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

So we are gaining momentum as we head to the home stretch. The fun guys.

Oh boy.

So again, welcome back.

I'm like the monkey in the circus. I got to perform.

You always have to perform.

Because I won't disappoint.

The 20th -- whatever the 20th something Global Exchange & FinTech Conference.

This is really our last one, Rich.

For the time being, yes. It is.

This guy has been so good to me over the years. He really has. This is like senior [indiscernible] that, right, the last day.

But there is a cutoff.

You do just enough not to get expelled that you can still get a graduation, but we're going to have some fun, right? Oh, Alex is here. I got to be serious.

There's a cutoff.

Okay.

Anyway, I'll -- this isn't our last speaking. We have a next speaker as well.

Yes.

But Douglas Cifu...

The only guy who made this like Gary Gensler more than me.

You compete. I think you sort of compete for that position.

If that's in the journal [indiscernible], we're not talking, all right? Chatham House Rules. Is this Chatham New Jersey? No, okay.

For that comment, yes.

I'm on the record. Okay. That was on background.

So the Doug Cifu...

Poor Andrew, look at him, trying to control me. Go ahead, I'm sorry.

is the CEO of Virtu.

Yes. For now, yes.

One of the lead wholesale Market Making firms -- lead Market Making firms in the United -- in the global actually. So we talked a lot this afternoon about the partnership that Doug has with Vinnie Viola and being right there beside of it as he created Virtu and really brought more automation, despite all the pushbacks that were happening at that time, and they were interested. But let's get to the current environment. 2021, 20 -- in really good part 2020, 2021, really strong retail environments. 2022 was a little bit more challenge up and down. But just general outlook, we're not talking specific quarter. We're just talking outlook for the rest of the year. What you see is good and not so good over the year period, again, I'm not going to pressure on...

That's right. Yes, you're retiring, what do you care about the third quarter, right? Yes. No, look, I think I watched the last panel and it was excellent, by the way. It's always good to see professionals like Joe McCann, who actually articulate things and don't act like complete jackasses like I do sometimes. So I have a lot of respect for him and for what Citadel does. And he articulated it correctly, which is it was not just a pandemic-driven impact to retail trading. And this is a long time coming. It was a combination of some regulatory changes, but marketplace competition, which led to 0 commission trading, everybody knows the story. I give a lot of credit to the Robinhoods of the world, Win Lose or Draw, whether you like them or not, they're obviously a big client of ours, but whether you like them or not, they really were disruptors, if you will, to the financial services industry. I'm sure they would like to have done some things differently that they did, et cetera. We all know that story. But in terms of driving innovation, competition, reducing commissions effectively to 0, all of the good things that happened, and I say this at every one of these panels, et cetera, that I do, which is like everybody that has been involved in the industry, this isn't a Virtu public service message should be very proud of what has the end state, if you will, and Vinnie said it very well. He said to Thomas Peterffy today, imagine Thomas if I had said to you in 1980 whatever when they first met when you were trading options on the floor. The Amex that you would have immediacy effectively to unlimited size from a retail perspective at sub-penny pricing to 10,000 Reg NMS names and countless option contracts, et cetera, right? That is a unfathomable system that we all should be very, very proud of. And it's unprecedented globally. We're in 50 different countries around the world. We interact with retail flow in Japan and in Canada and in Europe and nowhere else in the globe is there an experience that is as transparent, efficient and frictionless as there is in the United States, which is why I get so annoyed about Gensler tone and his posture on this. It's all political. It's all political. And I think he has thrown kerosene onto the fire of some retail folks by casting aspersions on an industry and on retail practices when there was really no need for it. right? Dan Gallagher, my friend of Robinhood, said it quite well, which is Gensler is not taking like an sledgehammer to a fleet, taking an anvil to a fleet. And I originally, 2 years ago, when these proposals were first being floated, I said like this is obviously a legal term, I used to be a lawyer, but like, who's the plaintiff? Like, where are these coming from? Like who's complaining so furciferously, like I understand that there was this meme stock phenomenon in January and February of 2021. I understand that it became incredibly political down in Washington, but it's very disappointing that our chief regulator in Washington has politicized so much the markets that we are all wasting all of our time and energy and frankly, hundreds and hundreds of millions of lawyers dollars and other things that, frankly, could be put to much better use. Trying to solve problems that, frankly, just don't exist in the marketplace, right? And even the language that he uses, right, is intentionally political. So he talks about dark markets. They're not dark markets. They're ATSs, they're regulated by you. What the f*** are you talking about dark markets, right? So that's why I get so bent out of shape about this. And obviously, it impacts Virtu, it impacts all of our clients, et cetera. But at the end of the day, it's casting aspersions on all the good work that a lot of great people have done in this industry and pioneers like Vinnie and Thomas that saw something and acted on it and put their good names and their capital and their hard work to use and created a system that is incredibly fair, transparent and beneficial to millions of Americans, right? And that's why I think that he has done a real disservice to the markets and more broadly to the country. And I know this is an open meeting, and I'm happy, and I've talked to them openly about this. And to me, it's a big disappointment. And I think it's bipartisan. In my time down in Washington, there were Republicans and a lot of Democrats that privately and publicly -- I started saying Gensler was a politician not a regulator because Ritchie Torres, who's a congressman from the Bronx, you should meet him, he is a wonderful man. There's not a thing probably politically Ritchie and I agree on, and we agree on that, right? What he said to me is really impactful to me and he said it publicly, but he said it privately to me, which is there's nothing that has happened that is more progressive in this country with regard to capital markets than what has happened to retail trading. It has opened up the universe of investing and trading to previously underserved communities, and Ritchie is a minority talking about himself and socioeconomic communities. And to me, to have a progressive cast aspersions on that, it's just completely antithetical to what they should stand for, and therefore, it's just holy political. I was in such a happy mood, Rich. You had a...

