the labor market. You have, you know, tech companies, tech related companies that are limited hiring, they’re trimming. But then you have the airline industry that can’t find enough people. You have a hotel that just can’t find enough people. So there’s sort of this weird paradox within the economy itself that also separates out a recession from not. But if you’re a business that’s doing business globally and you see what’s going on in Europe and you see the second biggest economy in Asia, that’s slowing, it’s hard to avoid a recession. And you have the most aggressive monetary tightening in 40 years on an economy that was fed cheap money, which helped to create this dependance that now we’re seeing the reverse of. So I don’t see how we avoid recession. But, you know, just as night follows day, a recession follows an expansion. So it’s not like it’s crazy talk to think we’re going to have one at some point. [00:11:45][56.2]
Dan Nathan: [00:11:46] So Peter, the other night when you were on fast money, Melissa said, how are you playing your sort of bearish economic view in the markets? And when I say playing, how are you lining up, I guess, for defensive sort of sectors? You said value, you talked about energy. You’ve been a big proponent of energy. We know that you like the gold complex in general. After you got off, guy knows this once Mel goodbyes the guest there is no bringing it back. So I always try to be very respectful. If I have someone like yourself that I love your work and love your points of view, but sometimes disagree and sometimes I think about things very simply. I think the stuff that work, this is what I said, it’s going to be the growth that leads us on the way out. I don’t trade or invest defensively. That’s not my game. You’re in a different business at Bleakely you’re trying to help people maintain their wealth in difficult periods and then grow it in good periods. For me, I kind of look at things sometimes in zero. So my point is the things that I were buying were like the growth of your things over the course of the summer, that nice little runs. And I think on the way out when we come out of this bear market period, however long it takes, I think some of the prior leaders, whether it be Apple and Microsoft and Amazon, will be the leaders again. So talk to us a little bit how positioning right now for clients and how you might start to position when you can see the light at the end of the tunnel as far as coming out of a recessionary period and the next bull run. [00:13:06][79.8]
Peter Boockvar: [00:13:06] I did hear your comments after and I didn’t disagree. I mean, I think we looked at it through the same lens, whether it’s a growth company that became a value company just because the stock fell. To me, if a stock’s down 70%, 80%, and they still have very long term positive fundamentals, that’s an attraction to me. And whether it’s PayPal or SNAP or it’s CVS Drugstore, that’s not a tech growth story, but you can throw it into that value bucket. Cheap is cheap, however, the growth prospects are, and that’s the one thing about a bear market. It creates amazing opportunities. And when a stock is down a lot and you believe in it, it’s fundamentals. And that really the correction was more of a multiple situation rather than a big change in the company’s outlook. Well, those are the things you want to buy. And just my nature is to look at the investing world through a value lens. So I’m attracted to things that are beaten up again, whether that was a previous high flying tech stock or it’s a boring, dull company, like I was buying Madison Square Garden Entertainment or even Manchester United before all this takeover stuff came about. I’m looking for cheap stuff that has a very attractive tailwinds to their business and an attractive outlook regardless of what industry they’re in. And that’s the one thing about a bear market is it takes the biggest knife to those stocks that are most expensive. Those stocks are already cheap. They have low expectations already embedded in them. So there’s less risk in. At the end of the day, though, you still need the fundamentals to be good. You still need a growing business. You don’t want to buy a melting ice cube just because it’s a value stock. Those things you have to avoid. And also time horizon is a really important thing for us. Like when I am buying something, I am buying the stock that I plan to hold for many years and that it helps me cut away the noise of short term movements, really, to earnings, to the economy or what the Fed is doing. And I still believe in a long term runway to this business. And if I’m buying what I think is the right price, then it’ll never be the bottom. Then I’m going to just ride through whatever comes my way. [00:15:08][122.0]
Guy Adami: [00:15:09] Hey, Peter, I can’t let you go before just commenting quickly on this. Federal Reserve as Dan. As everybody knows, I’m an unabashed hater of the group. I’m sure the individuals are lovely, although I’ve never met them personally. But it was really interesting. There was a journal article last week talking about how the market was playing a high stakes game of chicken with the Federal Reserve. And what I’ve been saying for a while is, you know what, market participants, people are just buying stocks because they think this Federal Reserve is going to flinch or are going to pause or pivot whatever word you want to use. And I’ve said a number of times, I don’t know what you’re listening to, but they’ve trotted out just about everybody that’s ever been associated with the Federal Reserve to say exactly the opposite. Is this fight going to flinch? [00:15:56][47.1]
