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

Welcome back, everyone, to Piper Sandler's Global Exchange and Fintech Conference. We're very pleased to have Virtu CEO, Doug Cifu here. He's been -- he was a co-founder of Virtu with Vinnie Viola, and they went public in 2015. So I know we have a lot of things to talk about.

We do.

And just as animated as my previous speaker, I know Doug is energetic and highly committed as well. So I guess we could talk about...

I was going to say committed to what? Continue. Yes.

So we could talk about the current and just overall market environment. We can talk about a number of things. Let's get right to the point. So that's -- what is your first impressions of potential regulatory change? Chair...

Yes. Yes. Great to be back here. I don't love this room. I'd don't like to call them. Bob Greifeld is here, I feel like my dad is watching me. So if I tone it down a little bit. I love Bob, he's my Chairman. Everybody knows that. So if I tone it down a little bit, I apologize. Look, I mean, obviously, I have great respect for the Chair. I mean, he's a very thoughtful man. And I think fundamentally, he's trying his best to understand the market and to make it better. There are certain things that he talked about around like transparency, more disclosure to investors about aggregate amounts of payment for order flow, trying to measure price improvement in a holistic and uniform way, which we've advocated, giving exchanges the ability to compete on some level with like lit quotes and whatnot. We've said that actually, that would endure ultimately to the benefit of Virtu as well. So all of those things make a great deal of sense. Where I think he gets a little sideways, right, and where he just lacks frankly, maybe context and certainly any data is around like how the ecosystem works and why it ultimately has benefited retail investors so incredibly over these years. And then he goes off and he conflates payment for order flow with like retail, wholesaling and market making. And I don't know if that's an intentional conflation or not, but he's just -- the facts are just not as he has stated them, right? So we said today that every retail broker is effectively paid for or that's just factually not correct, right? We have 250 retail brokers, wealth managers. Everybody you could possibly imagine under the sun and then some of you never even heard of. 95% of them don't take a rebate, right? I don't name client names because I'm a client guy first and foremost, which is why do these things, which is why I'm outspoken on these things, right? But we have major financial institutions that still send orders to wholesalers, 95% of their marketable orders, right, some of the big names you can imagine that don't take a rebate. Why did they do that? Why do they send orders? They can send them to an exchange, don't have a contract. They can send them to an ATS, there's no obligation. They are acting in their clients' best interest, right? By getting customer service from firms like Virtu, Citadel, et cetera, right, we act as their risk manager. We handle these orders for them. They get a guaranteed execution at a price that's better that's at or better than the national best better offer. And most importantly, and the thing that he always conflates at a size that assumes that there's infinite size at the NBBO. So everybody talks about Tesla and Amazon, et cetera, everybody -- you have a smaller cap company, which has gone smaller these days called Virtu, for example, right, where there's not a significant amount of interest or there's not a lot of trading. We get an order for 1,000 shares from some or some reg stock you've never heard of before. We're obligated to fill that entire order, right? That's the deal we have with our customers, they just mouse click away. We have an obligation to fill that instantaneously at that size, even if there's only 200 shares on the bit of the offer at NASDAQ New York and the other national securities exchanges, that's a real meaningful liquidity provisioning, size improvement. I kind of jokingly talked about the liquidity ferry today when Mr. Pisani interviewed me on CNBC and now I tend to be a little flipped sometimes, maybe I shouldn't have said that. But the notion somehow that we're going to just obviate the need for wholesalers. And all of the stuff is going to go to some auction and exchange and the long tail of these names, all of a sudden, magically, people are going to want to proper liquidity and exercise them. It's just not -- it's just -- it's not factual, it's not supported by any of the data, and it's not logical. We would not today, as I sit here today, we have an internal interest in 8,000 names. We're willing to buy or we want to sell a lot of them. There's not a chance on God's green earth we're going to post that on a National Securities Exchange. Why? Because 95% of the people in the market like Dave Cummings, would see that, and he would run me over from a trade bot, because Dave is a genius and he'd figure it out, and he would like just steam roll Virtu, we'd be out of business. And I'm not joking, right, Dave, right? Yes, exactly, right? So that's why the segmentation. This is what the SEC just -- and frankly, the Chair just fundamentally just gets wrong. That's why segmentation is so darn important. It has created this ecosystem, which was created by the market. It was helped by regulation, but created by the marketplace is so darn important. If on the other hand, you have religion around payment for order flow, if you have religion around not setting your order to a wholesaler, there are opportunities for you to do so in the marketplace. The market has corrected for that. I'm not going to name names. I'm not here to advertise for a particular retail broker or not, but let the market solve these problems. Why do we need a Chair to come in and some [ academician ] that don't have the data come in and say, "You know what, we're going to blow this whole thing. It doesn't really make any sense." Why? What are we trying to accomplish? Who's complaining? Who's the plaintiff?

