Virtu Financial, Inc. (VIRT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Virtu FIA call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Richard Repetto. Sir, please go ahead.

Yes. Thank you, Ren. First, welcome to everybody. And thank you for calling in for the Virtu FIA call. This is our eighth call of our virtual FIA conference. And we want to thank Doug Cifu, the CEO of Virtu, like the other CEOs, for his commitment to business continuity and trying to get some business normalcy in this turbulent market. So just some ground rules. We still have a lot of people dial in. We apologize for that. But one, we'll take questions. If you want to submit a question, you can do it to me. And the e-mail is [email protected]. So that -- we'll see time permitting, whether we'll take questions at the end. So I will first turn it over to Doug Cifu, the CEO of Virtu for some introductory comments on the market environment and what he is seeing at Virtu. So Doug?

Great. Thank you. And good afternoon, everybody. Rich, thank you for setting this up and for inviting us. As Rich said, I thank everybody for joining. I know folks are busy and distracted dealing with the environment, both in the financial markets and in the greater environment. Just some brief introductory comments about what we are seeing here at Virtu and how the firm is handling it, and then I will turn it back to Rich for questions. And I will do my best to try to answer everybody's questions. So it is -- it goes without saying that the marketplaces that we have seen globally, and again, we're a market maker, an institutional broker in over 50 countries in a variety -- in 235 markets. So we see a lot of flows, and these are unprecedented times. You have a confluence of obviously, reaction to the virus, a disruption in the crude and in the energy market and then various interventions by Central Banks, including the Fed and today, the Bank of England. And so it is a confluence of all of these events that has led to extremely high elevated levels of volatility and volumes across all of the asset classes and geographies in which we make markets. This is truly a global phenomenon that has -- that is unprecedented, certainly in the 12 years that we are -- we have been running Virtu Financial. There have been a number of instances of episodic volatility that we have dealt with in the last 10 to 12 years, all of which either impacted a single asset class or a geography and lasted a day or 2 or 3 or a week in some instances, but we've not seen anything that is this pervasive and this global in nature. The firm's reaction to this has obviously been to, first and foremost, be cognizant of the risk and try to manage all of the various flows that we are receiving. And we have spent a lot of years and a lot of money, having a financial technology system that is able to handle and process significant amounts of order flow. And I'm happy to report we have done that very, very successfully. But secondly, and most important, our job is, first and foremost, to provide great customer service to our clients, both on the market making side, on the institutional side. We have literally thousands of clients around the globe that are trying to understand and deal with what is going on in the marketplace. And so they are seeking our advice, our liquidity and our execution services. And all of our 1,000 employees around the world are striving very hard to continue to provide that service. I'm sure you'll have a lot of questions about what we are seeing in the U.S. equities market, but Virtu is a lot more than that. And so we're seeing elevated flows and elevated questions and a lot more interest in our global equities business and what we do in FX, fixed income options and ETF market making around the world and as well, all of our financial technology products. So the markets have functioned exceedingly well, particularly the equities markets. We've had very minor slowdowns and a couple of outages. There's one up in Canada. There were a couple of dark pools that slowed down. But other than that, there has not been any systemic slowdowns or breakdowns of the exchanges. And so I highly commend the investments that the exchanges globally have made in their infrastructure around the world. That is a significant improvement that we've seen in the last 4 or 5 years. As well as everybody knows, we had a first market-wide trading halt here in the United States just this week. And again, a lot of thought and care was put into that by the exchanges and the regulators and a lot of other market participants. And while there are certainly things that we have learned that we think we can improve from that, and there's already a committee in formation to kind of discuss improvements that we think can be made to that, I thought the industry as a whole and the exchanges, in particular, handled that very, very well. And I think it is very important for all of the market participants in this time of, I'll say, crisis, for all of us to be aware and to continue to allow the capital markets to function efficiently as they have for years. And so we play a very meaningful part of that. We continue to play a very meaningful part of that. I'm very proud by the way that we have conducted ourselves. We're obviously trying to manage the risks and the flows back and forth. We have put out our numbers for the first and second quarters. I'm not today going to discuss what we have -- our results for March. That's not the purpose of this call. But certainly, these elevated volumes and volatilities are very attractive for a market maker and for an institutional broker, but it's much more important that we talk about our role and the significance that we play in the financial ecosystem. So Rich, those are sort of my overviews. I'm happy to take specific questions that you have.