So I take it that the...

The painters are down to nothing, so I'm going to -- anyhow.

You deserve to -- some frustration...

But I really mean what I said, which is -- like obviously, there's substantive issues, there's this, there's that, there's data, but just the language that he uses as the Chair of the SEC, to me, is inappropriate, right? You never heard -- [ Clayton ], Barry Joe, we dealt with 4 or 5 different shares in the last 15 years. Never have heard language come out of the SEC like that. It's wholly political. Even yesterday when I went on CNBC and said that we already have digital currencies. It's called the U.S. dollar, the euro, the yen, et cetera. That's for the Congress to make that determination. You're a regulator, not a politician, right? The House Financial Services Committee and the [indiscernible] Committee had a hearing on this. Was it yesterday, right? So this is let the policymakers make those determinations. If you want to be a politician, run for Senate in Maryland, whatever the max is, I will give him. My wife as well.

To the other?

No, to him. He'd be a fantastic Senator. He lives in Maryland, right?

All right. So...

You can quote me on that was on the record.

So let's talk just a little bit about Virtu. So Virtu...

Sure. Great company. I like it. I spend a lot of time to.

So you and Vinnie electronified really, against some process that really took his market making both of your energy and ingenuity and made a market-making process electronic. So as you did, -- so today, as you look at the markets today, is there any -- and we don't want to talk about right -- per se about regulation, but any flaws in what you've developed on how you interact with flow? Is there any...

