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

Welcome back to Piper Sandler's Global Exchange and Financial Technology Conference. We're pleased to welcome our next speaker, Doug Cifu of Virtu. He co-founded the company back in 2008, has been the leader since it's been a public company, had a phenomenal first quarter. I guess I can say that. Doug doesn't like to brag about it as much or talk about, but a phenomenal first quarter. So I guess, first, welcome.

And then first question would be market disruptions happen every year to 2 years or so. So how does this compare to Brexit, the Trump election, the Swiss National Bank decoupling. How would you characterize what happened in the first quarter?

Yes. Great. Thank you, Rich, and thank you very much for having me, and thank you, everybody, for participating in this, and I hope everybody is safe and well and doing the best they can in these very, very trying circumstances. So yes, the -- we've been around for 12 years, as you said, we started in 2008. And so we have seen other, both geopolitical and also market dislocation [indiscernible] events that have resulted in periods of enhanced volume and volatility in the marketplace. And one of the ethos of our firm when we started was like, let's build a firm that does extremely well when markets are calm, let's call that a famine but does really well when there's times of a feast. And so as you point out, there have been events in 2011, U.S. gets downgraded, Swiss de-pegging, vol-mageddon, the Asian dislocation in 2015 where we've had these outsized period. I think the common thread of each of those was that they were short in duration, and the market quickly kind of reverted back to the form in which it had been. Some were slightly longer, Brexit was maybe 2, 3 days, vol-mageddon a little bit longer. But this feels very different, right? It feels very different in the sense that it's been it's obviously a global phenomena, and it's been sustained, and there's been elevated volumes and volatility around the world. And I think there are some significant systematic things that have changed, one of which, which really benefits us is 0 commissions, working from home and this focus on kind of trading for retail investors has really benefited Market Making business. You see in the off exchange volumes and market share that are trade-off exchange in the United States gone from like the high 30s to like the low 40s. So that 500 basis point shift, a lot of that has been retail and broker to broker block trading where Virtu can kind of play. And so you've seen larger trends that have really helped primarily at the Market Making side of our business. And the question I keep getting from people is like, when is it going to normalize? What's the new normal? What's going to happen? And I think a lot of -- a lot of that really -- I think there has been a lot of change because of 0 commissions and the ease of which people are accessing the market and the opportunities that people see in the marketplace. And then on top of that, if you think about it, this is the first time in history where you have this unbelievably coordinated central bank intervention and printing of money and provisioning of liquidity and stimulus and whatnot, and it's from the Bank of Japan, through Europe, obviously, to our own treasury and our Fed here. And so all of that money, all of that liquidity is sloshing around the system. And I thought it was very interesting. I saw on CNBC, Brian Moynihan of Bank of America even noted that in their business accounts, the elevated cash volumes are so significant, not that all that's going to end up in the marketplace. But what that means to me is there's so much money sitting in bank accounts, on the sideline that has been printed in stimulus in PPE -- PPP loans and other things. And a portion of that is going to end up flowing through the ecosystem. You see it with the debt offerings that issuers are doing, the IPO market is now open again. And so I get that the real-world literally appears like it's on fire. And in many places, it is, unfortunately, but the financial markets have had this resiliency and this flood of liquidity and interest in trading and a lot of that obviously inures ultimately to our benefit, as you noted.

And just you put out some numbers, the adjusted net trading income is still above -- very elevated levels at above $10 million, which is phenomenal.

Right. Thank you.

I guess the question is because as you look at it, this is -- well, as you look at it, what do you separate as alpha versus beta, the market, the volatility is still elevated stock. We're still well into the 20s, if not 30s and still sometimes in the 20s. And you still printing -- printing 10 billion shares a day, again, your point being the retail TRF volumes are off the charts. So do you think this is sustainable for a reasonable amount of time or this is the new normal?