Peter Boockvar: [00:15:57] There are two things. They’re not going to flinch in the sense that they’re going to continue to hike rates to a level that will for sure put us into recession. And their pivot and reversal is going to be different than what we’re used to. We’re used to the Fed tightening its recession and then immediately cutting rates and easing this time around, because inflation is as high as it is, even though it’s going to be falling. The stickiness of it is going to limit their ability to respond to an economic downturn. But I think the market psychology is what they were trying to do. Since QE one. Every market correction of note coincided with the end of QE, the initiation of QT and rate hikes, and you can market the markets fell either 10 to 20% during each of those time periods. And the second the Fed backed off the markets, then rallied and eventually went to new highs. So the market right now is just taking out the playbook that worked since 2010. Of course, this time is not the same in terms of inflation being at 40 year highs and the pace of the aggressiveness of the tightening is at 40 year highs. So this is not like the last 12 years, but that’s the mentality that people are opening up in terms of their playbook. Unfortunately, though, I don’t think that playbook is going to work this time around. [00:17:17][79.7]
Dan Nathan: [00:17:18] We covered a lot of ground their markets, maybe a little what the Fed may or may not indicate before we get out of here and before our listener gets to hear your conversation with Doug Cifu, one of the things you, Danny Moses, our co-host on the tape, we’ve been doing this podcast since January of 2021, and we started with this kind of meme stock thing. Remember that January, February, March of 2021. And Danny has been very clearly critical of a lot of the trading mechanisms that exist that he thinks kind of allows for this sort of behavior and really harms retail traders. And a lot of that is, I think you could encapsulate in this payment for order flow and some of these models that exist to do that that might have been taking advantage of a little bit by those looking to kind of get some of these things going in a way. I’m just curious, what are your thoughts going into this conversation with Doug and on the way out about virtue’s business model in general? [00:18:09][51.9]
Peter Boockvar: [00:18:10] Well, the first thing with regards to the meme stocks, we’ve been seeing episodes like that since the history of markets. You can go back a few hundred years, you can go back to the tulip situation and bubble. And there are always times when you have this craze. And obviously recently we saw in the late nineties and you just seen moments of of euphoria. I mean, I have my book here, Manias, Panics and Crashes by Charles Kendall Lerner. He was writing about this in the late seventies. So it’s just human nature never changes. It just sort of takes on a different form and virtues business really just replaced specialists industry on the floor of the New York Stock Exchange. So instead of calling down to the floor and somebody answering the phone and taking an order and then passing it on to a broker who then ran out to the post, and you had a specialist that sold them whatever stock they wanted to buy. Obviously, that is all automated. So to me Virtu Citadel, these businesses are electronic market makers that have replaced the specialist system and we all grew up when it was quarter spreads in stocks, then it went to eighths, then it’s decimals and now you have sub penny spreads between bid and offers and the retail customer pays zero commission. To me, there’s no better progress than that in terms of making trading affordable to the average person, whereas 20 years ago maybe cost them $200 to place one trade. Now what they do with that in terms of their speculation or what they want to do with the craps table, well, that’s up to them, but that’s human nature. And that was going to happen anyway in whatever form it might have taken. So I think Doug does a good job of laying out his business. [00:19:49][98.3]
Guy Adami: [00:19:50] Upon our return. Peter’s conversation with the CEO of Virtu Financial. [00:19:56][5.8]
Dan Nathan: [00:20:21] CME Ad. iConnections Ad. [00:20:21][0.0]
Peter Boockvar: [00:21:15] Hi I’m Peter Boockvar Welcome to the first podcast of the Book Report CEO Podcast. Our first guest is Doug Cifu. He is the CEO and co-founder of Virtu Financial. He’s also the co-owner and vice chairman of the Florida Panthers of the National Hockey League. Doug, welcome. I appreciate you being my first guest. [00:21:35][20.7]
Doug Cifu: [00:21:36] Well, I’m honored, Peter. Happy to be here. [00:21:37][1.6]
Peter Boockvar: [00:21:38] So before we get into the details of your business, I want the listener to understand how you got to where you are. You were a corporate lawyer for almost 20 years, and now you’re running a global market making and execution firm. And what was it that introduced you to Vinnie Viola? What gave you guys the idea to start this business? [00:21:59][21.0]