Can I leave now?

We've just begun.

Yes, okay.

So that's why I get so impassioned by it, right? Because it just is it's high handed, right, and it's not supported by the data or the facts, engage us on it then, right? I'm happy to sit here and the Chair could be sitting right here, and I would -- I don't need a handler, I don't need any data. I don't need any facts. They're all in my brain. Let's go. Let's talk about it. Let's talk about it. I'm not trying to be disrespectful. I want the right answer for the marketplace, and I'm obviously contexted and highly opinion it as you can probably tell. But look, we should all be very proud of the ecosystem we've created, right? Because a lot of people who have been in this industry for an awful long time. I teased Bob all the time, but he was 1 of the pioneers of this, right, Bob Greifeld right? And he did an amazing job creating a lot of this value for what we see. So it's not just like some trite thing to say retail has never had it better. It's factual. It's factual. He talks about Canada and Europe and Asia, we're in all these markets. The Canadian retail market system is materially worse than the U.S. system. It is right -- you want to talk about conflicts, go to Canada, right? That's why they ban payment for order flow, right? Because they didn't want real competition. Virtu can't compete on a level playing field up in Canada as the same way came today. 5 or 6 new firms have entered as wholesalers. We welcome that. These are great firms. Jane, Jump, Hudson River, right? UBS is a wholesaler. And he never mentions that. It's not just Virtu and Citadel. And by the way, Citadel is a pretty damn good firm, right, right? We're fighting with them every day. They're a great firm run by a great pioneer in the industry. So we're beating each other up every day for our clients and orders are being routed to us for price improvement and ultimately, all of that endures to the benefit of retail investors in this country. So the reason -- the other reason that it's sort of gets under my skin a little bit because I think when he goes out there with this innuendo, I really think he's doing a disservice to our capital markets because ultimately, it creates a level of like uncertainty. Is there something really wrong. It's just the reason I got so irritated with what [ Lewis ] did with [ Flash Boys ]. It was just nonsense, was just fiction, right? And then all of these people all of a sudden became less certain of the capital markets, right? And that ultimately then costs issuers more money, right, because bid offer spreads are wider, less people are interested, right? So that level of like trust in the market is so fundamental. And I just don't think it's responsible, frankly, for the Chair to make suggestions in innuendo that are not fact-based. So I welcome the discussion, right? We welcome the data. We're going to be a big participant in it. And I think, ultimately, when all is said and done, it's their burden of proof, not ours, right? System we think works really well today, $12 billion of price improvement, $12 billion of price improvement in 2021. If you got a system that does better than that, I'm all years. I don't think it exists.

So you made a number of points, but one was the big size improvement that you're filling orders at the best, you fill in orders that what is the same size isn't displayed in the marketplace.

Correct. We assume that's the deal we have with our clients. There's respectively infinite size of being hyperbolic in my way. It has to be less than 10,000 years, but there's effectively infinite size at the inside.

And that's one thing I don't know whether investors or the community fully gets is that you are filling orders, if the 200 share bid at 10 and someone comes in to sell 500, you're filling the 500 or 1,000 et cetera.

