Working in Jersey City as a broker to institutional investors, Michael Beth could mostly only watch in awe as the Reddit mob turned GameStop Corp. into the hottest stock on Earth.

It wasn’t always so for Beth and traders like him. The pros his brokerage WallachBeth Capital counts as clients have always been stock-market kingmakers, historically putting them in the mix at pivotal moments.

But the pandemic-era boom in retail trading has diminished their role. Individual investors’ share of trading has jumped to roughly a quarter of volume, according to Bank of America Corp. estimates. Because these orders almost always get executed by electronic market makers—away from exchanges that display price quotes to the trading public—the rise of the pipsqueaks has turned Wall Street upside down. More than 50% of trading has been done privately on some recent days—possibly for the first time ever.

“Because that flow isn’t always accessible to most participants, it’s not necessarily adding liquidity to the overall market,” said Beth, vice president for equity and derivative trading at WallachBeth.

Beth is not alone in feeling like something important has changed when more than half of stock dealing is arranged in secret. Congress will begin taking a look Thursday with a hearing featuring, among others, Ken Griffin, the billionaire owner of Citadel Securities, the biggest firm that executes retail orders.

Citadel Securities, Virtu Financial Inc. and other so-called internalizers have built up this business by striking deals with all the major retail brokers like Robinhood and Charles Schwab Corp. WallachBeth couldn’t interact with the Gen-Z crowd who steered GameStop’s massive boom because those transactions go directly from the retail broker to the internalizer. Don’t hold your breath expecting those orders to hit the New York Stock Exchange, Nasdaq or some other public venue where others can respond to them.

For years, off-exchange trading usually comprised between 30% and 40% of total U.S. share volume. In the early part of the last decade, much of critics’ angst focused on how dark pools—private markets usually run by banks that want to keep their clients’ orders in-house—were siphoning business from NYSE and Nasdaq. But the move to more than 50% started about a year ago in the early stages of the pandemic, fueled by the explosion in retail trading.

“It’s appropriate to ask the question: Is the market still getting the prices right when there are elevated levels of off-exchange activity?” said Justin Schack, partner at Rosenblatt Securities in New York. “If you’re selling your house, you’d want to show it to as many people as possible, not just one or two.”

Price Discovery
A Virtu executive pushed back on the notion that trades handled by his firm and its competitors are done in secret. “Trades, the culmination of price discovery, are reported to the public immediately regardless of where they occur and the algos and order routers that brokers provide to clients should incorporate those established prices in real time,” said Steve Cavoli, global head of execution services at Virtu.

Retail investors have also benefited from faster execution and better prices, said Citadel Securities spokeswoman Julia Kosygina.

For the r/WallStreetBets populists, what happened with GameStop stirs up a whiff of irony: While their frenzied trading has trounced a few storied hedge funds, their activity has swollen profits for a billionaire—Griffin—and cemented an oligarchy in serving this new horde of customers.

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