Doug Cifu: [00:22:00] Yeah, great question and thanks very much for having me. I mean, it’s a little bit sort of equal parts, hard work, being in the right place at the right time. And I do believe in like sort of a higher power that kind of brings people together. So my background very quickly was as a lawyer, as you mentioned, I was at a law firm called Paul Weiss, Rifkind, Wharton and Garrison, big New York law firm. I specialized in mergers and acquisitions, private equity. One of my clients was a private equity firm that was making in the late 1990 and early 2000, Peter, a lot of investments in market structure companies. It was a firm called General Atlantic, and their basic thesis was that markets exchanges, data providers, retail brokers were going to evolve through technology to become more efficient. Trading was going to become 24 hours is going to be more ubiquitous across asset classes and geographies. And so as a result, I had a number of experiences as a lawyer investing in exchanges in Brazil and in India and in the United States and options in equities. One of the investments that they made pre-IPO was in and you know this company very well now part of the CME, but the New York Mercantile Exchange, which was our exchange in Lower Manhattan, the fella who was the chairman of the New York Mercantile Exchange in 2001 through 2005 was a guy by the name of Vinnie Viola. So I was the lawyer for General Atlantic. Vinny, the chairman of the nomics, was effectively on the other side of the table, if you will, when GM was making that investment. And so I got to know Vinny because he was effectively on the opposite side. So one of the great lessons of my life was don’t be a schmuck, right? If I had been a real schmuck and arrogant and pounded my fist on the table, you know, Vinny would have dismissed me. I did a good job representing my client. Deal closes in. I’ll make this up to three months later and my phone rings. And it’s Vinny, who I vaguely knew was like this chairman, larger than life futures trader. And he says, Hey, you know, I remember you. You did a great job, blah, blah, blah. I need a lawyer for X, Y and Z. And so that’s how I met Vinny. I had been just a practicing lawyer. I started to represent him in a number of matters that he needed help with as a corporate lawyer. And after a few years of doing that, Peter, he turned to me and said, You know, you’re a great lawyer, but you have a great business sense. I have this idea to start. And what he then described Virtu and I’ll describe it as a technologically enabled, scaled global firm that wants to be the best bid and the best offer in every electronic market, in every asset class, in every regulated country around the world. So he had brought ambitions for what Virtu was going to be. And he says, I want to do it with you because we have a good combination of skill sets. At the time, I didn’t know a bit from an offer. I was an M&A lawyer. I read the Wall Street Journal, I looked at stock prices, but I didn’t know anything about the plumbing of Wall Street, didn’t know anything about really about trading. And he said, you’re a smart guy. You’ll figure it out. And here I am 15 years later. Don’t know if I figured it out or not, but here we are. So that’s the story. [00:24:52][172.0]
Peter Boockvar: [00:24:52] It’s impressive the world that we’re in right now when it comes to trading of anything relative to even just the nineties when you had the Nasdaq and really was created to be an electronic system with both bid and offers. But the New York Stock Exchange was very old school with people running around with their heads cut off on the floor, running from the phones to the specialist booths. And the way that I look at your business is you essentially have replaced the human being special assistant and you were the buyer to every seller, the seller to every buyer, and not just equities, a trade on the New York Stock Exchange, but you guys are trading in markets in over 50 different countries in a variety of different markets. [00:25:35][42.7]
Doug Cifu: [00:25:36] Yeah, that was the basic idea that financial intermediation matching buyers and sellers is a business that is as old as, you know, markets and at time. Right. It goes back hundreds and hundreds of years. So it was a business that was going to evolve. It wasn’t going to go away. You always need that market maker to sort of match buyers and sellers. What has happened through scale, hard work and technology, as you indicated, is that that function has become and we were one of the main driving forces and there are a lot of other firms that compete with us, but their function has become a lot more efficient, a lot more scaled and a lot more global. And the end result is, as you mention. And that the bid offer has collapsed because of efficiency. Right. We’ve taken a lot of the human process out of it, a lot of the inefficiency out of it. And as well, because of that efficiency commission rates and you well know this, right, because you’ve been in the business a long time, have gone from $300 for a full priced broker to effectively zero commission using an iPhone where you could get access to real time liquidity in 8000 in the United States, 8000 rogue NMS stocks, both companies in ETFs instantaneously at a price greater than any institutional investor can get if you’re a retail investor in this country. So I’m very proud of the role we have played in that. And in the 15 years we’ve been doing this, I’ve seen a collapse of bid offer spreads. I’ve seen commission rates go from 895 to 4, 95, to zero. And so competition, technology and a lot of automation, a lot of really talented good people at Virtu and dozens of companies around the world have really made markets a heck of a lot more efficient, and I would argue a heck of a lot better. [00:27:11][94.9]
