Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Virtu Financial 2019 third quarter results Conference call.
At this time all participants are in listen only mode. After the presentation, there will be a question and answer session.
To ask a question during this time simply you'll need to press star one on your telephone keypad. If you require any further assistive assistance.
Please press Star zero.
Thank you I would now like to turn right conference over to your speakers today, Andrew Smith Senior Vice President head of Investor Relations and corporate strategy. Please go ahead Sir.
Good morning, everyone.
Our third quarter results were released this morning and are available on our website.
Today's call May include forward looking statements, which represent virtue currently regarding future events and are therefore subject to risks assumptions and uncertainties, which maybe outside.
Our actual results and financial condition may differ materially or what is indicated in these forward looking statements.
Important to note that any forward looking statements made on this call are based on information currently available to the company and we do not undertake update or revise any forward looking statements.
No.
We refer you to disclaimers in our press release and encourage you to review the description of risk factors in our annual report on Form 10-K , another public filings.
The GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income adjusted net income adjusted EBITDA and adjusted EBITDA margin.
These non-GAAP measures should be considered a supplemental too and not superior to financial measures prepared in accordance with.
You'll find a reconciliation of these non-GAAP measures to get from one downturn in the earnings materials with an explanation of why we deem this information to be meaningful as well how management uses these matters.
This call adjusted net trading income or first you are trading at.
Oh person dividend income and expense and all brokerage clearing and exchange rebates Andrew.
Speaking in answering your questions today are Mr. whisky, who our chief Executive Officer, Mr., Alex <unk>, Our Chief Financial Officer, There will be government prepared remarks, and then take your questions I'd like to turn the call Uh Huh.
Good morning, and thank you Andrew.
Thank you also for joining us today today I'm very pleased to report our financial results for the third quarter of 2019.
Well the third quarter was punctuated with periods of volatility and uncertainty across the global markets on the home the market environment was similar to the second quarter.
Despite this backdrop.
Market, making an execution service segments, we're able to capitalize on some episodic volatility and otherwise performed in line with our expectations.
In short our results reflect our continued disciplined focus on achieving and executing on our strategic that's sustainable growth initiatives across across both our business segments.
In my remarks today I will highlight the exciting progress we've made in the short eight months since we closed the I TG transaction on March 1st and discuss our strong performance in spite of the muted opportunity in the quarter looking first at the integration and product enhancements. While much runway lies ahead, let me tell you about distances we've come.
Most importantly client feedback has been overwhelmingly positive and constructive we continue to receive supportive and constructive feedback from our global institutional client base as we invest in our global scale platform to accelerate our sustainable growth and capture opportunities.
These opportunities include initiatives that we previously previously discussed like Replatforming and improving the latency of our alert block crossing product.
Replatforming and enhancing our global yeah, that's triton and bringing true multi asset class capabilities to the new Triton platform as well as new initiatives like our new FX in fixed income modules for our analytics tool kit, our recently announced execution concierge service outsourced trading offering.
I'm pleased to tell you that in the three months since our last call. We have begun to deliver on each of these initiatives alert is a better functioning and less Leighton platform.
Clients are seeing the benefits of the Triton enhancements, we discussed on the last call with over a dozen clients already migrated to the new Triton Valor platform and our first FX trades recently completed from a Triton CMS, although it's still early days client feedback is highly complementary.
Our recently announced FX and fixed income analytics modules and our entry into the outsourced trading business with our execution Concierge service are both great examples of leveraging our unique position and capabilities to find incremental ways to deliver value to our clients and generate sustainable organic.
Gross.
Keeping with that theme today, we're announcing the launch of Virtu capital markets, which will provide select capital markets services, including at the market offerings and corporate buybacks to issuers.
Discussed the details further in a moment, but the idea is consistent with our strategy of leveraging our core market structure expertise global technology platform and distribution network to deliver efficient and transparent products and solutions to the market.
Now turning to our specific results looking at our execution service business segment, our average daily adjusted net trading income increased 1% versus the prior quarter, which is reflective of the growth we have been focused on achieving.
This growth is especially impressive given the relatively challenging environment.
Specifically, noting that global equity volumes were flat to negative compared to the prior quarter and considering the global Commission wallet trends the outperformance of our execution service business segment is a strong testament to the value our clients placed on the product and services we provide.
As a reminder, execution services segment includes our execution brokerage workflow in technology and our analytics business.
As we outlined on our previous quarterly updates, we have identified $25 million to $50 million of opportunities from leveraging virtues best in class technology and operational expertise to enhance and expand the legacy ITD products and we already seeing some of those benefits in Q3.
As you know the third quarter represent only the second full quarter of our operations as a combined virtue and TG organization. However, we have made significant progress integrating our businesses as well as identifying capturing meaningful revenue synergy opportunities.
Building, our our leadership position and workflow automation products continues to be a priority at the forefront convert to.
Specifically, our multi broker and multi asset class Dms Triton is the engine at the Nexus across our complete suite of products and services.