Yes. I think. Yes. Look, I mean, we have invested -- we merged with Knight Capital in the middle of 2017. By the time we got our bearings, we made a lot of investments in 2018 and in 2019, the same with ITG. And we haven't been just sitting here extracting expense synergies. A lot of what we did was by integrating the firms, by improving risk management, by migrating to lower latency more proficient platforms, by investing heavily in new style quant strategies and new predictors. And then lastly, by trying to grow organically, through some of the initiatives we talked about on the earnings call, block ETFs, options, our ATM business, the quant strategies that I mentioned. I mean all of those investments like set us up very nicely. We don't just sit here and I'm actually sitting in Virtu, right, and money doesn't just fall from the sky. We would not have had the quarter and the first 5 months of the year we had had if we hadn't made all those investments. I mean one of the things we tried to articulate to separate the alpha from the beta with our first quarter results was the amount of adjusted net trading income that came from these new organic growth initiatives, right? We said it was 8%, the $780-odd million of adjusted net trading income that we reported. So if you extrapolate out, right, obviously, every quarter is not going to be like the first quarter, but that's a significant amount of revenue synergy growth that has come from those acquisitions from investing in options -- architecture and options technology, right, which is really like in early innings and has a lot of growth to it in virtualizing some of the businesses we inherited from a great firm, Knight Capital when we merged with them. And so that was really the vision and the strategy. I think some of that, Rich, gets lost because we did these 2 acquisitions on top of each other and kind of what does the normalized run-rate look like? And then when we have a period like this where volumes and volatility are through the roof, everybody says, well, it's just because of volumes and volatility. I can tell you it's not because we obviously track our profit per unit and things like that. So I think a lot of this is sustainable. One of the things we aim to do is to provide more clarity to that by deleveraging our firm and being more front-footed in terms of giving you guys a model with respect to our expenses, so that you could run through the model and plug-in adjusted trading scenarios and come up with an EPS number that's compelling.

That's helpful, Doug. Hopefully, you can see -- you're not overheated by the fire, I get going here.

Yes.

Our fireside chat.

It's extremely cozy, Rich, as usual, highlighted my year-over-year.

So moving on here. One of the core strengths of Virtu is it's become integration, both of Knight as well as of ITG. I guess could you update us on ITG? You sold an asset match now. And you've already discussed some of the product enhancements. But just what more needs to be done to get fully -- ITG fully there.

Yes. It's a great question. And just to take a step back, the strategy that we embarked on, Vinnie and myself, when we started Virtu was to build a scaled financial technology firm that could do a lot of things in a lot of different markets, right, create this ubiquitous multiasset class, multicurrency platform. What we realized when we did due diligence on Knight Capital in 2012, that was really the core and the strength of what Virtu was. We had built the scaled infrastructure that was more efficient we thought than what others had that you could connect other strategies and other types of businesses to it and it would scale effectively well. So the Knight Capital and ITG transactions don't happen without that accelerant, without that impetus, without that core architecture, if you will. And so the job has been and will continue to be to continue to decommission Knight and ITG technologies, both front end trading, middle and back office and obviously, while the market data connectivity and replatform them on Virtu. And then continue to add to that build-to-scale model, right? So ITG was a great company founded by some really, really talented people, but it was very siloed, both from a people perspective, but also technologically, right? So 4 different middle and back offices. So harmonizing all of that was the first job that we did. And the second thing was from an algo perspective, we at legacy Virtu had a, what we thought was a really scaled, efficient algo stack, if you will, in the United States and in Europe and to get that to Canada and to Asia and to migrate all the ITG clients -- former ITG clients onto the Virtu algo stack has been job #1, 2 and 3. So that's in progress. By the end of this year, we'll have migrated most of the U.S. and the European clients. We've gone from 5 broker-dealers down to 1 broker-dealer, which is not an easy circus trick. I thank Brett Fairclough, my very talented COO for doing that. And as well, we now have an algo product in Canada and in Asia that we're rolling out to the former ITG clients. So getting all of that into a smaller, more nimble firm that truly is a global firm is a game changer. I don't think there's another broker-dealer out there, agency broker, if you will, that has a single ubiquitous global algo product that really is the same, whether you're in the U.S., Europe or in Asia or in Canada, right? And that's really -- and what does that mean? That means we're scaled, we're cheaper, we're more efficient. We're more productive, right? We can do a lot more with a lot less people. That's the Virtu mantra. So bringing that discipline and architecture to KCG and ITG has been -- has really -- sure, it's been accretive, but it also has strategically expanded the footprint of this firm dramatically.