Correct. Correct. That was an institutional order like if my great friend [ Matt ] in the back send me in that order, and I gave you a VWAP, right? You pay me half a penny, you'd be like, okay, you did a good job, right? You'd be happy shaking his head, yes, right? But a retail customer doesn't pay that 50 mills to Virtu and gets filled at the touch. If I did that, we'd have 100% market share with Troll, we don't, right? So they just have a better deal, frankly.

Yes. And one other point I want to bring up because I think we've heard it and I discussed it with your guys is the selectivity that when -- if you're Joe retail out there, you're putting in order for any myriad of stocks, the reason why you get execution immediately is because people like yourselves or sit at all immediately take the other side of the order for stocks at illiquid thinly traded, et cetera.

For everything. There's 8,000 Reg NMS-listed stocks, ETFs and issuers. It doesn't matter -- if we get a share for less than 10,000 -- excuse me, in order for less than 10,000 shares a lot of regulators in the room. So Brett, correct me if I'm wrong here, right? That's how it works, right? That's a held order. We are obligated to give a fill instantaneously on at or better. This is how the world works than what the NBBO is at the moment in time. And so Gensler -- excuse me, the Chair then says, well, the NBBO was fraudulent. Well, it's a circular argument he's making. It's very disingenuous, okay? The NBBO is a representation of what every participant in the universe is willing to proffer as it liquidity. That's what it is. It's not correct because there's a bunch of us, ATSs, wholesalers, et cetera. Well, we may have private interest, right? Trade bought may say, "You know what, we buy 10,000, but we're rolling on display 1,000, right? Dave is not going to go publish that into the into the NBBO, right? So the NBBO reflects, but people are willing to proffer as lit orders in a market book. It's legitimate for what it is, okay? Certainly, there are people that are willing to transact with inside of that, but they're not going to do that in a fully displayed lit manner, right? So to suggest somehow that price improvement is not real because the -- I did quotation marks for those listening on the web because the NBBO doesn't reflect all of the interest is just a circular disingenuous argument by the Chair, right? What he's trying to do is say, well, the standard is not right. Putting all that to the side. What I have suggested publicly is then measure price improvement off the midpoint, right? Books 9 bid of 10,right? Someone wants to price improve. The midpoint is what it is. So if you want a single measuring right of execution quality of price improvement that is regardless of whether the NBBO was valid or not, they just do it off the midpoint. It's done, right? There were answers to these problems. I don't think that, that's a fair problem that he's presented, right, because I think he's mixing apples and oranges for -- to reach a conclusion that I think is not correct.

I think we'll see whether it's more than one quarter. But one question I would have is, he did at least outwardly appear to welcome comments feedback, et cetera?

Yes. Yes. I should say, for the record, I mean, like we have had dozens and dozens of conversations with staff. We have spoken to every commissioner down there multiple times. We have spoken to the Chair. He's amenable to a conversation. So I'm not suggesting that he's sitting where he's sitting and stonewalling us. The staff has been, and there are hundreds of great people at the SEC that have been there for 20, 30 years, and they get it. They understand what -- how the ecosystem works, and we love to engage with them. We love to give them data. We love to share with them. And we think we've been very helpful and collaborative with that, right? So this isn't about that. I think ultimately, my suggestion, and it really just came off of what I saw the CFTC did. There was this somewhat controversial proposal around like sort of direct clearing, if you will, that [ FX ] at put out there. And so there was a large round table. It was a little rocks and it wasn't particularly like -- maybe it could have been organized better, but putting that aside, but at least you got all the participants in a room, right, with the commissioners, with the thought leaders and said, okay, what do everyone think, like why does this make sense? And everyone's going to talk their book, I get that. But that's traditionally how these things are done, right, as opposed to just like boom, here's a bomb, right, without any context. Like where did this auction thing come from, right? Has a single market participant other than on Twitter, but that to the side. Is any single market participant ever suggested that this really makes sense and this is how retail should work. I don't know, Dave, you've been in this a long time. Can you think anybody I know you're not on [indiscernible]. You're way too smart for that. I'm the only i**** that goes on Twitter. Yes. And you don't have to answer. Yes, it's an academic argument, right, right? That's why I comically mentioned the Twitter fairy today because some of the conversations we've had I'm not going to name names, but like, really, you think that's how the market works. You think if we -- these orders that in names that no one really cares about that the institutional investors don't even trade, like we have a big institutional business. We see they don't trade a lot of these names. It really retail. Do you think someone's going to magically like fill them at midpoint. I wish, right? I'd like to be 180 pounds, right, in a pro golfer, but it's not going to happen. Well, 180 pounds might happen to pro golfer may never going to happen. So like next year. Next year. Maybe if there's a live senior tour for heavier guys. Yes. 200 and above. All right, 210, 220 who kidding. All right. Got it. Yes.