We are encouraged with the growth we've seen from new and existing clients choosing to integrate more of our products into the daily operations in today's supplemental materials. We have highlighted how clients have embraced the launch of analytics portal or FX and fix them analytics modules and are beginning to migrate to try and valor.
As I mentioned briefly we are launching today Virtu capital markets to provide select capital market services for issuers, including at the money offerings at the at the market excuse me offerings and corporate buybacks.
In the same way that our entry into into the outsourced trading space was a natural extension.
Of our native capabilities to provide more services to our client base virtue capital markets. Likewise, leverages, our unique position and core market structure expertise technology platform and our broad global distribution network to deliver efficient and trends product transparent products and solutions.
So the market.
ATM offerings are useful tool for a public company in any sector that is looking to raise equity capital.
As with other parts of the financial services ecosystem. There has been an increased focus on the cost and efficiencies of the capital raising function of the marketplace as witnessed by the recent increased focus on direct listings as a more efficient alternative Avenue for initial public offerings and ATM offering provides efficiency.
At scale to an existing public company seeking to raise equity capital as with other new initiatives, we are applying virtu efficiencies and expertise to enable us to engage with a growing sector in the capital markets as a leader in providing trading technology and liquidity to the buy side and sell side.
The new Virtu capital markets business will allow us to offer those same core strengths to public companies through the ATM structure virtue capital markets is led by Jeff lumpy and Josh will Feldman, both of whom have extensive records in the ATM space over the last two decades and were attracted to Virtu global exit.
Fusion platform distribution and capabilities.
Looking at our market, making segment. This quarter is a great example of how the strength and sustainability of virtues global diversified financial technology, driven market, making operations continues to perform in any environment.
Overall, while realized volatility a major major indices was mostly up global equity volumes were flat to down and retail engagement indicators like LTC volume lagged or flat in short this quarter presented a mix of challenges and reduced opportunities for market, making.
However, despite these conditions, we outperform largely enabled by two factors first our efforts to increase our global reach has helped us grow our addressable opportunities and second our efforts to improve our capture rates have helped improve our yield on existing opportunities. This is largely driven by continued deployment of and integrate.
And with with Virtu trading technology of X KCG ex GETCO Quants strategies continued success of our ETF block desks and our early wins from our growing options market, making presence.
We are constantly working to increase the addressable opportunities across the firm. This is especially true with our market, making business segment, where we are uniquely able to scale existing strategy strategies. The previously untreated products end markets as well as develop new strategies building on our knowledge and experience with global markets.
This quarter's market maker result reflect meaningful contribution from strategies, both derived from legacy night and legacy GETCO strategies and brought to new markets using Virtu technology, and new strategies that combine the best of virtue gecko and night.
The revenue synergies that we have previously discussed on the call are exactly these strategies and we estimate that the 2019 adjusted net trading income run rate of these revenue synergies is approximately $40 million.
Since the night acquisition in mid 2017, we have been working to grow or capture rates through improving our internalization internalization is an essential function of competitive market, making as it creates opportunities to retain the bid ask spread and reduced transaction costs to this end. We've recently merged the legacy Bert you broke.
Good deal with the legacy night broker dealer not only was one of this not only was this one in the last major hurdles limiting how much we could interact within our firm for emerging broker dealers has allowed us to free up approximately $100 million $50 million of which we used to repay our term loan just last week.
This quarter performance also demonstrates how quickly virtu teams can mobilize on our last call. We mentioned our efforts to organically grow or options market, making and customer facing efflux walk death.
Our block deaths results for 2019 year to date already 31% above our full year 2018 results our options market, making is off to a very strong start is well, earning several million dollars more in the third quarter 2019 than we did in all of 2018.
In today's supplemental materials, you can see how the technological advancements we've made have allowed us to grow our options market, making presence.
Our customer facing market, making unit continues to deliver essential liquidity in price improvement to customers. We of course had been seen observers around the recent announcements by some of our valued clients of their move to zero commissions for their clients in us equities.
These cost reduction speaks volumes about the efficiency and transparency, our retail partners and Virtu together with the other great market, making firms have brought to the us equities market for retail investors.
We are proud of the role we have played in this ecosystem and the value. We end the value we provide to us retail investors in partnership with over 200 retail partners. For example in the third quarter virtue provided over $80 million in price improvement better than then could be obtained.
Any exchange to the end investor.
Retail investors have never had it so good and wish you all be proud of this ecosystem.
Before I introduce our new CFO , Alex IOP I'd like to comment on how very proud I am of these enhancements and integration progress we've made to date and I'm very optimistic for the future our teams of new and veteran virtually ins have come together to make meaningful progress towards our strategic initiatives to leverage our global scale.
Technology platform and deploying it advancements to our clients across our suite of products and services.
Now I am pleased to introduce our new Chief Financial Officer, Alex IOP, who many of you already know Alex is a 25 year veteran in the electronic brokerage industry previously serving as a senior executive at interactive brokers and we look forward to benefiting from his deep experience and leadership now let me turn the call over to.
Alex Alex Thank you Doug Good morning, everyone. It's good to be here.