As long as we're on MA (sic) [ M&A ] topics, I won't mention any firms specifically.

Okay. Don't get me in trouble, Rich.

But if there was a firm out there that might have started testing the market that looked like it would fit well with your business, specifically, ITG, would -- is Virtu at a point now that would have an appetite -- are you fired enough along the ITG acquisition to have an appetite for something else?

Yes. Here's what I would say. I look at M&A as being -- I'm a former M&A lawyer, so I used to live off this world, right? And I know it very well. I look at M&A as really 2 different things. You can make an acquisition because it's really keenly strategic to your firm. What does that mean? It's going to give you a product or a service or a capability or a competency that you don't have, right? That was really Knight and that was really ITG, in large measure, right? Knight, we didn't have a customer-facing business. The guys that had started Knight did it 25 years ago, and they had all of this great DNA, both from a strategy and a relationship perspective. So we couldn't build that. A lot of other things we couldn't build as well, a block ETF desk, a OTC cash desk, right? We didn't have any of that. So it brought us to this whole new world, again, applying the Virtu technology and the Virtu rigor to this whole new strategy set. Same thing with ITG. Yes, we had an algo set, we didn't have it in Canada. We didn't have Europe. We don't have the customers that they had, but we also didn't have a block-crossing network. We didn't have an EMS. We didn't have the best analytics business in the world. All of those things that ITG had. That was a very strategic transaction. Yes, there were synergies, yes, they were accretive. Yes, there's capital synergies, all that stuff that you guys care about. But the most important reason behind both of those transactions was the strategic rationale behind both of them. Now we're a big broad firm, right? Think of an asset class or a geography or a tool that we don't have. There aren't a lot of them, right? So I look at M&A and I say to myself, okay, if it's opportunistic, right, if we can add value to a company, it makes sense to do it. But if we're in the business already, I'm not compelled to go do anything, right? We can build an options business. We are. We're building a fixed income market making business. We have all the -- a lot of the agency products. We have an EMS platform. We have a block crossing business. We have an algo suite that's global, right? We have an analytics business. Do I need to buy an analytics business? No, I'm in it, right? Maybe somebody is better in X, Y or Z, but I can build that. I don't need to go pay somebody a multiple for that. So I look at M&A and I say, okay, I'm going to be very disciplined about it, right, because it's a huge expense, both financially but also intellectually within the firm, and we're going to be -- we've got this great fixed cost plant, right, that we're going to harmonize, and we have this great strategic scale, right, that our competitors don't have, right? So in terms of buying or building, my predilection is to build things, right? Because we've got some really, really talented folks within the firm. And we've had the blessings this year of a lot of cash flow, right, which allows us to delever and invest back into our business. So that's really what I'm focused on. Layer on top of that, the fact that I'm sitting here in our office in One Liberty, and there's 6 other people here, right? So it's a little hard to do an acquisition with 7 people, 6 look more busy. I'm the only guy with absolutely nothing to do most days. So it's hard to envision undertaking a large transaction in that environment.

And just -- I don't want to spend a lot of time on this because you wouldn't be putting up the numbers you did in the first quarter or the ANTI [ Z ], adjusted net trading income for April and May. But this transition, even though you are one of the seven hasn't seemed -- appears like has gone pretty flawlessly, correct?.