Peter Boockvar: [00:27:11] And on the institutional side as well, when you think about an institutional order, an institutional order being from hedge fund, a mutual fund, a pension fund, whatever, and they’re buying multimillion dollars worth of stock where in the nineties there was a quarter spread and a quarter of a lot of money is a lot of money. And that that went to an eighth. And then, as you said, decimals. And, you know, I was even looking at Virtu stock today and it was a penny spread. And we know that there are a lot of stocks that are Penny. So it’s an incredible efficiency that this technology has built in and as you mentioned, a zero emission rate. So, you know, that begs the question, when you hear Gary Gensler, who has obviously gotten involved in this business, is what problem is he trying to solve? If they’re looking out for the consumer and the consumer now has penny spreads and at the retail level paying no commission, I don’t understand. To be honest, I really am confused about what problem is trying to be fixed here. [00:28:13][61.5]
Doug Cifu: [00:28:14] I’m going to try to be somewhat polite. I’m typically not real polite about this, about him and about what he’s trying to accomplish. I mean, really, at the end of the day, Peter, it really is just a political he’s really more of a political activist as a SEC chair than a regulator. It’s really kind of a new type of SEC chairman that we have. Historically, the chairs have been they get their direction from Congress. They’re worried about enforcement actions. They want to protect the marketplaces. But Gensler really has a political agenda. They don’t. And the progressives, I’ll say this broadly, do not like self-directed trading. They don’t like what happened with Robinhood and the meme stock phenomenon. They think it’s you know, the hordes are sort of trading too much this gamification and layer on top of that. Our biggest competitor is a firm called Citadel Securities, great firm, run by a brilliant once in a generation kind of talent guy named Ken Griffin. And Ken is a very, very successful but very Republican and a very large donor. So he’s not well-liked in Washington. So you add up all those facts. And I would argue and I’ve said this publicly and I’m saying it again publicly, that Gensler is on a political witch hunt, what he is doing and the suggestions he have made are simply not supported by the facts and not supported by any data that any reasonable person could look at. The marketplace has solved and created through competition, this incredibly efficient ecosystem where, as you say, a retail investor can buy up to 10,000 shares with a mouse click or a push of an iPhone at a price that is at or better than the national best offer that any institutional investor would pay. It’s a remarkable system and Zero Commission, right? So that is something as a proud card carrying American, we should all be very proud of and wave our flag because as you said, we trade in dozens and dozens of marketplaces around the world where there is retail participation in Japan, in Europe, in Canada, in Brazil, there is not a marketplace that is as efficient and is as robust for a retail investor as is the United States. So sadly and unfortunately and I have to waste a lot of time on this, Gensler is on a little bit of a political jihad that is not backed by the facts in the data. And we will continue to be very front footed, transparent and vocal in opposing what he’s trying to do. [00:30:22][128.1]
Peter Boockvar: [00:30:22] When people look at the U.S. and they see the big tech companies and Google and Microsoft, and they say that while the U.S. is dominant in these big tech companies, I think people should also understand that when it comes to the global capital markets, there is nothing like the US, there is nothing like how our capital markets, whether it’s from a fundraising standpoint, a fixed income capital raising standpoint and certainly when it comes to making markets, I don’t think people appreciate that a bit on offer spread of just a penny or below that is quite unbelievable. And you can look at any other market around the world and while spreads have definitely collapsed, there’s nothing like those spreads here. [00:30:58][36.3]
Doug Cifu: [00:30:59] The importance of that is what it means for capital formation and growing businesses. Right? The title of the bid offer is if you’re an issuer and I know this because I run a public company, the better execution price and better quality you’ll get when you try to raise capital. So our efficient markets allow for real, robust, efficient capital formation, which creates jobs and grows our economy. So that’s why so many foreign issuers want to come to our marketplace. And yes, there should be robust rules about that and obviously not in favor of scams and frauds and things like that. But we should be celebrating this market. It’s one of the core strengths and something that we have. I use the word dominated because we trade in so many different marketplaces. The U.S. equities market and U.S. capital markets are so overwhelmingly more efficient in scale than any other place in the world. They should be celebrated. And unfortunately, we’re in a political world right now where Wall Street and efficiency and trading and capital markets are not nearly as celebrated and valued as they should be. [00:31:53][54.5]
Peter Boockvar: [00:31:54] Absolutely. And you guys are making markets and equities and options and fixed income and ETFs and even crypto, which I want to touch upon. [00:32:03][8.6]
Doug Cifu: [00:32:03] And FX and commodities [00:32:04][1.1]
