So much criticism has been leveled at Robinhood Markets by Wall Street’s mandarins that it’s easy to forget that the online brokerage firm has achieved a monumental accomplishment: Its free trading platform has made investing compelling to young people—a group that Wall Street feared had little interest in investing after watching their parents suffer financial calamities over the past 20 years.
Robinhood has reached this millennial generation by using technology to make playing the market fun. Opening accounts is easy, too. And everyone who signs up gets a free, surprise stock in their account.
Warren Buffett recently criticized Robinhood for creating a casino-like environment. That may be true. But what is little appreciated is the ecosystem that Robinhood has created since it was founded in 2013.
In return for letting clients trade stocks and options without paying commissions, Robinhood sells orders to market-making firms. The practice—known as payment for order flow, or PFOF—is controversial. But the debate over it, and how Robinhood appeals to clients, obscures opportunities for investors to profit.
In recent regulatory filings, Robinhood revealed PFOF relationships with Virtu Financial (ticker: VIRT), Citadel Securities, Two Sigma Securities, Susquehanna International Group’s G1 Execution Services, and Wolverine Securities. Virtu is the only one that is listed on the stock market. The rest are private, as is Robinhood.
Virtu just released first-quarter earnings that wildly exceeded analyst expectations. The automated, high-speed trading firm reported adjusted earnings per share of $2.04, compared with an estimated $1.29, on adjusted net revenue of $728 million.
Piper Sandler analyst Richard Repetto advised his clients that Virtu plays an essential role in the significant growth of retail investing, while also providing efficiency to the markets. Repetto described Virtu as an “integral part of market infrastructure.”
Virtu’s business could slow this year, since the first quarter was such an extraordinary time for retail investors. But the company has increased its stock-buyback program by $300 million, to $470 million. This suggests that it would buy its own shares should the stock suffer any weakness.
Investors who are intrigued by the opportunity to own a piece of the market’s infrastructure—one usually controlled by wealthy, private firms—could use the “half and half” strategy to build a position in Virtu. If an investor wanted to buy 2,000 shares, for instance, he or she would buy 1,000 shares and sell 10 put options.
With the stock at $27.84, the June $26 put could be sold for about 60 cents, creating an effective purchase price of $25.40.
Should the stock be above the strike price at expiration, investors could keep the premium for selling the put. The trade could then be reset with a higher strike price and a more distant expiration. The put sale would continue until someone bought the stock.
The risk to this approach is if the stock plummets far below the strike price, requiring investors to buy the stock at the higher strike price or adjust the position in the options market. The other risk is that investors miss out on any stock rallies by selling puts.
During the past 52 weeks, Virtu stock has ranged from $20.93 to $32.35. Shares are up almost 11% this year, about the same as the S&P 500 index.
Though some analysts are concerned that retail participation may cool and Virtu’s performance may ebb, the role that it plays in the markets is unlikely to change. That makes the company a worthy consideration for anyone interested in establishing exposure to a critical part of the market liquidity ecosystem.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.