Our GAAP results for the third quarter revenues of 385 million net loss of 4.1 million and diluted loss per share of four cents.
Normalized adjusted EPS, we moving one time integration costs and non cash items was 21 cents compared to 16 cents in the prior quarter.
Prior quarter was the first full quarter after that the GE acquisition and irrelevant basis for comparison.
We closed dengue transit transaction on March one of this year and I will provide details on the financial progress of this integration in a few minutes.
Adjusted net trading income, which is our trading gains net of direct trading expenses was 250 million in the third quarter.
That is foreign half percent better than last quarter, driven by 3% increase in the average adjusted daily net trading income.
Which rose to 3.9 million and one additional trading day in the third quarter.
Within that our execution services segment was 43% of the adjusted net trading income and market, making was 57.
The addition of ICICI helps improve the consistency of our results.
Substantial part of the execution services trading income, which has recurring subscription income components came from the business lines acquired from my DG.
As described in detail, we are enhancing legacy ICICI products by leveraging existing virtue capabilities to modernize the underlying technology.
Improving latency for alert product.
Adding both assets capabilities to the tried to CMS and new features to for the analytics products.
We're also extending our product set to feel to needs and institutional clients by one utilizing our existing capabilities.
What we call execution, concierge services, which is outsourced trading desk and to adding new capabilities with virtual capital markets.
Our goal is to leverage our technology and market knowledge to bring together complete offering to our institutional customers growing the agency and recurring revenue streams.
Switching over to that.
And ended the third quarter, we find that 500 million of our outstanding notes to take advantage of favorable interest rate environment.
This transaction closed in October nine.
Interest rate was reduced from 6.75% to 4.8% were 195 basis points lower.
Thanks for five years and.
We extended the maturity of this debt from 2020 to 2026.
This will reduce our interest expense by approximately 8.6 billion per year.
The interest rate environment continues to be favorable and.
Attention bankers.
We are evaluating options for additional optimization of the 1.5 billion in floating rate term debt maturing in 2026.
As Doug mentioned after the end of the third quarter, we prepaid 50 million of outstanding debt. However, we included 10 million of accrued interest in the refinancing of the 500 million notes.
Sequentially, the net debt pay down since the third quarter was $40 million.
Adjusted EBITDA for the third quarter was 104 million net interest expense was 34 million debt to trailing 12, one half debt to trailing 12 month EBITDA stood at 3.4 times.
Integration was that DG is proceeding well.
Through the third quarter, we realize 96 million of synergies were 72% of the original target of $133 million.
The full year, we expect to realise 134 million in expense synergies or hundreds of 1% of the of the original target.
To be fair.
The last quarterly call race total synergies target from 133 267 million at 45% increase.
We are on track to achieve total synergies of 167 million midpoint of the higher second quarter guidance.
Or better by the end of 2014.
As we are working through the integration, we think 10 million better or how did that 77 million in savings is reasonable.
This would put us on an operating expense run rate of 156 million for the quarter.
Paired to a pre merger combined run rate virtue and TG up 200 million per quarter.
I would like to point out the 200 million quarterly expense run rate was already reduced for Virtu as a result of synergies from the KC GE acquisition.
We continue to be within the expense guidance range for 29 seat.
We are at the higher end.
The rate.
This is mostly due.
To do with timing and does not impact 2020 projected savings. The two main components for the timing were sub leases for the space that is no longer needed and the timing of staff reductions, which reduced expense run rate in future periods.
Finally, we declared a custom rate 44 cents dividend for the quarter, which will be paid on December 16.
Now I would like to turn the call over to the operator for today.
Thank you as a reminder to ask a question you will need to press star one on your telephone keypad. Please limit yourself to one question and one follow up question only to withdraw your question press the pound key or hash key.
Your first question comes from Rich Repetto from Sandler O'neill. Your line is open.
Yes, good morning, Doug Good morning, Alex.
I guess my question is on the global Vic.
Options and other main strong outperformance was up 39% quarter over quarter.
I guess could you go give us a little bit more specifics in details on.
On the outperformance in that segment.
Yes, good good morning, Thanks for participating rich, yes, a couple of things.
One is during the quarter I mentioned in my remarks that there was periods of episodic volatility so.
We had during the quarter, a spike in energy volumes and energy volatility for example.
Thanks to some.
Upheaval in the Middle East.
And so there were there were events like that on them on the organic front.
I mentioned in my remarks, as well that like our options market, making business has started to perform there was some good opportunities in the quarter and as well on the side.
They are significant.
Opportunity that traditionally in.
In fixed income and so that gets classified in that area. So we have become as I mentioned in the last call. We are now or participate participant excuse me and credit.
In 2019, so we're seeing opportunities both on the fixed income ETF side, but also on the credit side. So it's really a combination of those if you look at the volatility on on energy for example in the quarter I think it was up something like 280%.
Although the seem evolve volume was down there was that brief period of time I think it was in September when you really saw WT NCL spike in terms of of of volatility in that that's kind of the virtues story right, where there to capture volatility and provide two sided prices during times of stay.