Peter Boockvar: [00:32:06] Trading $7 trillion a day. I think stocks trades globally can be even more than that now, but also doing it globally. So the whole world is essentially stealing your technology, not really understanding it, because when they’re buying and selling, it’s like when you go out for dinner, you know, necessarily thinking about what goes on in the kitchen in order to provide that food. You know, they’re having access to liquidity with tight spreads, not understanding that firms like yourself that are creating those better opportunities for these people to be buying and selling things. [00:32:34][27.8]
Doug Cifu: [00:32:35] It’s not even in the kitchen like we’re the guys actually, like planting the kernel of corn that becomes corn that then gets sent to the kitchen. We are the plumbing of the capital markets around the world because we are at the point determining what fair value is for every instrument at every moment in time. Without that level of investment and precision around pricing and being able to price as tightly as we can. Everything kind of ripples from that. Peter, to continue your farming food analogy, which means that then you’re going to have larger commissions, you can have wider bid offer spreads, etc. it sort of ripples through. So the billions and billions of dollars that we have invested in the last 15 years to create this really robust trading infrastructure that we have, that is scale, that is low latency, but more importantly is agnostic across asset classes and geographies. Right. Really kind of tying together an asset class, whether it’s an ETF, it’s a future, it’s a spot. And that level of precision and investment just enormous ultimately to the benefit of the end user, as you’ve indicated. [00:33:37][62.1]
Peter Boockvar: [00:33:38] So you mentioned Citadel’s being a main competitor. So just trying to give an example, let’s just say I put in a buy Twitter to buy a thousand shares of GM, for example. [00:33:46][7.7]
Doug Cifu: [00:33:47] And you’re Peter, you’re a retail investor. [00:33:48][1.2]
Peter Boockvar: [00:33:48] Yeah. So we’re a retail investor. I’m going tohrough chwab fidelity whatever and is a virtu that’s on the other side. Is it Citadel, where you guys competing for that offer? Is it. [00:33:57][9.3]
Doug Cifu: [00:33:58] Yes. So retail brokers and there are hundreds of them. Right. And you’ve named obviously some of the bigger ones. And we have 250 retail broker customers, everybody from, you know, Ameritrade to Xcode trade and everybody in between. So we love all of our clients. When you look at your phone or you have your PC and you see a price, you push the button, that order, which is a market order, right? So it just says, you know, get me a thousand shares, a GM, whatever the market prices and you kind of see a market price there. Fidelity, Schwab, etc., they have a choice. They can send that order to an exchange. They can send that order to a dark pool, an ATS, or they can send that to what we call a wholesaler, a market maker. So that would be Virtu, Citadel, Susquehanna. There’s about seven or eight of us that do this Uber right. That’s a highly competitive business. And we’re competing for Peter as order based on price. So how much are we able to price improve off of the NDBO display price on an exchange that order. All right. So if the market is like 9 to 10, we’re going to be able to do it at non spite nine, nine, spot eight, whatever it is over a period of time. And so Fidelity Schwab in your example will have a wheel where it has predetermined. Okay, my number one market center for a thousand shares is going to be virtu. So they’ll get one out of every three orders, Citadel will get one out of every four, etc. And so it’ll be sort of round robin. So oftentimes you’re right, that order gets sent to us as the market center. When it gets sent to us and hits our environment, you’re done. You’re filled. Whether I take it into inventory or whether I access liquidity because I don’t want that order, I don’t want the risk. I’m over my risk capacity. However, that’s my issue. You are done. You get a price at that microsecond in time. That is going to be better than you can get on a national securities exchange. And this is all monitored by the retail broker. They’re scoring us on this hourly, daily, weekly, monthly in a very robust fashion. So from the retail brokers perspective, they then take that fill and send it back to the client at the price. Improved will be a four decimal execution. It immediately gets printed onto the tape, the TRF right, the trade reporting facility. So the entire world sees that Peter sent the thousand shares of GE or GM, whatever it is. You said the price was so penny executions there for so you know, it was a retail price and the entire world knows it. You get your confirm and you’re done. That’s how it works. Very competitive. Robust environment, we get literally millions of those orders a day. Citadel represents somewhere between 35 to 40% of the retail market. We represent around 30%. So we’re number two. And then there’s Susquehanna, Jane Street, and there’s a number of other competitive firms that try to do the same thing. The key takeaway is because of the market dynamics and, you know, Fidelity’s playing us off against each other, right? We’re providing this customer service, this outsourced routing solution, but it’s also a principal solution. So we’re taking real risk on those orders. Sometimes Peter’s order ends up being a loser for us and we lose money. Hopefully, more often than not, we can make money on these smaller, non correlated market orders, but sometimes we don’t, somedays we do. [00:36:53][174.5]