Yes. Thanks, Doug. That's -- you actually answered a couple of the first few questions that I had. So if we sort of took this sort of systematically, if you look at market making, you have put out the results for the -- for January and February, and we can read the volatility every day, the volumes every day. But I guess the point that I wanted to draw out is you made it -- you highlighted that volatility was up across asset classes globally and that's something that Virtu since I -- covered since the IPO, but has stressed about the number of exchanges, the number of countries you're in, the number of products you're in. So can you talk about the sort of the match up of your market making diversified capabilities? And in this, what do you call, widespread volatility across the globe that you've already talked about?

Sure, sure. So the phenomenon we are seeing in U.S. equities, where we have virtually unprecedented days. I think we have a 19 billion share day last week, and we've seen now the VIX spike up to over 50. We are seeing similar results or figures, if you will, across the board. So the Japanese market -- I'm just kind of following this on. The Japanese equities and the futures markets have seen unprecedented volumes and volatility. Australia has been very busy. EU, notional turnover. I think on an earnings call, maybe last quarter or the quarter before, I said we were used to seeing 40 billion share days notional prints, and we were not even getting 30 billion share days and I said anything more than that was a white rhino was the comment I made. Well, we're seeing a lot of white rhinos. We have had EUR 60 billion and EUR 70 billion notional turnover days across the EU. We've seen increased volumes in Canada and U.S. equities, but also in the FX market, which had reached historical low volatility levels in the fourth quarter of 2019. And we've seen a tremendous spike in volumes and volatility across the FX market. And then lastly, obviously, in the crude and in the energy complex, the actions, I guess, I'll call them by OPEC over the weekend, with the largest 1 day decline in the price of crude oil, I think, Rich, since either the first Persian Gulf War way back before we even had electronic trading. So you're seeing unprecedented levels of volatility in volume, but -- and they're not episodic, right? They've continued now for these 10 or so trading days. And again, I'm not a prognosticator of marketplaces, that's not what we do at Virtu, but I'm a guy that watches TV and reads the paper like everybody else. It does not appear as if this is going to dissipate anytime soon. So we are hunkered down here at Virtu, trying to serve our clients, trying to give great 2-sided prices, trying to execute efficiently, making sure that our EMS solution, where we've got 1,000 customers accessing the market is up and vibrant and running 24 hours a day, 5 days a week. That's what we're focused on. And I think that's really our role in the financial ecosystem.

And I think you mentioned the things I wanted to get at, Doug, is if you take FX, and we know you're market making there, the CVIX has doubled or nearly doubled over the past week. And energy, that goes back to your roots, and I think everybody is aware of the volatility there. So I guess, the only, I guess, question, there is interest rate that some of the newer products that are becoming more electronic, like interest rates, credit, et cetera. Is it say -- would they fall in the same category of -- certainly by looking at treasury prices, you'd expect high volatility across the board to be -- you to be benefited in there as well.

Yes. I mean there were unprecedented moves where you have the entire yield curve below 100 basis points, right? I mean, that's something I never saw that -- thought I would see. One of the things we checked in our system was to make sure if interest rates went negative, right, would we be able to continue to trade in price. Again, these are the types of things that you were not really within contemplation or not within contemplation, right? So you're seeing increased activity there, and obviously, in the options market as well. I mean we're not large participants, we're kind of baby participants in all those marketplaces. And so we've seen increased volumes and volatility there. Our bread and butter global equities and across the FICC complex. To your point, Rich, we have seen very significant elevated volumes and volatility. Again, these marketplaces, for the most part, have functioned exceedingly well. And so I give a lot of credit to the regulators and to the global exchanges that have invested in the ecosystem and responded to criticism in prior years in 2015 and other events where we have strengthened the ecosystem.

Got it. And then, I guess, one last question on market making. The volatility, at least in the past, there's been some volatility. If it's just one way that probably isn't as good for a market maker. Would you say -- and could you sort of comment on the -- there seems like there's many of up and down movements here and break-up movement. So just talk about sort of the quality of the volatility we're seeing?