Yes, we continue to trade that during that vary.
Serious geopolitical event and that resulted in some nice nice PNNT pickup.
But also I would stress the organic growth of our of our options business and our block ETF business as well rich.
Got it so it's so it seems like you pretty positive on I should have a remiss in not asking what sort of the outlook but.
Mike I do want to do my my one follow up on a different topic, but it's a zero commissions and.
Just trying to get a feel for.
The communications with the brokers I know some of expected that did beat.
Methods to try to increase payment for order flow excuse me versus price improvement et cetera, and I know your margins are very said now.
And then what Youre seeing census.
Touched went into effect in the beginning of October yes, I'll speak very generally I never I never talk about specific customer as publicly and obviously I'm not can do that here, but I think generally here's what I would say I view this.
Move towards zero efficient commissions as just part of a larger mosaic that we're seeing in the financial services market around efficiency and scale. This is what we deny preach this from when we started virtu in 2008, and we're still seeing from the same sheet of music, which is if you are scale than efficient you will do well.
And customers, whether they're retailer institutional or otherwise are going to demand efficiency and then scale to your business and so this is just a natural to me evolution of the market and it is made possible by the good services Virtu financial and to give them credit Citadel Susquehanna to segment.
Other great firms that are wholesalers are market makers in what we referred to as the six so five space. So I think and you know this but the lions share of what we provided I mentioned in the script if price improvement. So that means that we are actually providing a price that is better than the national best better best offer back to the retail and.
User of the 200 or so retail brokers that we do business with we provide price improvement to every retail broker that we do business with period and story. There are some of them that in addition to that.
We'll take a rebate from us right as part of.
Of our interactions and everything is fully disclosed everything fully transparent we don't have customers that are sending us orders based on the size of the rebate, we're competing with those aforementioned.
Market, making firms based on our ability to pipe to provide price improvement. So I look at this move towards zero commissions as at further.
Support if you will for the efficiency in the service that virtue and our competitors are providing in this ecosystem and this ecosystem works incredibly well so for me it really sort of buttresses our belief in that business.
But obviously rich there is only if we run a great business here, we provide a lot of value back, but theres only so many eggs in the basket.
Our customers want to engage into discussion about.
How those eggs should be allocated we're obviously open to that discussion, but certainly we're not we're not creating more eggs at any time.
And so at the end of the day I think this is ultimately a strong positive for the value that we bring and our competitors bring to the ecosystem as I said in the script I think it is.
Amazing the.
The the benefits that have been brought to a retail investment to think that in 2019, you can go on a terminal or a handheld and literally for $0 get a price in a large cap from medium cap or small cap name that better than you can get on any exchange is just an incredible.
Endorsement for the ecosystem that we've upgraded I'm very proud of our role in that ecosystem.
Got it thank you very much Doug.
Your next question comes from Alex Blostein from Goldman Sachs. Your line is open.
Hey, good morning, guys.
So Doug maybe building on that last point, you talk about efficiencies of scale, becoming increasingly important then we can debate whether or not payment for order flow pricing will go up because the brokers need to make money somewhere.
But but if they do how could that happen how does it change your M&A opportunity set because it feels like there'll be other small players that good.
Incremental more part pressure so as you kind of evaluate the landscape over the next couple of years, how big of a driver do you anticipate M&A to be for merger.
Yes. Thank you Alex I mean, I think for first of all just a follow up on the six so five theme and these are all public statistics and since I'm, saying that RFP public, but our market share and in six so five land, particularly with regard to marketable orders in September was up over 200 basis points right. So obviously, we're doing something right in terms of providing both the good service and a good price.
Two as I said, the 200 odd retail partners that we do business with so we're committed to that business. We think it's a great business. It's a longstanding night business that we've been privilege to inherit I think we've made it better and more streamlined theres a larger theme here, Alex which is and it's you'll see it on the institutional side I'm not going name names, but you know the large institutions.
I have either gotten out of the equities business or scaled back.
They're.
Infrastructure in the equities business because commission rates aren't going up the pool is going down right and so there's these large seismic shifts that are going on in the marketplace and all the big small medium size broker deals are trying to deal with it I think the most important theme and this is what we've been stressing frankly since we started virtue.
This was the theme behind the acquisitions of night Eni TG is that we're going to build a truly scale than we have the ability to build a truly scaled really efficient from that can provide prices. We can provide those prices as a principle. We can provide those as an institution and on top of that we can provide really adroit.
Skilled scaled excuse me financial technology products like Triton like analytics like alert like our Q hub et cetera, et cetera, and so to the efficient firms are going to survive firms that have legacy costs and aren't scale and aren't multi asset class and can't provide principal prices and institution.
Prices I don't think are going to survive right, they're going to be forced to do something different going to be forced to take more risk they're going to be forced to combine and so we're going to be a natural landing place for a lot of those firms one of the reasons I brought my friend Mark Rosenthal into the firm was because we were being inundated by opportunities and I needed a smart guy to help.
Yes.