Peter Boockvar: [00:36:53] And that also seems to be a point that Gensler doesn’t understand either, is that you guys are competing to offer the best price. [00:36:58][5.1]
Doug Cifu: [00:36:59] Yeah, he’s got citadel on the brain because of the political dynamic, and it’s a mouse click business. There’s no long term contract here. If we mess up, Fidelity is going to shut us off for the day. If they don’t like our prices, they’re going to take us from 30% down to 15% with a mouse click. It happens intra day. It happens day to day. So it’s a very competitive monitoring business where the retail brokers have a ton of market power. It’s not the citadels and the virtus [00:37:23][24.2]
Peter Boockvar: [00:37:24] I want to transition. Tell me if I’m wrong. Market making is what about 70% of your top line and execution is is the balance predominantly? [00:37:30][6.4]
Doug Cifu: [00:37:31] Yeah. I mean, I’ll say it depends. Year to year is when there’s more volatility market making you know it offers will expand but roughly you’re correct. Yep. [00:37:38][7.2]
Peter Boockvar: [00:37:39] So the execution business and from back in the day in the nineties, if I called down to the floor of the exchange to buy 20,000, 50,000 shares, 100,000 shares or something, it would be person on the other side. They would call the runner. I would have to then run over to the specialist, execute the order. They would run back and I would literally have to write down every single transaction which can be 50 of them. [00:38:02][23.3]
Doug Cifu: [00:38:03] And you’re paying a nickel a share or something like that, right? [00:38:04][1.4]
Peter Boockvar: [00:38:05] Paying a nickel $0.06 and wide spreads. So your execution desk can literally take that 50,000 share by Twitter and with the technology that you guys have developed and execute that instantaneously, not all the time, but more often than not. [00:38:21][16.1]
Doug Cifu: [00:38:21] The answer is yes, but more to the point. So you set it right. Like 70% of our business, we’re acting as a principal, as a market maker, 30% of our business, we’re acting as an agent. Right? So our clients are large institutional pension funds around the world. It’s a who’s who. We’ve got 1400 institutional clients that trust us. And really the theory, Peter, was we’re really good at understanding markets, we’re really good at routing orders, we’re really great at providing liquidity and access and liquidity. So can we apply those activities that we do as a principal and empower our clients by offering that same understanding of the markets and our technology to institutions and act as an agent? As you said, sadly no longer get a nickel. It’s about half a penny for a low touch order and maybe, you know, a penny or two for a high touch order. But what we have done is we’ve created in the U.S. and in markets all around the world, Europe and in Asia, an algo suite where clients have their own trading desks for their own buy side firms. So in your example, you would have been outfitted with a suite of algo is virtual goes and other you could use Goldman and other folks and you’re an experienced trader, so you might want to just say, all right, I’m just going to VWAP or I’m just going to remove a because it’s a small order. Or maybe I want a liquid seeking what I want to be a little more patient. I don’t want to impact the marketplace. Whatever it is. We have this suite of algos. You then can parameters that and use it on your desktop. It’s going to go through our pipes. We’re responsible for it where the broker, but we’re empowering you as a trader. That’s one option. So more self-directed trading by really experienced buy side traders. Of course we have a full service desk as well that will do the same thing where we’re going to charge a little bit more for more of a high touch order, where we’re going to work at during the day, more of a traditional kind of brokerage model. The world is moving more towards the former than the latter. Again, because of efficiency and scale, you follow the industry. So if you’re an institutional asset management fund, you’re under pressure. You want to reduce your costs, right? Mutual funds are challenged these days. So your cost of execution, your brokerage cost, is going to be a big deal. We’re a lower cost, if you will, but really excellent execution only type of firm. We don’t offer any research. We don’t offer any prime we don’t offer any IPO calendar. So the only way we get business from a who’s who of institutional clients is through superior execution, quality and obviously customer service. Right. And that’s demonstrably measurable based on analytics that either we can provide or third parties can provide. [00:40:39][137.2]
Peter Boockvar: [00:40:39] So when you look at taking that over the next three, five, ten years, the growth drivers of the business, is it just continuously being ahead of the competition in terms of delivering this technology? Is it in addition to finding new markets and more securities to trade and just get deeper within the capital markets throughout the world? [00:40:59][19.5]