Yes. It's been -- I mean, I give a lot of credit, a lot, a lot of credit, to a lot of really smart people here that were much more prescient than I was about how this was going to impact us, the world that in Virtu. And we saw it in January, thankfully because we had the canary in the coal mine of a Hong Kong, a Singapore and a Sydney office where we were like, wow, we got to clear those offices out, okay, what does this mean for London, Dublin, Paris, what does it mean to New York, Boston, San Francisco, Chicago, Austin, right? So we got ahead of that. We got a great network and on-desk team. We have a lot of gear. We had lot of screens here. I felt like I was running a Best Buy with screens all over the place. Everybody was walking out with screens, you think they were stealing them. No, they were setting up their home offices. We have a great VPN network, and so it works really well. It works really, really well. Is it optimal? No. I mean is it better if we had a small, but a larger cadre of people in the office, yes, but I have told our people, I am not risking anybody's health or welfare to make a buck. That's just not who I am, and that's not what Virtu is all about. So we're doing just fine until I'm sitting here, right, taking the risk I don't want anybody else to take that risk. And frankly, I don't want 20 people around me because it elevates my risk, right? So we're going to be really intelligent about how we -- how and when we repopulate this firm because we continue to do well. It does open your eyes, Rich, to the physical footprint you have, right? Do I need 80,000 square feet in Lower Manhattan? Probably not, right? A lot of our people have indicated they might want to work from home, maybe we'll do some of that. And I've been very front footed with our employees. We did a big survey. How many people, how many of you -- what are your concerns? Like 75% of the people that work in the New York area really said they don't want to get back in mass transit. I don't blame them. Would you want to get on the subway right now? I know I wouldn't. So I'm not going to force people to do that. And like 35-ish or so percent of our people said that they'd be happy to potentially work from home, that kind of thing. So we're considering all of those alternatives. I think every -- not only financial services firm, I think, every firm is struggling with that. I mean I know for sure that our costs of real estate are going to go down precipitously because I'm not going to pay for 80,000 square feet in Downtown Manhattan doesn't make any sense. I didn't think it made a lot of sense before because you know I hate cost, and now it really doesn't make sense.

Congrats, you and the industry on the seamless move to stay at home.

Yes. My -- I want to say 1 nice thing about the exchanges because I'm the guy that always is -- the negative exchange. You got to give New York, Cboe and NASDAQ, a hell of a lot of credit. They did an amazing job investing in their technology and infrastructure over the years. Not a single thing fell down, and they had unbelievable volumes. So somebody please tell Stacey, Adena and Harkins that I said nice things about them, please?

I will.

I need a little credit, Rich.

I will clip that part out and make copies, and then...

Yes. Send that directly to [ Sprecher ], would you? Okay. They will charge us too much for market data. But other than that, they did a great job.

So that actually is the next question. Right on it.

Now I'm in trouble.

Right up next is our market structure panel of Brett Redfearn and other representatives of the industry.

Great.

And so this -- it's about...

I notice you didn't put me on that panel. You didn't want to get me in trouble? I see. Okay. Thank you. Yes.

We want to -- we want equal...

Okay. Go ahead, ask your question.

Yes. The proposals as they've outlined so far, this potential where if they were passed as sort of they were initiated that -- or initially proposed that they could potentially -- you could be a SIP aggregate. You have to take feeds from everyone directly. Could it be someday, you are actually not just a competitor in the sense that you want prices lower, but the competitor in the sense of an aggregator...

Yes. Of course, we do that today, right? I mean we have geographically distributed versions of the SIP that we use for market making and for and I've said very loudly and publicly like the SIP as a product really doesn't make a lot of sense, right? To me, it's just overhead of the expense really where I think the universe is going. The properties in the SIP need to be aggregated and you need to almost kind of have 3 SIPs based on where the data centers are, right? And I, again, this is me speaking my own book, I would price control that, right? Because it's part of the monopoly of the exchanges, the oligopoly of exchanges, right? And that's always been my fundamental argument, which is like the prop feeds and the SIP really are one and the same because with SIP today as a product is kind of useless for most of the industry, right? Even FINRA may not tell you that, that the best [ ex ] if you only have is SIP, but clients if we won't use you, right, if you don't have it. So everyone's paying for something in terms of depth of book, in terms of latency and then they're trying to do some aggregation of it. So I think that is a natural evolution of how market data will be shared. Again, Virtu has always just been about transparency and fairness. When I went on my little -- when I pitched my little fit about all this, a couple of 3 years ago, it was just because I didn't think it was fair, right? Some people said why are you doing this, Doug. Virtu, you can afford this, it keeps the small guys out. That argument didn't make any sense to me because it just didn't seem fair. We were paying a premium price without any ability to control price for a product basically that I felt we were providing the quotes for, and then we were -- on top of that, we're paying this tax for the SIP that just made no sense to me. So I really applaud Redfearn. I think Brett has done an amazing job. God bless him because being in Washington can't be a lot of fun. Jay Clayton is a superstar, best Chairman of the SEC we've ever had. I'll go on record of saying that. I can't think of anybody that was nearly as talented and speaks as forcefully and intelligently as he does. So I think they've done an amazing job. I hope that they -- this is not a political statement, but if they could stay through whosever's administration it is, I think it would be a great thing for the industry.