Navigate that path as to where the from can find opportunity and so what I have said before I will restate is the continuum of pre trade to post trade is now available cover two right. We provide pre trade analytics, we provide post trade analytics settlement and clearing everything in between other than being an exchange is something that we have skill in.
We have financial technology that can address and we think we can provide a service offerings.
So to the extent there are firms that we think can supplement that right or add to that either geographically or through a product or something they develop sure. We're willing to to take a look at it but this is not just an M&A machine right. There's a lot of great organic opportunities happening around here what are the things we highlighted today was our capital mom.
Cuts initiative to great guys.
Came to me I candidly had no idea what the ATM business was I thought it was a cash machine to begin with and when Jeff educated Jeff lumpy educated me on and I said this is a natural fit to virtu. He saw it as an outsider give jeff while the credit a world. These brilliant guys a pioneer in this business. He said I want to come to you affirm vigorous your scale bigger.
Yes, you've got.
Your own liquidity that you've got tools you've got.
You are not conflict in the sense you don't have research you don't have prime brokerage. So you can really provide a great service to these corporate issuers.
I'm not the smartest guy in the world when a smart guy like that comes to you. The LIFO when opposite boom. This is a natural for our firm. So thats. The I know kind of meandered, Alex but I wanted to give you a sense strategically where this firm is positioned in the middle of all that and how we're going to grow.
Got it thanks for that and my follow up and I guess speaking of cash.
The capital markets business that you guys have announced today and the initiatives are kind of taking place there.
How meaningful revenue contributor do you expect these to be over course of the next call. It 12 to 18 months.
And does not at all impact the balance sheet intensity or sort of capital utilization on the business.
My impact Youre de leveraging plasm buybacks et cetera, yes, yes. That's a great question. Thank you look on the answer is yes.
Each of these things individually are nice businesses in the aggregate their significant right Thats really we're talking about so.
Block business has grown 31%, we're now and meaningful options market maker I've said that the revenue synergies I said today are on a run rate for $40 million. This year right. The ATM business, we havent in our supplemental materials on page eight were showing you the size of the opportunity right I'm not suggesting we're going to have double digit market.
Great and a lot of great competitors in this business, but again it can be a meaningful business, Jeff and Josh.
Have done this for a long time right. So all of these things are additive to the opportunity set the key point is that the we have all the infrastructure right. So we'd sure we had to bring Jeff and Josh in a couple other talented folks into the from because they had subject matter expertise that we did not have but all of the accoutrements.
Is that they needed our here.
Here, So there's no incremental investment that is needed on the capital side.
Whereas we're acting as a conduit and as an agent. If you will so there's really no incremental capital for the ATM business other than obviously, having a self clearing broker dealer that has full distribution capability. We already have that so all the things that we've talked about execution concierge services.
I am business.
Even the options, making and the ETF business, that's all done within the structure of our of our broker dealer, which as I as we announced on the on the call on the as part of the script, we merge all of our broker dealer. So we brought even more capital efficiency. There. So we just paid back 50 million Bucks.
Last week, we announced our dividends. So we're on plan for our deleveraging and maintaining our dividend while at the same time trying to grow.
Great. Thanks very much.
Yes.
Your next question comes from Ken Worthington from Jpmorgan. Your line is open.
Hi, good morning, and thank you for taking my questions.
Maybe first and along those lines.
Mentioned the merger the key CGM for Virtu broker dealers.
Hey, down the 50 million of debt.
Are you considering for the other 50 million.
Are there more capital efficiencies that can be freed up from the TG acquisition and then with this merger of the broker dealers are there any other benefits that you expect to see either on the trading side or expense side that come from the integration.
Yes, Thats a good question. So you're correct we are migrating clients.
From the TG broker dealer, whose name I forgot into this large virtue broker dealers at the end of the day, we will have in the United States, one large scale broker dealer that.
That acts as both as a principal in Asian with different AG units and all that stuff that you know very well. So so we are bringing efficiency with regard to the.
The other $50 million in the broker dealer today right. So we're going to.
Yes, you're absolutely right, Ken it freed up a little over 100 million pull together and we're keeping the other 50 million in the broker dealer, yes for the time being just to see kind of yet to see I would kind of plays out so our capital needs can have been haven't changed dramatically right. So if we put on a larger position here and there you know the business.
We explained it to you we have.
Flexes, where we need to have flex funds effectively available to satisfy those but in terms of getting into some new business line, where there is a dramatic need for incremental capital that's not in my DNA right. We're not changing the DNA of what the from is about we're just trying to create as much internal efficiencies and having two or three broker dealers with separate RPH in with.
Compliance and audit requirements, just didnt make a lot of sense from our perspective, and so thats why we're doing we're pushing it altogether you're going to see that.
Globally. The most important thing, though operationally from the convergence of these broker dealers as internalization.
I don't think people understand how important that is and how candidly good at legacy virtual wasn't that we built our firm in our financial technology.
On the basis that everything can and should be internalized applying that financial techno technology and that DNA in that regard now to the night and the and even the DG business is monumentally important it's not just exposing the water or the intention to the marketplace. It's the friction in the cost of doing that so.