Doug Cifu: [00:41:00] The answer is yes, right? Obviously, we want market share and there’s always the 8020 rule or really like 9010 rule. I mean, there’s going to be a handful of behemoths, kind of asset managers, pension funds that really we’re competing for. But we offer a multiple of products. So we have an execution management system called Triton that sits on the desktop. We have an analytics business. We have high touch and low touch. So what we have found is and the reason we can continue to grow is when clients buy. This is kind of sales 1 to 1. Peter. I was literally just looking at these metrics yesterday when clients use two or more of our services or three or more of our services. We’re going to make a lot more money in aggregate, but also they’re more attached to the firm. So using our technology to actually give people the pipes, if you will, that they can access the market and access the brokers. Right. We call that our EMR execution management system, along with our old ITG net, where we actually offer connectivity and then putting the broker, our algos on that desktop and then providing an analytics business so that they can actually do their own TCA, really empowering the large asset managers pension funds around the world to be more self-sufficient, leveraging the technology that we’ve built for our own market making aside, the last part, which is really keenly strategic, particularly in the U.S., is because we are a large market maker and because we have this large central risk book, if you will, of our own properties and retail orders, clients that choose to opt in get access to that. So think about that. If you’re a large institutional investor and some of our clients are just amazed by the size of the fills that they can get. From my perspective, I’m more than happy to have my institutional client pay me a commission, be happy and execute at midpoint against some large retail orders that I happen to have in inventory, because that allows me to be more aggressive in pricing to my retail customers, right? So I become more of the market center. So that’s one of the strategic growth areas for our firm, effectively internalizing within virtu liquidity provisioning. [00:42:58][118.1]
Peter Boockvar: [00:42:59] Right. You’re deepening the liquidity at the same time improving the price as well, correct? [00:43:03][3.9]
Doug Cifu: [00:43:03] Correct. And providing 100% transparency and post-trade reporting and all of that. [00:43:08][4.5]
Peter Boockvar: [00:43:08] Right. Which is the ideal combination. This one stop shop. [00:43:11][2.9]
Doug Cifu: [00:43:12] Exactly. And sophisticated high end large global asset managers love that. Right. Because they get access to real liquidity, they got transparency and they can show their their committee, hey, look at all these data. It shows that we executed better. We got larger fills. And the only reason we have market share, right? Because why the hell else would you use Virtu as opposed to using Goldman or Morgan Stanley or JPMorgan, one of the large guys that offer you calendar that are for you prime brokerage and leverage. If you’re a hedge fund that offer you corporate access, we have nothing, right. We don’t even have tchotchkes and hats that we give at all. We have an execution quality. [00:43:45][33.6]
Peter Boockvar: [00:43:46] So crypto, you have ETFs and crypto you have the futures. I know Canada has spot ETFs. Obviously we have futures ETFs. Is there also a cash market that you guys are trading? And like, if I have an account, a Coinbase and I’m buying Bitcoin, is it virtu that is providing liquidity or it’s done in a different way? [00:44:04][18.3]
Doug Cifu: [00:44:05] It’s done in the same way. So, you know, I kind of look at crypto a little bit like the FX market. Pete Right, because there’s no centralized clearing. There’s not really like a central club anywhere, right? Obviously there’s no NDBO, right? There’s no. So it’s a little bit like facts where you have spot venues. Banks are actual venues, you have futures and you even have some ETFs. Right? So we look at this is it’s a widget to us. I don’t have any fundamental view on Bitcoin or anything else, just in the same way that you’re smarter than me in terms of where’s the euro dollar going to go, I really don’t care. I’m worried about the next tick, not what’s going to happen in six months. So we look at Bitcoin and these other coins that are, you know, have enough volume as just widgets. And so we are connected to, you know, the big guys, the Binance, the FDX is the coinbases Gemini’s. So there’s like seven, eight, nine, ten cash spot venues where we can act as a market maker. But it’s more challenging, right? Because there’s not really prime brokers in a traditional sense. There’s no centralized clearinghouse. It’s not as much leverage. It’s an operational pain in the tertiary because you got to move coins and cash. But it’s a great business for us and a growing business for us because again, think about it. You have all these different coins and all these different venues, but they’re also going to be denominated in different types of currencies. I mean, there are people that want to buy Bitcoin on some venue in Turkish lira and we can do that, right, because we provide two sided liquidity in Turkish lira. So we can do Bitcoin try against Bitcoin dollar. Anyhow so that’s why it’s an exciting business for us. As a quick editorial, we should have a spot ETF in the United States. This is another one of the Gensler isms. It makes no sense. All he’s doing is harming retail investors. There’s a whole bunch of letters and there’s litigation that grayscale brought and great law firm Davis Polk is involved in it. And if you read their letter on this, they’re 100% right on this. This is another one of Gensler’s political dogmas. All he’s doing is hurting retail investors because there is a future space ETF which has to roll periodically. So it’s a lot less efficient. [00:45:59][114.5]
