Business

Hudson River, a high-frequency trader, executes retail stock trading

Hudson River Trading LLC, one of the largest high-frequency trading companies, plans to enter the business of conducting equity trading for retail investors.

The company, which handles about 8% of the daily stock trading volume in the United States, has built a so-called retail wholesaler business. Company executives told The Wall Street Journal that they are aiming to launch later this year or early 2022.

The wholesaler is Robinhood Markets Inc. Or execute orders to buy or sell shares submitted by people who use online brokerage firms such as TD Ameritrade.

New York-based Hudson River has entered the business with two giant rivals, Citadel Securities.

Virtu Financial Co., Ltd.

Together, the companies process more than 70% of individual investor equity orders, according to Bloomberg Intelligence data.

In an interview, Hudson River Head of Business Development Adam Nunez said, “We have great respect for Citadel Securities and Birtu, as well as our ability to provide superior enforcement to retail investors.” “We see demand from retail brokers for additional wholesalers. We are confident that we can compete with Citadel Securities and Virtu by providing liquidity to retail investors, much like we do on exchanges. doing.”

Most retailers are unlikely to notice the effects of intensifying competition with the Hudson River. Investors usually save a small amount of money by routing orders to wholesalers. Often only one penny per share.

Wholesalers often pay intermediaries for their right to fulfill their orders. This is a practice called order flow payment. Such payments, and more broadly the wholesaler’s business, are being scrutinized this year after the frenzy of trading Reddit-fueled meme stocks.

GameStop Co., Ltd.

And

AMC Entertainment Holdings Co., Ltd.

The Securities and Exchange Commission recently launched an extensive review of payments for order flows and related practices. SEC Chairman Gary Gensler, We announced a review earlier this monthIt has also expressed concern that the wholesaler’s business is over-concentrated.

In addition to Citadel Securities and Virtu, several other wholesalers are competing to fulfill individual investor stock orders. Most are units of high-speed trading companies.

The Hudson River has grown into a huge competitor in the global financial markets since its inception in 2002, but remains unobtrusive.

“”
“We are confident that we can compete with Citadel Securities and Virtu in providing liquidity to retail investors.”


— Hudson River cadre Adam Nunez

The company employs more than 500 people worldwide. Active in stocks, options, futures, currencies, bonds and cryptocurrencies. Like many HFT companies, Hudson River is a proprietary trading company that manages its own funds and does not utilize external capital.

Nunes said Hudson needs to clear some final regulatory and technical hurdles before it can start trading for retail investors. A few years ago, the company decided to enter the wholesale business a long time ago. Recent meme stock frenzy, He said.

Critics say that paying an order flow creates a conflict of interest for the intermediary to maximize profits, rather than ensuring that the customer gets a good price in the transaction.Some analysts send investor orders to wholesalers on the New York Stock Exchange and

Nasdaq

The stock market that misses much of the activity of individual investors.

FCMs and trading firms argue that the current system will benefit U.S. retail investors and help them get better prices than if orders were sent to the New York Stock Exchange, Nasdaq, or other exchanges. I am.

The individual investor order flow is attractive to fast traders because it provides an easier way to make money than trading on an exchange.

Share your thoughts

What should regulators do with retail wholesalers and order flow payments? Join the conversation below.

This is because such companies often make money from market making. That is, the strategy is to buy and sell stocks throughout the day and collect small so-called spreads between trading prices. When creating a market on an exchange, market makers run the risk that the participants on the other side of the trade are large, sophisticated financial institutions that raise or lower the price of their stocks through mass trading. It can cause market makers to lose money.

In contrast, when market makers deal directly with individual investors, those individuals are generally too small to move the price of a particular stock and tend to be a mix of buyers and sellers.

Still, it can be difficult to succeed in a wholesaler’s business. It requires trading companies to establish sales relationships with brokerage firms and trade in a wide range of stocks and exchange-traded funds preferred by small investors.

The retail wholesale division of Chicago-based trading firm Wolverine Holdings LP was closed earlier this year due to lack of significant market share, but Wolverine has another division that handles option orders for retail investors. Is still there.

Arxis Capital Group LLC, a startup founded by former Bank of America Merrill Lynch executives who were previously seeking to enter the wholesale business, closed in 2017 after most were unable to get going. it was done.

Write to Alexander Osipovich alexander.osipovich@dowjones.com

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Hudson River, a high-frequency trader, executes retail stock trading

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