We can internalize more flow, we're going to reduce our brokerage Commission exchange line, which we never talk about right because we always talk about everything in terms of net trading right, but we make a lot of gross PNNT, we pay a lot of it back to exchanges and brokers. If we can reduce that that just creates more net trading opportunities for the firm.
Okay, great. Thank you.
And then on the net trading revenue capture were both under pressure this quarter.
I know theres, a lot of moving pieces something for better some things were worse. What I was hoping you do is take a layer deeper on the one or two factors that may be helps for the quarter and one or two factors that may effort for the quarter, you'd mentioned volatility being better, but otcs volume being lower.
Can you go a step further or.
A layer deeper to help us better understand maybe one or two of the positive things that maybe one of the to the negative things.
That has the impact this quarter.
Yes, I'll give you the positives and when we talked about I.
I mentioned in the script already or answer to where riches first question, which is there were some opportunities.
In.
The energy complex this quarter, where you saw a big spike in volatility that just by definition is going to enhance your capture rate and then there was some some china volatility from Trump tweet related volatility those are always going to be positives I would say the ETF block business as it has a capture rate Ken.
Particularly globally is a positive to our overall capture rates, because it's more segmentation and bespoke.
Liquidity, we're providing directly to counterparties right, so you're going to by definition.
You are taking more risk and you're providing a better service or your capture rate is going to go up so those are the the positives.
I would say the pressures and this these change quarter by quarter is when you have the us.
Equities volume that is flat and it was coming up a quarter that was not a great quarter and you have volatility goes up when you really you went from an 11 and change realized volatility to a 15 and change realized volatility although on a percentage basis, that's meaningful as an absolute matter, it's really not.
That meaningful right. So you continued to see pressures there and then as you mentioned.
The two initiative that we look for his interactive brokers numbers because they give you a per share number but also the LTC number that you alluded to I think it was down like Tenish percent.
In the in the quarter. So the just the addressable opportunity is going to contract when you see those types of have.
Metrics and so those are the the positives weighed against the negative than I think the wash here was whether it was a directionally positive quarter in that we performed.
Better, but obviously, we think there is.
Enhancements inorganic growth and we continue on.
Awesome. Thank you.
Thank you very much.
Your next question comes from Ken Hill from Rosenblatt. Your line is open.
Hi, good morning.
First question I guess is on the dividend.
Talked about some of the capital it gives and takes during the quarter, but 5% to 6% of anyway, so really attractive.
Just curious despite that really attracted limiting any does tend to get a lot of credit for that in the stability of the shares do you guys ever kind of reconsider that given the ownership structure as far as maybe reallocating to other areas. The repurchases are there kind of growth areas that might add to the revenue have enhancement over time.
Just curious.
Yes, not so good question I mean, obviously you could probably answer better in your colleagues. They are asking these questions could probably answer that are why we don't get that credit I have we've paid a dividend.
You can ask my wife to verify this since 2009, right and I'm, a very large shareholder and we will continue to pay a dividend and as long as I have anything to do with it I've told people I would sell this lovely table that im sitting out before I would cut the dividend thats, how impassioned dime about it because I think it's my job my job is to return capital to.
To my investors My partners that I started the firm with the now the public shareholders and Thats, what we do here.
We do not need to.
Add incremental capital for our growth initiatives. That's one of the core strengths of Virtu. That's one of the continuing themes that I am always going to hammer on which is we've built this fixed cost plant that scales exceptionally well, we can add the capital markets business execution Concierge services, we have chosen not to go out the spectrum of risk which requires.
More capital because that's not in our DNA, ultimately, where a market, making from we're not a hedge funds nothing wrong with being a hedge fund, but that's not our business. If you want to run a hedge fund you need billions of dollars. The capital if you want to run a market maker, you don't need billion dollars the capital not risk capital its facilitation capital. That's the most important distinction that I've always tried to make so all of the.
Income investors out there yet they should by virtue.
Doesn't make any sense to me when the when the feds, reducing interest rates and you can get a five and a half 6% return from what I think is a growth socket makes a lot of sense, but again I'm not.
Im not graded apparently convincing public investors because you're right that narrative seems to have been lost in the weeds. There was the second part to your question, which I got excited about the answer that forgotten.
I answer your question can you answer this harvest, okay, where you're allocating capital and dividend strength there.
The second question I guess I have is on execution company or services. Just recently launched in October I was hoping to get an update on what's kind of indications of interest you're hearing from folks and just anything more broadly about the October environment that you can share. Thanks, Yes. That's a great question, Yes look I mean weve subsequent to the announcement.
A nice press release, and we got some good.
Yes on it which was great.
We were in and data within bounds and Jack Polina, who runs the business long term.
Got it has been here over 20 years has been out and about we've signed our first customer we announced that last week right and so the profile of customer runs the gamut of your small to midsized firms that is thinking about.
Outsourcing either the entirety or a substantial portion of the trading desks because of cost concerns right. That's a natural were all feeling it right again this theme of efficiency and scale, if you're an asset manager what are you great at well you are great at at that hopefully generating alpha Alpha and distribution of that product you don't need to.
