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Trading Opportunity For A Driver Of The Retail Trading Revolution

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We have an excellent buying opportunity in the largest publicly traded high-frequency market-maker, Virtu Financial (VIRT - Free Report) . Yesterday VIRT tumbled over 7.5% in the afternoon trading session following comments from Gary Gensler, the chairmen of the SEC, regarding potential new market regulation to improve its efficiency. The SEC chair argues that there is a conflict of interest between best execution (brokers executing orders at the best possible price) and payment-for-order-flow. Payment-for-order-flow occurs when market makers pay brokerages to execute their orders (for a profit), typically on off-exchange 'dark pools.' Virtu Financial is the second-largest market-maker in this space, with an over 30% market share of retail investing order flows. Citadel, which is not publicly traded, is the dominant player, controlling 46% of this retail investing market.

The rise of the retail trader has driven fresh concern about the opaque sale of orders by brokerages like Robinhood, TD Ameritrade, Charles Schwab (SCHW), Interactive Brokers (IBKR), and many others to these market makers. All the publicly traded brokerages fell on this news because payment-for-order-flow is one of the principal ways these firms can afford to execute commission-free orders from retail investors.

Virtu's CEO, Doug Cifu, came on CNBC yesterday afternoon after Gensler's comments and discussed the long-term opportunity his company sees with the retail investing revolution we've observed over the past 15 months and showed little worry about Gensler's remarks. In fact, he welcomed the "study and review" of the payment-for-order-flow process by the SEC, citing that the execution price for a trader on a smartphone is as good as any large financial institution because of market-makers like Virtu. According to Cifu, Virtu alone provided $3 billion in price improvement to retail investors.

Doug's apparent lack of concern about this SEC probe leads me to believe that there may be less to worry about than the market's initial knee-jerk reaction suggests. In fact, every time VIRT has had a precipice sell-off since the beginning of 2020 it has been an excellent buying opportunity. This morning, we saw support from the September highs around $28.60, pointing to a potential springboard trade opportunity for the stock.

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