Yes. I mean there's this mythology out there that somehow in our wholesale/retail business that you're just kind of clipping coupons, right? And nothing could be further from the truth because we are providing meaningful price improvement. When this is all said and done, we'll go through the statistics as to the aggregate notional amount of price improvement we're providing retail investors. I don't have that number today. It's going to be extraordinarily large, given just the magnitude of market orders that we have processed here at Virtu and what my colleagues at Citadel and other great firms have done as well. We provided tens of -- hundreds of millions of dollars of price improvement in the last 2 weeks. And so -- yes, there are moments in time when the market is kind of falling off a cliff, and there's a significant imbalance to retail orders that it's really difficult to be a market maker. You're catching -- we can't turn off and we don't turn off in those circumstances. We have agreements with the 200 retail brokers that send us flow that we will continue to price that flow. We will continue to provide price improvement there. We don't just exhaust it out to the exchanges. Obviously, we do some of that. And so we're catching a lot of falling knives during that time period. And that's the yin and the yang of being a market maker. You're right, Rich, there are also times where there's been reversion and up and down and whatnot. And so that's a little more -- that's an easier environment to be a market maker. On balance, when there is elevated volumes and volatility, the bid offer spread is wider and X volume, Y bid offer spread equals Z. And so generally, in these marketplaces, the X and Ys are significantly larger than they would be in a "normal" market environment, certainly, of the type we saw in 2019. One other thing, just some of our new initiatives. Our outsourced trading desk has seen a significant uptick in activity, again, because the buy side is busy, right? And there is a lot of overflow trading. And so we've seen a big uptick there. So I'm glad we started that initiative. And as well, Virtu Capital Markets, which is our -- the initiative we started in the second half of 2019 has seen some significant interest from issuers that when the market was up, needed to get liquidity or sometimes now, the market is down, they need to get liquidity. So they're using us because of our efficiency and skill in terms of routing orders. So it's -- we've seen some nice upticks in those initiatives that we started in the second half of 2019.

Got it. Again, I just want to remind everyone, if you do have a question, feel free to e-mail it to me at [email protected]. But you hit on a point, Doug, melting these or integrating these new businesses into the legacy Virtu with KCG, but much more broader with ITG as well and their products. And I guess, could you give us a little color on how the execution services side of the business is doing as well?

Yes, yes, sure. So we had closed the ITG transaction about a year ago. And so we had done a significant migration of former ITG clients in the United States and in Europe, and we have started the migration of clients in Canada and in Asia onto the Virtu algo stack. And so that has -- I was fortuitous in that those algos, we believe, are highly conformant. They scale very well. And the throughput is very, very robust. And so the timing was propitious, I guess, if you will, for the transaction, in that we were ready, willing and able, particularly in the United States and Europe, for an influx of algo flow. So that desk has been extremely busy in the last couple of weeks. And the feedback again from clients and customers has been very positive. On the broker neutral side, we had -- in the United States and in Europe, in particular, we had done significant technology work in terms of re-platforming our POSIT Alert block crossing network. And so we have seen significant increase in the usage of that broker neutral product in all 3 of our regions, actually, all 4, in the United States, Canada, Europe and in Asia. I can't forget Canada. And so -- and we're very happy that we had made those investments that the POSIT Alert product is more robust, has lower latency and better throughput, right? All of those things are very important in terms of functionality in marketplaces like this because there's nothing that's going to irritate a buy side client more than if he gets a frozen or a slow GUI areas and get a response time or an acknowledgment from an order. And so having performance systems is really, really important. And then I mentioned before, but I'll mention again, apropos the comments I just made. We have a very -- a market-leading execution management system called Triton that sits on the desktop of buy side and sell-side customers around the world. We had just launched in the last 3 to 6 months, a new version called Triton Valor. We have rolled it out to a lot of clients. And again, performance there is just really important because it's sitting on a lot of early important desks of our clients around the world. And they want to make sure when they're pushing their buttons and clicking their GUI that they get their acknowledgments in their fills. Here it's -- it can mean a lot of money one way or the other because these markets are really, really moving very, very quickly. So we've made a lot of investments already. Obviously, there are things in hindsight you wish you would have done more or have done faster, or done this, and we're continuing to upgrade. But the timing of the ITG transaction and our ability to kind of rapidly integrate that into the firm is -- has paid handsome dividends during this period. And I think it will continue to inure to our benefit as long as, obviously, just last, but more importantly, we've got the goodwill of clients that are using these products in times of, frankly, crisis and borderline pandemonium.

Got it. I have had some questions come in. And I'll just go ahead and just ask it directly. It says, with the very strong cash flow we suspect you're experiencing, are you going to -- what are going to do to generate -- what are you going to do with this cash flow? Do you plan to delever?