I want to slowly get into the fundamentals of Virtu. And it's still -- we're going to make it easy transition. So one of the things you're doing is working hard on options market this is a sort of a bridge. Because as we look at the options market, it's different. Yes, it has auctions in it, many options, but there's also significant differences in the overall structure. And you've been very deliberate in moving. So can you educate us a little bit on the options, auctions and your progress there as well.

Yes. I mean we've announced publicly, and it was something that sort of fundamentally made sense for Virtu because we were -- obviously, we're a big delta firm, right? We tried a lot of underlying objects and obviously, options is a gigantic asset class. The DNA of Virtu was not an options business. Vinnie came from the pits in New York Mercantile Exchange. So we were much more of an order-based firm, equities and futures and the like, right? So we had to rearchitect our technology, if you will, to deal with like to be more of a quote-based firm. It was the first thing we did. And the second thing, obviously, it's not a -- there are Greeks and there are risks, right? So it's not necessarily a linear market with a single object. So it's a lot more challenging. So to get talent from outside the firm that could build us models that made a lot of sense, took some time. And we've been very successful. We publicly disclosed some of our growth initiatives, the lion's share of -- our growth initiatives comes from options. We think we're in the early innings in terms of the opportunity there. There are obviously incumbents in Europe and in the United States, Optiver, IMC that don't do retail, but then Susquehanna and Citadel that are amazing companies, great companies, but we -- there's been a big proliferation in interest. And I think there's room for a new entrant, and we appear to be like that right person, as I said, because we have the scale, we have the technology, we have the delta. There's a lot of work to do, but it's been really successful thus far, Rich. We're actually now active in Asia in the big index products there in Japan and in India, which is exciting for us. So it's a great growth opportunity for us. And -- but that's how markets should work. I here in my back on my eye horse again, right? It's about competition, right? So whether that the options auction model works and not. I don't really care. It is what it is, right? There's what it is. The retail brokers seem to think it works. It provides price improvement to their client, yes, payment for order flow as well. We're going to compete right? And no one at Citadel is winding about it, right? They're going to a, all right we're going to go compete with them in the same way that we don't want when people want to come and compete. Let the markets be when regulators come into markets, it's happened every time over the last 30 years and they start tinkering and picking winners and losers and trying to say, you have to go here, you got to do there, what ends up happening. Everyone then complains years later, we got regions, Oh my god, what a disaster. So is this going to be any better, right? Somehow people in Washington have a better judge than some really, really or better judges at where order should be sent and some really, really smart people at American financial institutions that have market caps that are 50x larger than ours are not going to name names, right? They send orders to Citadel, Susquehanna and us, right, for reasons because we give great execution [indiscernible]. It's going to be the same thing in options, right?

The only -- we're not going to be able to fully dissect. But the one fact that I would want to bring out is options is significant payment for to flow and [ auctions ] as well.

As there should be, right? It's facilitated like I did even know how many options exchanges there are and MEMX is going to launch...

16.