Peter Boockvar: [00:46:00] And you get slippage. [00:46:00][0.4]
Doug Cifu: [00:46:01] Yeah, there’s a lot more slippage. Yeah. So that’s why we’re involved in crypto and we will continue to be involved in crypto. [00:46:05][4.2]
Peter Boockvar: [00:46:06] You also have a side business and that’s called co-owner of the Florida Panthers, which happened to have the best record and the most points in hockey last year, but obviously it was disappointing playoffs and how’s it looking for the upcoming season, which starts before you know it. [00:46:21][14.7]
Doug Cifu: [00:46:21] You’re very, very generous by calling it a business. I call it a very, very expensive hobby [00:46:25][4.0]
Peter Boockvar: [00:46:26] A fun one I’m sure that. [00:46:27][0.4]
Doug Cifu: [00:46:27] You know, hope springs eternal. This is our ninth season. Vinnie is the majority controlling partner. I’m just a little partner, but I do enjoy it. It’s fun. Every year I think we’re going to win the Stanley Cup. But I’ve been wrong eight times in a row so you shouldn’t listen to me about that. But I think we did make the team better in the off season. We made a very, very controversial trade. It was a painful one because we traded a guy named Jonathan Huberdeau, who has just been a wonderful long time, our longest tenured panther. And the guy came off a 100 point season and he comes from a great family. I know the mother, I know the father. I know his brother. His sister sings the national anthem when we play the Canadiens. So it’s a painful trade to make. But we got back one of these rare players, a guy named Matt Kosuke, who is a great scorer, but he’s also got like a physical side to his game. He’s got a lot of grit, I think in Bill I trust, Bill Zito as our GM. He’s made some amazing moves. He’s really turned over the franchise in the last three years. And so I know people will think we got worse because we traded Johnny for Matt and all that kind of stuff. I think we’ll be a better postseason team. I’m very optimistic we’ll make the postseason. As you said, we won the Presidents Trophy last year, which is like kind of touching the Stanley Cup. Everybody that wins, it doesn’t win the Stanley Cup. So I’d be really happy if we had 99 points or whatever it was and made the playoffs and then won the Stanley Cup. We want our first round since 1996. Last year we beat the Capitals in a very tight 4 to 2 series and then Tampa just showed us what a championship caliber playoff team can do. I mean, they swept us in four games. I mean, that was on paper. We were a better team, but on the ice they beat us for nothing, so we had to make a change. [00:48:04][97.1]
Peter Boockvar: [00:48:04] Well, between you and Tampa, you’ve put Florida on the map of hockey. I mean, Florida is now the dominant hockey state. Quite interesting when these teams in and exist not too long ago. [00:48:14][9.8]
Doug Cifu: [00:48:15] Yeah. You’ve got to give Gary Bettman a lot of credit. I mean, he had some chutzpah by deciding he was going to take hockey south in the mainland to nontraditional markets. I’ll say San Jose and Carolina and Dallas and Sunrise Florida and Tampa and all these great locations where hockey was not traditional. You know, hockey is like religion in Montreal and Toronto and even New York. You know, the Rangers obviously in Chicago, the original six, Detroit, Boston, those are great markets. Nashville to me is like one of the best places to go to watch a game. Now look at Vegas, give them a lot of credit. He’s really done a remarkable job growing the game. We’re happy to be part of that. I love the South Florida market. We’ve got a great fan base and. [00:48:55][40.1]
Peter Boockvar: [00:48:55] And a sports never been more popular. [00:48:56][1.1]
Doug Cifu: [00:48:57] Yeah, yeah. It’s a great sports the best live sport I think. But I’m biased. [00:49:00][2.8]
Peter Boockvar: [00:49:01] And playoff hockey. Nothing like it [00:49:02][1.3]
Doug Cifu: [00:49:02] Nothing like it. [00:49:03][0.8]
Peter Boockvar: [00:49:03] Well, Doug, I really appreciate the time. This was great and I hope the listeners got a good sense of how your business is done. And again, I thank you so much. [00:49:11][8.3]
Doug Cifu: [00:49:12] My pleasure. I really enjoyed it. And best of luck with this podcast going forward. I appreciate it. [00:49:16][3.7]
Peter Boockvar: [00:49:17] Nothing in this broadcast should be construed as investment advice nor a recommendation to buy or sell securities. The discussion is for informational purposes only, and past performance is not indicative of future results. The specific securities discussed may be held by Peter Boockvar personally and or purchased, sold or recommended to weekly clients. [00:49:37][20.2]
Guy Adami: [00:49:39] Thanks once again to CME Group and I connections for sponsoring this episode of On the Tape. If you like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we love hearing from you can also email us at on the tape at risk reversal. Dot com any time. Follow and connect with us on Twitter at on the tape pod and we’ll see you next time. [00:50:03][23.5]
Dan Nathan: [00:50:04] On the tape is a risk reversal media production. This podcast is for informational purposes only. All opinions expressed by me and Nathan Guy, Danny, Danny Moses and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [00:50:04][0.0]
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