Yes. I mean, look, I'm not an apologist that's going to set up and say everything is perfect, right? There aren't rules and regulations. I mean, Joe, in the last panel, and we've been very publicly supportive of reforms and amendments to Rule 605 and 606. I mean there's no reason that the retail brokers or clients shouldn't have disclosure obligations and more transparency. A payment for order flow is just a rebate, right? So at the end of the day, should it be fully disclosed? It is already fully disclosed. Should it show up on the confirm so people understand what the product is that they're buying? Of course, right? That's not a controversial issue. And I think the industry has been very fashion forward about that. And I think the industry and market forces have made markets more efficient and continue to do so. And you see it ripple through asset classes. 15 years ago when we first started Virtu, the FX asset class, if you will, was a hell of a lot less efficient, more manual, more controlled by the large broker-dealers. Now you've got firms like Jump and XTX and Citadel and Virtu that are significant-sized dealers in FX. And I would argue that the marketplace is a lot more efficient and works better and people have greater access to it and transaction costs have been significantly reduced. So there are market-based solutions to all of these things. What gets my gander up is when regulators -- and it doesn't just happen in United States. I mean there's a reason there's going to be a MiFID 2.5 and then a MiFID 3 and a MiFID 4 is because -- I was going to say schmuck, I shouldn't speak like that. But folks over there, the regulators over there pick winners and losers. They decided that the exchanges should win. So they put these artificial caps on dark pools in Europe. They didn't work, right? Liquidity is like water, it finds its level. People want market-based solutions. They don't want to be told where to trade. I said this to the staff of the SEC and to Gensler, which is you think that Schwab, Fidelity, Vanguard, Morgan Stanley, E-TRADE, they need to be told where to send their retail orders, like they don't have choice. It's a mouse click business. Every day, we're working our asses off to compete with Citadel, et cetera, and the exchanges and 40 different ATSs. They send their market orders to us not because they're getting some pernicious conflicted like rebate or payment for order flow, it's bulls***. They send it to us because we provide a service, we provide better prices, right? The marketplace has created this unbelievable ecosystem, and it will continue to do it in asset classes around. See everything I do comes back to Gensler. Have you noticed every question you asked me. But I think -- but I really am -- and I'm not some like crazy anti-government libertarian kind of guy. Nothing is wrong with that, but I'm not going to go start emulation, go to Idaho, I've thought about it a few times. But what bothers me is when regulators and governments getting involved in marketplaces, they always screw it up. They always screw it up. The reason we're having a lot of these conversations about fragmentation and whatnot was because what happened in Reg NMS. So the unintended consequences lead to all of this [indiscernible]. And I'm a big believer, just let the markets work.

My -- what do you call lack of comment is not an agreement.

Are you just like winding me up and let me go. See how much trouble I can get myself in.

What I do appreciate is your candidness and you...

I get -- so people say to me sometimes, like you're a CEO of a public company, how can you speak like this? So number one, it's who I am. Number two, my partner and I get along great and he's our controlling shareholder, so like I feel great about my position. And Vinnie's one of -- and he's a results-driven guy. He gets the P&L every day. And if it's start doing well, believe me, he kicks me in the ass, right? So I work really hard to satisfy him and all of our investors. But at the end of the day, it's like I feel very passionately about these issues, right? So if I sat up here, [indiscernible] I go to meetings and say, okay, do you want Doug that went to Ivy League, went to Colombia for 7 years and was 5 [indiscernible] or do you want the real me, right? So you get the real me if you want, I can pretend I used to be a partner, Paul Weiss, I can speak like a fancy lord. But at the end of the day, these are not complicated issues, right? You need to distill them down ultimately to like their fine points. And really what this is, is a philosophical like debate that we're having. Gensler and the "elite" progressives believe in the Nanny state, right? They think they should tell us how things should work. I don't agree with that. I think that everybody out here is pretty damn smart. I think we are really -- we've created a really good market structure. I think retail investors with the right information can make their own choices. But at the end of the day, we don't need the government to tell the Charles Schwab Company where to send its orders, right? The Charles Schwab Company can figure it out on its own. They don't need Gary Gensler to create some proscriptive auction that is as [indiscernible] as it comes, I can go through the details of it, that will negatively impact retail investors and tell them where to send their orders. That's crazy to me, crazy to me. Then a bunch of academics that came in under a political mandate would want to change the equity market structure for no reason whatever, without any substantive data behind them. Think about that for a second. As Americans, we should all be offended by that. At least I am.