Sure. We've always said that our target was 2 to 2.5x debt-to-EBITDA ratio. I don't know what our ratio is right now. It's getting better, obviously, as we generate more cash. And so right now, we're not focused on deleveraging this week or next week or the week after, we're really focused on continuing to provide great client service. But we have always been really good stewards of capital in terms of, one, borrowing and then deleveraging; two, buying back stock when we find it attractive; and then three, providing a very consistent dividend to our investors, even from when -- before we went public. So we'll continue that policy going forward. Obviously, when our results come out for the first quarter, you'll see, over the long period of time, we've more than covered the dividend. I've always said that. And so there is a significant cushion around that. And so Virtu continues to be affirmed that it's very, very -- that it takes its obligations with respect to returning capital to its investors very seriously.

Got it. Another question, as buy side investors, what metrics should we be monitoring closely to make sure Virtu and Citadel and the banks are functioning properly? We're not talking just volume and volatility.

Yes. Yes. No, that's a great question. I mean, obviously, we are functioning properly. And I'm saying that Citadel is a world-class, great firm, run by a terrific leader and they are extremely well organized and have invested probably billions of dollars in technology and my friends at the banks are in a similar situation. So to the extent Virtu or one of the other participants was out of the marketplace, it would probably resonate pretty quickly, right, because we're all major participants in the marketplace, particularly in U.S. equities. It's a small world. And so I would imagine there probably would be some notification of that. I would find that would be pretty unusual. The market would survive. There's a lot of different participants, right? We have competitors and all of our retail partners, none of them sole-sourced to Virtu, right, and nor should they. They use Virtu, they use Citadel, they use Susquehanna, they use Two Sigma, UBS, right? There's a lot of great firms that do what we do on the kind of 605 wholesaling business. So there's a lot of resiliency and redundancy built into the system. Obviously, I run this firm, and I'm very proud of how we have always acted and conducted ourselves, and the competitors firms that I just mentioned, all of whom have continued to operate in this environment.

Got it. Another question. It says, can Doug comment on progress they are making in new products and asset classes? What is the outlook for adjusted net trading income growth in new non-Americas equities' products?

Okay. So I'm just trying to make sure I understand the question. So the new non-Americas equities. So I guess, what the question is referring to is our ETF business outside the United States. I mean we continue to invest there. It's been -- we are quoting block ETFs in Europe. It's been a good time to be doing that. We are the newcomer there, right? So our volumes have not been large, but certainly, the P&L opportunity in an environment like this is very significant. So we are doing that in Europe and in Asia. Similar to our options market making here in the United States, where again, we're not talking about -- we're not going to disclose individual numbers, but it has been a nice environment even to have a small but growing business because there's a lot of opportunity there. And we have the platform and the scale and the systems and everything has been in place. Same with corporate credit market making, which, again, is a U.S. activity. And I think those are kind of the main things that we have focused on outside of U.S. equities and that we have talked about. So all of those continue to scale and growth remains a priority of ours. Obviously, in this environment, it's going to -- it's hard to separate sometimes the alpha from the beta, right? But there certainly is alpha and beta in this marketplace.

Understood. Just my question. So on the market making, you experienced a number of quarters with volatility, significant volatility, whether it'd be the Swiss Franc, decoupling or other -- end of 2018. So again, you've noted that this is significantly -- maybe extend it here this quarter. But you've gone through that, and we can see how the company performs. I guess, when looking at -- the market maker performance. Looking at execution services, what -- is anything -- have you learned or jumped out? I think this would be your first highly volatile period with you being the owner of ITG and Execution Services, the dark pools. So can you comment on anything, takeaways you've learned generically, I'm sure not quantitatively, but objectively about [ watching ] during this?

Yes. That's a great question. I mean what I've learned is ITG really had -- has and had and continues to have an incredible franchise. I mean, we have an unbelievable assortment of clients that have continued to use us and, frankly, are using us more during this crisis because they really are looking to us to understand kind of what's going on, how to get executed? They want either immediacy or transparency. And they know that we are a firm that has robust, transparent, electronic execution, and we have a unique global view of kind of what's going on, both in Japan as well as Austria as well as Chicago across asset classes and geographies, right? So -- and it is literally a potpourri of clients from large government pension funds to multinational asset managers to long, short funds to quant firms and everybody in between of all sizes and shapes. And as well on our ETF desk, right, we have people -- it's always been a bit of a kind of trading and consulting business over there, if you will, because we're helping clients understand how they can manage their risk and balance their portfolios. And so we have a lot of capacity to service those folks. Virtu has 1,000 great employees roughly in it right now and a lot -- and a vast performance in them are client facing. So it's not a firm of robots, if you will, that kind of stuff. So we have a broad portfolio of products and services. And then the last thing which I should mention, which I neglected to mention is our analytics business, right? This is a time when asset managers and our customers and our clients in analytics really are leading for us in terms of bespoke review and analysis of their performance and how they should get in and out of positions. The last thing I'll say is and I won't comment on any specifics, but we have been in touch with regulators in this country and abroad, because we are a large market participant. They have asked us questions around the functioning of the markets. They've asked us questions around obviously, the market-wide circuit breaker and market structure and they want our input, and they want to understand how the market is functioning and could we do better. There have been multiple calls that I have received myself from very senior folks around the world that are looking to Virtu for experienced leadership, thoughts, conditions. And we offer those opinions and try to be as collaborative we can because it is fully in our best interest to have the market function in an open, transparent and efficient way.