Subject matter expert and trading let the subject matter experts eager to do that for you and as well larger institutions that are looking to outsource, perhaps part of what they do internationally, let's not.
Trade, 20% of my book in Asia, I don't want to set up a Hong Kong office Virtu can you do this for US of course, that's a solution. So I think.
Again from our perspective, the incremental cost of her to getting to that business was effectively zero right. We had a commission management business Thats been led by a great Pro Jack for the last 20 years, we obviously know how to trade and we've got Algos and we've got connectivity, we own TG nets are connected to all the brokers were completely non conflicted.
Don't have to use a virtue algo you don't have to celebrate your product was isn't about researcher investment banking, it's about giving you the opportunity to execute through whoever you want at a low cost and the most adroitly that you, possibly can globally and we think we can provide that service at a per unit costs that is competitive with anybody on the street, because our incremental cost and provide.
And that service is effectively zero thats the theme using our assets using our our scale using our technology to provide really good products and services that individually may not move the dial, but collectively they are going to start pushing the style for the right.
Your next question comes from Dan Fannon from Jefferies. Your line is open.
Thanks, Good morning.
My questions on the regulatory front last year, the kind of exchange market data kind of was a focus.
If you think about the next 10 to 12 18 months I guess can you talk about the one or two areas you're most focused on.
Yes. Good question, Yes, I think and I Havent mentioned this before on calls, but I think one of the offshoots Dan of this race to zero around commissions is.
Six so five reform.
We've been I've been beating the drum probably little to quietly and I'm generally not a shy guy. So we're just not beating the drum a little bit louder in terms of really what a mark and make the can provide best service to an end user is when at the end user is willing to segment flow in a way that makes sense right. So not all retail flow.
Is the same not surprising a 200 share order for mid cap stock is very different from a 9000 share order for Amazon right, everybody would agree and it's a lot more challenging for Martin market maker to handle that 9000 share order under Reg rule six so five which was created before there was an Amazon for that.
Company, even exist in right, that's how antiquated as if you will write those two.
Orders.
Our kind of handle the same way and we provide price improvement each of US I don't think that that makes a lot of sense like I was a little bit of a newcomer to this industry. As you guys know and looking at that it does that doesn't make a lot of sense. So we have been quietly.
Working with our partners in terms of trying to create a more sensible way to segment flow and I think there's a regulatory solution and virtu is going to go public with some of our thoughts around that because we want to be a thought leader there I think thats, an important way to make the industry better and ultimately.
Send that price improvement to an end user that is probably a little more akin to a retail investor then to then then to an institutional investor I think Thats one area.
Of of intense focus in terms of some of the other regulatory items around market data connectivity I think thats. Obviously this litigation going on in Washington, So thats kind of grind to a halt saying with the access fee pilot because there's such animus right. Now obviously, we've been at the center of a little bit of that have that Mount storm and.
We did that for the right reasons, but I think ultimately our main priorities are going to be around six so five or four for the next six to 12 months.
And zero commissions puts additional incentives for that to go forward yes.
Okay, and then just a follow up on expenses, Alex you mentioned some of the moving parts with regards to kind of the synergy expectation at the lower half for this year.
Versus next I guess, if we think about a revenue environment that continues to be.
Not as constructive what are the levers that you have to the kind of pull forward or reduce kind of expenses, particularly as we think about kind of 2020 in that baseline level of kind of investment or trajectory of expenses that you might have.
Well the biggest levers we have is really consult continuing to consolidate the companies.
TG integration continues and should be in very good shape towards the end of 2020, and that's where we're going to get the most bank.
In terms of synergies and reduction in expenses.
Okay, I guess over just.
Is there anything in specific.
You talked about I think.
Some duplicate rent or sub sublease stuff like.
Is that we should that does that just timing associated with the ended this year.
Anything else.
Yes, I think I mean, I've been here long and out so I'll take the blame for it I mean some of the the sub.
We have a lot of real estate I used to kid with jumbo loose our former CFO it feels like sometimes I'm running a read right because we bought these two companies and they they were very long offices and so.
We had a lot of space here in New York, Our building at 300, Betsy if anybody is in threats that we'd be happy to sublet one of the floors they've been hard to sublet under the GAAP rules you can't take.
Some of these write offs until you actually have a sublet.
So part of that's been my issue or the marketplaces issue in terms of how that happens we just need to dance partner for some of these Dan and then some of it is.
Once you get in here and look at what the run off is from technology licenses and Datacenters and things like that it's sometimes you can take longer so Alex is point, which I will let him finish in the second is that ultimately at the end of this in 2020, we come out the back side very scale from the time, if it was a little.
Nuanced and some of it.
Has slipped slightly.
Yes.
Doug is absolutely right.
Also practically if you think about acquisitions.
Phil said improvement is.
Comes quickly.
And then you have a bit of along in the middle as you are lining up to next set of.
Big things right, so thats why.