16 so 17, we are right, JK, there you go. So there's a proliferation. That requires a lot of technology, a lot of investment, right? Who's going to pay for all that? Well, the market makers, this is not on my pet Ps, right? When the Chair talks about like the rent in the market, if you will, right? It's a basic philosophical difference, right? A retail buyer, the market is 6 to 7, they're going to -- they're happy to pay 7, right? If some person called a market maker and spend 20 years and billions of dollars to extract value out of the bid offer spread, and it's not owned by the retail investor, right? We've created that, and we've made an economic deal with our client, the broker to say, some of you want some of that back as payment for fine, we'll pay you a rebate for that. In the same way in exchange pays a rebate, right? But otherwise, we're going to effectively JV it with you, joint venture with you, and we're going to share some of those economics back to you and you can ultimately give them back to the client. In any other jurisdiction in the world, right, the retail investors is more than happy to pay the outside price. And they don't think that they own that, right? So I don't know what this notion somehow that this is a rent being extracted for the market. Now we are extracting the value from the market because we and sit in on all the other great firms this isn't like a Virtu only thing have spent the time, money, the expertise and the pain and suffering to extract that. On many days, we don't extract it. It gets extracted from us. We lose money in our retail business on some days, right? So it in a rent, in rent. It's a value that we have created. That's one of the main philosophical differences, I think, between the way that he articulated it today in a way I think that is a fair way of looking at the marketplace.

I think my -- well, one point is you operated in an ecosystem that you developed.

Not me, but a lot of smart people can't before me Yes. I bought it. And hopefully, we've made it better. But yes.

You have scale, et cetera, you have the potential to mix flow, optimize flow put it that way would institute.

Sure. And give the retail brokers a lot of credit, like Schwab, Fidelity, E*TRADE, TD, all the predecessors, now Robin, et cetera, they're not like shrinking violence, right? Like they have -- Joe McCain's in the back, as Joe on the next panel, right, like these guys are tough, right? They're asking us for real execution quality, guaranteed execution, real customer service. It's a mouse click business. If we screw up with one of those customers, guess what? Citadel is going to grab market share from us tomorrow. It's incredibly competitive. This narrative somehow that like, oh, we just like hang around and like we are of the SIP against this, we front-run because there's information you noticed you didn't mention that today, right? We talked about this information advantage that we used to have, it was complete bull****. It was complete bull**** and I told him it was bull****, and they stopped talking about it, right? So a lot of the stuff that you hear, right, is not fact-based. So let's have a fact-based conversation about it, and we'll see where this all comes out.

You are creating other ecosystems as well.

Am I doing so far, right? You're happy?

Yes.

All right. Good. Take a deep breath then.

I'm fine. I want you to express your opinion. What do you call it? You never disappoint me.

I aim to please. I just want to be invited back. And like want to be in the club.

We've done enough...

Everybody wants to be in the club, right? Kind of what the club is, I guess, right? Some clubs will never have me I can assure you. Anyhow, go on.

Me, I like the outspoken club.

Yes, me too. That's why we like each other, right?

Exactly. This is what you're in. but let me just get some other points out there just so people get educated on things that you're doing. You're also looking at crypto, looks like a crypto just by itself looks like an opportunity to get fragmented way, wide spreads, arbitrage opportunities. But then you come out you also partner integrated ecosystem with Citadel, Sequoia, Paradigm and probably a few others that are named as well. So I guess -- when you look at that ecosystem...

Well, I think, look, I mean, again, this is not about -- I don't have a view on crypto one or the other way, frankly, I don't really need to have one. What we have seen is, one, there's a market-making opportunity. And the second thing you mentioned, there was news about us partnering with Citadel and some other great folks and some industry players to try to create an ecosystem makes sense because what we see out there is like there's an intense demand, right, from -- certainly from retail. We think that there -- and we've -- it's been brought to our attention by our clients, that does going to be an intense demand for institutions in it. And frankly, I don't want to disparage the incumbents because I get in trouble every time I say something. But I don't think that there's a great deal of confidence in a lot of the incumbents or the newer companies that have started there, they've done fine jobs. But I think that -- and Citadel is an amazing firm and they're a great partner, and they -- frankly, they came to us -- and with this great idea, and I said, it took about 8 seconds to say, I'm in, let's go do this because I do think that we, with some other great folks can create an ecosystem that brings surety and real know your client kind of AML guarantees and surety, if you will, so that institutions feel good about what they're doing, right? That's really what this is all about, right? If people are interested in an asset class, there needs to be a rule set that is transparent enough and folks need to have confidence and trust in the marketplace to get back to the team I mentioned before, right? They need liquidity provide all those other things. But if you don't have the former, the latter, doesn't make a lot of sense, right? And right now, there's probably 100 or so of these crypto venues that go from A to Z. And again, I'm not trying to disparage this guy or that guy. I really don't care, we trade on some of them. We think that working collaboratively that we can create an ecosystem that scales and that institutions are attracted to. And if this is going to be -- continue to be an asset class that people are interested and want to invest in, we think we can serve a meaningful role in that marketplace.