So I guess to wrap up, Doug, you had an outstanding quarter. When you go back and look at -- we had the CFTC chairman, not quite the SEC or not ...

He's good, too. He's very good, too. I like Heath, yes. Very thoughtful man.

Yes. And he's now a proponent of electronic trade, saying that it brought liquidity during the pandemic period.

Yes, smart man.

And we've seen how the markets have operated remotely through electronics. We've seen in some asset classes, how liquidity -- illiquidity was solved through, especially in the fixed income area, in some areas of fixed income, solved the problem of illiquidity or at least partially solved. So we've come full circle. Do you think that we -- people now have a better appreciation of electronic trading? Chairman Tarbert spoke positively about high-frequency trading. And you do like him...

Yes. Look, I think that's the problem with labels. Okay. it's like I'm a lawyer. Okay. Guilty as charged, but I'm not a guide. I don't want to offend anybody, I guess I'm about to. I wasn't the guy that hung a shingle in the subway and said, have you been in an accident, right? I was at a high -- high-powered prestigious law firm and but okay, I'm a lawyer, guilty as charged, HFT to me was just a stupid label that Michael Lewis and a bunch of other no -- didn't really know what -- how the -- really was going on in the industry, just applied, right? and they created this nefarious -- these guys are smart and ripping everybody off, and they called it dark pools. And that's a problem with labeling -- the problem with labeling. So I give the smart people in the industry and I give a lot of credit to even guys like Sal and Joe over at Themis Trading, right, because they didn't have to come to Virtu and look under the covers and see what we were really all about, but they did. I give the guys at T. Rowe the same credit, right? They came to Virtu and saw what it was all about and like the emperor didn't have any clothes, okay? We were just -- the guy that used to be in the middle of the pit, the market maker, my partner Vinnie Viola, right? We just did what Vinnie used to do and he used to scream and yell and do this and keep it all in his head. We just reduced that to an algorithmic form and it became electronic. Those guys in the pit, they always had value. They always had value. So that's what Heath is really reflecting is that the pits are now Mauá, Carteret, Aurora, Frankfurt, someplace outside of Tokyo, I don't remember exactly the address, up in Toronto, right? Those are the trading pits today. And the guys and the gals that used to provide the value in the middle of the pit, the market makers, we've just become electronic, right? Instead of human beings, we have a lot of servers and switches that fit on top and interconnecting servers, right? So the world just got more efficient. So we've always provided value. In the pit, there were bad actors, right? So is everybody that's electronic a good actor? No. Are some people trying to like take advantage of structural changes? Sure. So people engage in criminality? Sure. Those people should go to jail, right? [ They're picking off ] to more than anybody else because we're the schmucks that don't know anything, just posting passive bids and offers, right? So ultimately, I think, look, the best antidote to rumor and innuendo was just sunshine, right? So opening our kimono and having everybody look at what we were really all about really has, I think, changed people's perceptions for the good -- for the good. Guys got -- guys like Clayton and Brett and now Heath at the CFTC, these are just smart, thoughtful people that actually went and took a look and said, you know what, this like labeling is kind of BS, the answer is somewhere in between.

I think we're going to have to -- since we are trying to stick on time. First, I want to thank you for your frank remarks. The day has come -- I think you've helped it and Virtu has helped the day come for electronic trading. So I think people are really understanding the benefits and good luck to as you integrate and try to balance out the revenues even more incrementally going forward, but electronic trading is having its day now by doing this. So...

Thank you, Rich, thanks for your time and stay well. And thank you, everybody, for your time.

I apologize for my little glitz on the fire. We had to put the fire out.

Yes. That's right. You'll make it up to me next year. I promise.

I will make it.

We'll do it live next year. And I want a really big bonfire, okay?

Huge. Thank you, Doug. That's it. People want to tune in at 2:30. We'll have our equity market structure panel at 2:30. Thank you.