You talked about -- again, the...

And you know what, a lot of good people at the SEC agree with me. They won't say it publicly. But as soon as Gensler's out of there, they will breathe a sigh of relief because a lot of them don't believe in any of this bulls***. We need a good head of Trading and Markets. Do you know anybody, Brett? What are you doing now? Obviously, with that expense of [indiscernible]. You're not in government work anymore. And that beautiful haircut you got. That wasn't $15. All right.

We appreciate having Brett as a prior regulator here observing and see some of the -- how...

Why do we miss him?

Yes, how regulation can impact people's strong feelings, put it that way. And again, I appreciate you can in this. I'm going to stay neutral, like...

I understand.

Like a neutral country...

We'll talk about it. When do you retire? June 30? Call me July 1. All right.

Exactly. But you did talk about the partnership that you have with Vinnie. Again, I'll go back to how the lunch was tremendous to hear about how electronic trading developed. So -- and you also said he gets a P&L, which to me just speaks to the discipline that he has that he would look at it every day. So the question is, as you look out -- we've had big years, we've had down years. We've had some environments, you can make a lot of money, $2. We've had other environment. So how do you and Vinnie look at sort of the longer-term profitability?

Yes. I mean, look, we built this firm for -- I mean, I'm 50 -- going to be 58 soon, 57, Vinnie is 10 years old than me. We started -- I started this when I was 41 or 42, I guess, and then he was obviously 10 years older. And so our theory was -- his theory, which I embraced, was to create a scaled firm, that could provide really, really attractive 2-sided prices in any asset class around the world. You all have heard that story. Now we've expanded our mandate through acquisition and through some organic changes. But the fundamental core of what Virtu is all about has not changed in its mission. And we've obviously evolved and hired some great people, et cetera, et cetera. But at the end of the day, we're not going to change that fundamental mission. I understand we're a public company. We take our fiduciary duties very seriously. We're big believers in being good stewards of capital. I run the firm with my partners in a very, very disciplined manner, right? I'm very, very focused on operating expenses. But at the end of the day, Virtu exists to return capital to its investors. And hopefully, the markets will understand that. And as we continue to grow and provide that service to other asset classes and continue to be efficient, we're going to keep paying our dividend and buying our stock back. We hit singles every day. This has never been a firm that tries to hit a double or triple or a home run. You know the story of Virtu, be a market structure Market Making firm, try to buy in the bid, sell in the offer, manage your risk and live to fight another day. So we're not going to have -- and so yes, we've had periods where there's been extraordinary opportunities because of expansion of bid offer and because of volumes and one that -- Dan, you're late, I already said nice things about you. Dan Gallagher just walked in. And so he distracted me here. Put a tie on. Would you be professional?

He's a Robinhood. He can...

Yes, exactly. He's a disruptor. I'm like part of the -- I'm the man now, I guess. So at the end of the day, like we are going to stick to that mission and not change our fundamental nature. I think where companies get in trouble is when they panic about this side or the other thing, and they try to do things that are orthogonal to their mission, right? Like the old Knight company had a reverse mortgage business. I don't want to insult anybody. I don't know who bought that, it made no sense, right? It just was not part of the core of what they are. So that's what Virtu is and will be as long as I'm living and breathing and running, which I hope is a long time, Rich. I'm working on that. I know you said I was chubby at lunch. I'm working on that, too.

I take that back.

That's right. I still love you. Hard not to love you.

You know your good friends when you call them public, I know your friend, chubby, that's right.

So you did say chubby?

We have to...

Okay. He admits it, Your Honor.