Got it. I'll ask one last industry question that keeps sort of popping up. So you've had some big mergers, Morgan Stanley, E*TRADE, Schwab, Ameritrade affecting the retail market. So there's been a lot of -- some questions about payment for order flow. Could you comment on -- do you expect any significant changes? Does these mergers impact what you're willing to pay or what you would pay, et cetera, in that area of payment for order flow as a wholesale market maker?

Sure, sure. It's a good question, yes. And I've been pretty direct in terms of answering it. The -- all of the retail brokers we deal with are routing orders to us based on execution quality or price improvement, right? There are brokers. So it's always EQ, EQ, EQ. We are competing with Citadel, Susquehanna, Two Sigma every day, every week, every month, every quarter on execution quality. How much are we improving the national best bidder, best offer, even in these volatile times, okay? There are brokers, some of which you have mentioned, retail brokers that do take payment for order flow on varying amounts. It's all publicly disclosed. I'm not going to go through. It's in their 605 reports, okay? So Schwab and TD Ameritrade are both in that camp. They take different amounts. And our market share, which, Rob (sic) [ Rich ], as I said on the prior call, is larger than TD Ameritrade. I have every reason to believe we continue to have significant market share. And again, we are agnostic. It's not our job to ascertain whether a broker wants 100% EQ or price improvement or some mixture of a rebate or execution quality. What we have said and what I continually say is there's a certain amount that we are prepared to offer, because there's only so much that we can do in a profitable fashion, depending upon market conditions and market share and all those types of things. And it is not our job or our business to decide in what format that is returned to the broker. So again, I have no concern. I know I've heard some of the stories and dogma out there that somehow there's going to be bargaining power, and we're going to be in this payment for order flow race. That used to be the case, I guess, in -- 10 years ago. The retail brokers don't operate in that fashion anymore. And they're very cognizant of their responsibilities. The 4 names that you mentioned are all world-class organizations with world-class people that have provided unbelievable customer service and are very cognizant of their regulatory obligations. So I have very little concern that somehow this price war is going to break out. I understand bargaining power. I understand mergers and acquisitions very, very well. We are key service providers to these clients. And they want sustainable long-term relationships with us. We're their market center. Nothing highlights the importance of Virtu Financial, Citadel, Susquehanna, Two Sigma, the 4 of -- UBS, the 5 of us than this environment. They are literally routing to us every single day, billions and billions of dollars of risk, and we are managing it, and we're providing them great execution quality. That's not about payment, that's about service. That's what this firm and the 4 firms that we compete with all do an awesome job with. So will the market shares ebb and flow? Absolutely. Does this situation highlight the importance of market centers like Virtu and the other 4 firms? Absolutely. They want a sustainable ecosystem that provides enhanced value to retail clients at a efficient and attractive rate. And that's what we provide, and we'll continue to provide.

Okay. I don't have any more questions coming in to me. And I think you sort of described in the best way you can inter-quarter sort of what's going on. I'd also -- first, I want to thank you for keeping the commitment of the FIA of meeting with investors and doing it virtually. And then I would say, I think you did a reasonable -- the Virtu is one of the unique companies that benefits in turbulent times, and you've done a good job at humbly sort of making your case and explaining it. So I want to thank you, Doug. Again, I'm not seeing any more questions. If you -- do you have -- if you have any closing remarks?

Yes. I just want to thank you, Rich, for putting this together. And I was -- decided to do this because I had made a commitment to do it. I didn't want at all for this to be a focus on Virtu or its results because obviously there's very significant things going out there in the world, which are a hell of a lot more important than my little company and our results. So I wish everybody safety and peace and that we all get through this together.

Thank you, Doug. Ren, that will end the call and so you could close the call. Thank you, again.

All right. Thank you, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.