From Citadel Securities to Tastyworks: The New Economics of Liquidity, Part 1

With the new disclosure from the revised SEC Rule 606, market observers can take an in-depth look into routing practices. As described by author Paul Rowady, Director of Research at Alphacution, the rich data sets under the revised rule are "a game changer for our ability to understand the nature of the market ecosystem. It reveals so much more about the interdependencies of market players."

“The real voyage of discovery consists, not in seeking new landscapes, but in having new eyes.” – Marcel Proust

The data contained in the revised SEC Rule 606 reporting has landed like a transparency bomb for those few of us who try to make sense of complex – and historically opaque – market structure issues; perhaps even more so for those fewer of us that are able to triangulate on the strategic movements of the various players by weaving additional insight from multiple datasets. Add the moves of the largest retail brokerage platforms, in particular, to a zero-commission paradigm off the back of the controversially-successful Robinhood platform, and we have a potent cocktail made of disruption and intrigue.

For those of you that have been following along recently, Alphacution has toggled widely between intense fixation on these themes – with our latest Robinhood-related Feed posts, “Phenomenon: On This Score, Robinhood Now Exceeds E*Trade, Others” and “Trick Shot: Robinhood Underwrites MEMX” and our recent contributions to the July 8 New York Times article by @NathanielPopper, “Robinhood Has Lured Young Traders, Sometimes With Devastating Results” – and being rendered mute (with nothing published last week on the sweltering eve of the long holiday weekend). Part of this phenomenon is caused by the fact that this new level of disclosure represents a game changer for our ability to understand the nature of the market ecosystem. It reveals so much more about the interdependencies of market players. And, because of this, it’s also difficult to know where to start…

So, we’re going to need to take some baby steps, as follows:

Contrary to much that has already been written since the first of the new Rule 606 reporting went live in late May (based on Q1 2020 trading activity), it’s important to understand right out of the gate that this new reporting format includes much more than just order routing payments. To understand the significance of this, recall that, prior to this point, order routing revenue and payments were disclosed and discovered in public financial statements from a subset of retail brokerage firms…

…and then corroborated by only one of the payers of order routing revenue, Virtu Financial:


However, given this new reporting format, we can now assemble a much more comprehensive picture of the participants, independent of whether they are public or private. And, in the case of the wholesale market makers who engage in the practice of paying for order flow, most of them are private (and quite secretive). Moreover, we can begin to make new and unprecedented distinctions about the primary economic factors around order flows…

So, depending on the counterparties, the new Rule 606 reports seem to comingle information on payments for order flow (PFOF) and liquidity payments, sometimes otherwise known as “maker-taker fees.” In other words, the wholesale market makers are typically the ones paying retail brokers for order flow. The exchanges, on the other hand, are the ones paying “maker” rebates or charging “taker” fees to market makers and brokers who add or take liquidity from the various “market centers” (aka – liquidity venues).

Along with other factors – like bid-ask spreads, liquidity fragmentation, and securities inventories – order routing and liquidity payments are key components of the economics of interacting with listed liquidity. The chart, below, illustrates the liquidity payment “buckets” reported by the three major US equity-related exchange groups – InterContinental Exchange (ICE/NYSE), Nasdaq, and CBOE Global Markets (CBOE) – plus the order routing revenues reported by Schwab, E*Trade, and TD Ameritrade (but not Interactive Brokers, as we will discuss below) – over the 9 quarters beginning Q1 2018 and ending Q1 2020:

Now, when we combine certain new Q1 2020 SEC Rule 606 reporting data with that of the relevant Q1 2020 SEC Form 10-Q data, we arrive at a very illuminating picture, like this:

These are a few of our more notable observations from this view of the combined data:

  • What we originally thought was $367 million in observable order routing revenue across 4 public companies in Q1 2020 is now estimated to be $487.7 million of mostly order routing revenue across at least 10 public and private retail-oriented brokerage entities, including one of which – Tastyworks – that we had never heard of before…
  • Not including the exchanges (currently representing $29.6 million in net liquidity payments to the 10 “payees”), this $487.7 million in (mostly) order routing revenue is being paid by 11 entities (the “payers”) which are otherwise dominated by 2 world-leading proprietary trading firms – Citadel Securities ($172.2 million, or 35.3%) and two units of Susquehanna International Group – SIG, G1 Execution Services – G1X and Global Execution Brokers – GEB ($108.4 million, or 22.2%).
  • Attracting at least $90.9 million in order routing revenue for Q1 2020, Robinhood is much bigger (~2x) on this measure than we had previously estimated. (Now, whether that fact represents a straight line to their tagline of “Democratizing Finance” and/or a recent $8.3 billion Silly Valley valuation, you be the judge…)
  • The Rule 606 data and the Form 10-Q data do not match up in any of the 5 cases in which it applies (including Virtu Americas), which means that we have not yet fully accounted for the sources and methods of order flow economics.
  • According to Alphacution’s interpretation of the Rule 606 data, 96.9% (or, $17.5 million) of Interactive Brokers Q1 2020 order flow economics come from exchanges. This is in fairly stark contrast to the $7 million in order flow revenue disclosed in IBKR’s Q1 2020 10-Q filing; which – again – suggests we haven’t fully connected the dots on all the payers, payees and taxonomy…

Nevertheless, despite additional complexity and new sources of confusion to be ironed out, this analysis does bring us much closer to understanding the competitive dynamics and strategic imperatives in a quadrant of the ecosystem that 1) was formerly much more opaque and 2) is known (by us at least) to cause serious downstream knock-on effects in other zones of the trading and asset management ecosystem…

Here’s a few more examples of what we mean before we wrap this one up:

Order routing revenue breakdowns imply the nature of underlying trading activity (given the mix of S&P500 names vs. Non-S&P500 names vs options), and therefore, the likely nature of the underlying client base. In other words, each of these players tends to promote a culture that attracts a certain type of client (with a certain – some might say, targeted – risk awareness/ignorance profile):

Order routing rates, a topic that is best left for its own dedicated explorations, is another fascinating and illuminating aspect of the new 606 reports because they beg so many new questions…

For instance, what explains the variance in rates paid to various retail brokers by various wholesale market makers across various order types? Moreover, in the chart below, why does it seem that certain market makers are paying Robinhood so much more for the most common (and most liquid) securities relative to the less common (and less liquid) securities? Could this represent a tip of the hand as to underlying strategy?

Alphacution will be back with some answers.

Until next time, always remember: Don’t get mad…


Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact:; Follow: @alphacution. 

This article, “From Citadel Securities to Tastyworks: The New Economics of Liquidity, Part 1,” originally appeared on the Alphacution website on July 9.

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