We're going to have to go back to the transcript and see that. You've added to, again, your vision, and you were right there because I was visiting you before you went public and talking to you and Vinnie about how you would -- the dream was taking a -- what you did -- what Vinnie -- you and Vinnie did humanly and put it into algorithms. Again, the tenets of creation of electronic trading. So now you've combined it with wholesale Market Making with an agency broker called ITG and probably the most diverse trading firm, I believe you can...

Yes, I'd say we're a broad financial services firm. The idea was -- what we saw was -- and it really stemmed out of August 1, 2012. When I got in to do some due diligence on that capital when they had their trading error, right, amazing firm. It really opened my eyes because I was a lawyer in private practice beforehand, and I just started Virtu, that's kind of all I knew. When I saw this broad financial services firm, I said, my gosh, look at this firm. It's got an unbelievable client roster. It's got all this goodwill. It's got some amazing, amazing really talented people. It's not run very well, and it's got some c***** technology. We can really add a lot of value to that as Virtu. And that kind of started, Rich, us on this progression of expanding the financial services we offer, but again, staying core, very, very central to that mission. So any place we think we can add value through automation technology and providing a good 2-sided price or access to a marketplace, that's what we're going to do.

And I think because there's no doubt the -- what's going on with the equity market structure is, you're emotionally committed to it. Again, you've created the most diverse...

But I think it's more than that though. It's more than that. I mean the data and the results speak for themselves, right? That's the thing that really -- a lot of things infuriate me about the SEC. But the data is so damn compelling. And not only that, like the data set that they have, the existing 205 in terms of showing what price improvement is so compelling. But they, in their own proposal acknowledge. They don't even have the right data set. And yet, they're still going to do this large compendium of rules. It's crazy what they propose. So when you look at like the white paper we put out, the white paper even better that Schwab put out, what my friends at Citadel did, what Robinhood did, it's literally tens of billions of dollars of incremental savings and value that is provided to the retail investor today. They don't have an answer for that. Just -- if you look at the cost benefit analysis they put in the auction proposal, for example, I would be charitable to say that it's incomplete. How is that, Dan? Is that okay? I mean it's -- I called it academically soft more of what they're proposing because it is. It's like a bunch of guys got together and said, "Let's play markets here without any substantive reason or rationale and without a cost-benefit analysis." I almost kind of feel bad for the Office of Chief Economist because they've been handed this like pile of c***. And they've said, okay, you know what, here's a pile of c***, put a bow on it and make it look okay, so that it passes the Administrative Procedures Act. It's not going to. It's not going to. So if this stuff sees the light of the day, the only thing that's going to happen, I said it on Bob show today with regard to crypto and Gensler is we're going to spend years and hundreds of millions of dollars of legal fees. And to me, that's -- as a former lawyer, that's sinful. Trust me. Lawyers charge too much. I used to do it. All right. Before we have too much, I have something to say. So this guy, everybody knows how wonderful Rich is and how instrumental he's been to Virtu Financial over these years. So we want to -- on behalf of Virtu and my friends at the Florida Panthers, I want to thank Rich for everything that he's done, and we want to give him the ultimate reward. Andrew is going to bring it up. This is an authentic Florida Panthers jersey with the fight strap. So if anyone [indiscernible] with Rich. I see the fight strap.

Thank you.

On behalf of me and Vinnie, thank you.

Thank you.

So we make him put it on. Yes, come up, put it on. I won't fight you because I'm not a fighter. Just verbally, there you go.

You beat the hell out of you.

Yes. No, you're on west point, you kicked my a**. I haven't done chin-up my entire life. That's why you can't get to the west point. You got to do 15. How good does that look? Someone take a picture of me and Rich with that, yes. I hope I see you Saturday.

So just so you know I think I can say this. I've been to 5 of the 7 Florida Panther playoffs.

Playoff games, yes.

If I could be there tomorrow night, I would be there tomorrow night. The one thing I would last say about Doug. If you're a west point grad, I totally see why you hire this guy, who's emotionally committed to his company besides Doug Cifu.

Thanks. Good luck. Thank you.