One fundamental question. I think that really the investors that are attracted to Virtu have certainly highlighted, but you've been an aggressive buyback, repurchase of shares.

Yes. And well, obviously, we think they're dramatically undervalued, right? I mean, Howard said it before. I mean, I'm one of the larger holders of Virtu. I bought a lot of stock in the last 3, 4 years. And as a CEO of a public company, I think I have one job, which is to be a steward of capital for my investors, right? And we don't have a need within the firm for capital, we love capital. But we pay a dividend. We'll continue to pay that dividend. And we're big believers in returning capital to our shareholders. We've been very transparent about it. We tried to put out a metric that says if we make X per day, that means Y of EBITDA, that means Z in terms of buyback. We've exceeded that plan every quarter since we announced it. And my Board is very, very supportive of it, and we're going to continue to do that because we just think that the public markets are better or worse, I'm not trying to despair anybody don't -- does not appreciate the value and the continuing value of a firm like Virtu. And so therefore, we think the stock is cheap. So we're going to buy a lot of it.

Last question, we end up, every speaker.

Why does the flame not move? I don't know. On a loop? I don't know.

It's the joke is it's a 3-year look.

Yes. That lot looks familiar, Rich.

Exactly. Exactly. It's Thomas Peterffy, actually. He always comments on.

Yes.

The last question is -- and you can answer it however way you want whether it's regulatory incorporated or but as you at the helm of Virtu, what does Virtu look like 2, 3 years from now.

I would say, look, I could give you a really boring answer. Really not much...

You've excited on that already.

Yes, yes, I'm going to be boring about this because people talking about M&A and opportunities and things like that, I don't really see much out there that like excites me. I think we're a broad-scale financial services firm. There's a lot of like things that we can sort of fill in, but we have broad competency across assets and marketplaces, both as a principal, acting as a market maker, but also as an agent, and that's an important part of what we do. So there's a whole like panoply of things that we can do out there that are of great interest to us. I'm a big believer in efficiency and a big believer in cost, right? So we're going to do our best to like manage our costs as we have done since we started the firm. And as I said, to continue to beat that horse, which is horribly dead by now. We're going to buy back a lot of stock. We bought back around 10% of the company in the last couple of years, right, Joe, shake your head up and down. Okay. And my Board is very, very supportive of continuing to do that. So Howard said it on the last power a lot next said in the last panel, he's bought back 12%, 2 years from now, we will -- our share count will be meaningfully smaller. Other than that, the log will still be burning.

We are out of time, but I just want to say you are permanently in the club, tell it like it is. You tell it like it is. I would tell one prominent competitors.

We just need a good golf course. We don't have -- we have no golf course.

Any golf course will take us. But I would say a prominent competitor said this about VIRT because the scale that they've achieved and the -- under the structure -- the cost structure that they have, we have given them portion that we can't compete in that market. And I think that's a testament to what you and Vinnie.

It's Vinnie. I mean it was really Vinnie that he is genius in his DNA, but thank you very kind of whoever that competitor was.

You are the executor, you're the operator, and we know it's probably little bit of trying times, but...

No, I like this. I like a good flight to answer.

But we know you're going to tell it like it is.

I am. All right. Thank you, guys. Thanks very much.

Thank you.

Thanks, Bob. Thanks. Appreciate it.