The timing of shifting a little bit it's not a linear straight line thing.
Okay. Thank you.
Thanks, Ed.
Your next question comes from Chris Allen from Compass Point Your line is open.
Okay.
Morning, guys I wanted to.
Henry visit the leverage targets you guys talked about still on the path to achieving those.
Does that contemplate an improvement in the environment.
Obviously, you have a very good fourth quarter of 18, rolling loss or turning tons in the wrong direction and presence.
And obviously you get some benefits from synergies moving forwards once we see it can you kind of challenging environment.
The two half a year end of 2020 realistic.
And maybe you also tell us let us know what what level of essence cash on hand can use it.
But to that to pay down the debt.
Yes, I look I still think is realistic obviously I'm going to.
State the obvious it helps to have more EBITDA, when you're doing that right. So like having a nice quarter.
It is not to is not a negative and you're right. The fourth quarter of 2018 was a nice quarter.
That will kind of kicked into gear in mid to late November December so who knows we could have a similar events here.
As well, but we have a lot of free cash.
We don't disclose separately, what is free and what we actually use.
For trading, but as a significant amount it obviously oscillates everyday depending upon opportunities. We also have credit lines at our broker dealer and at our holding company. So the from is very well capitalized.
We've already paid down $100 million in aggregate.
When we acquired TJ, we did.
50 in May or June and we just at 50 last week so in eight months.
We paid down $100 million and I think our target was 200 issue or something like that or yes. So we're halfway there in less than eight month. So we're executing according to plan you do make the right point also Chris which is.
You know that these synergies.
Continue to roll off and so as our expense base goes down that obviously is generating more free cash flow in a lot of that is as we just articulated is back ended 2020. So I don't we're not sitting here praying to the volatility God's for an influx of EBITDA is a lot of.
Levers that we can push to get there and we're still.
Reasonably confident that we'll get there and at the end today. The from is very well capitalized paying a dividend we're not missing on it any growth are trading opportunities.
Based on what we have.
And Chris to your point, we keep reasonable amount.
Free cash on hand to be able to take advantage of volatility when.
When it emerges.
Understood.
Just a one follow up I just wanted to ask about the communication and data processing line.
Increase a decent amount sequentially.
Hey, can you give us any color in terms of what's driving that.
How we're thinking about that moving forward and kind of hitting the targets because we didn't seem pretty big move down the fourth quarter hit the 2019 God trying to think about 2020 as well.
Good.
Chris can you. Please repeat the question was.
That Colo and I'm, sorry, technology, and communication was higher than he thought and I think a lot it yes.
Yes.
That's right and.
Part of it is timing and part of it is.
Rationalizing some of the expenses between categories.
Okay.
Okay any incremental color in terms of what kind of categories and talk about here is this is.
Yes, I think what should the reclassification right I mean, Alex if I'm correct am I wrong here, but there was a reclassification that we did from when we bought TJ right. There was some things that they put in.
Yes that they had an occupancy like datacenters or things like that that we thought more properly fit in in technology and communications that right right that it was that was meaningful for data center of about $3.1 million that will move from occupancy to communications and data processing right. It was just to Chris methodology that ITD employees that we thought was.
Not was different than ours on was a incorrect, but it was just a different way of ultimately the expense number with the same. It's just a question of how to classify that there is not like some new technology or some new data center or anything like that I mean, we are.
Wickedly focused on obviously you can tell my public positions on market data and Colo and so it's not any ongoing expense that has.
Move the dial here, that's the important takeaway.
Got it makes more sense just to think about total up just a lot based on versus Thats, because you got as long as well guys. Yes. We should have made clear that started yet we should have been clear thing or the clarification.
Your next question comes from Michael Cyprys from Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question.
I'm, just hoping we could diving a little bit more on the equity market, making.
For use in the quarter about 100 in two and a half million dollars just hoping you could provide some additional color around the cadence of how that progress during the quarter in July August and September how things are shaping a fund October we see volatility is up sharply in October just curious if thats coming through in terms of the opportunity set for market, making as well.
Yes, yes. Good question I mean, I think look the as I said in my remarks.
Third quarter.
Although there were some periods of of.
Until the it felt a lot like the second quarter.
I think it was more balanced in terms of the monthly distribution. Although in September there was some rumblings out of the middle East as I've mentioned a few times.
That were significant.
In terms of what the fourth quarter looks like I think you guys can look.
Point, you first to the volume numbers.
Which we track fairly religiously here I think the October and to date November volume numbers, you haven't seen any real material increases at all it's mixed Europe continues to be pretty.
Muted I'll say nicely and used to be a $30 billion notional day in Europe was a little bit like a white right now and now it's just like a regular Rhino you see a lot I've ever seen Rhino, but you get my point. So I think look at the market continues to be challenging.
That's why we don't obviously, we focus on the market every day and that's how we run the firm, but there is a bigger story here in terms of efficiency and scale and the from continues to chug along even in these are even in these more challenging marketplaces.
Okay, and you may be just as a follow up on the regulatory theme. That's been a proposal for a transaction fee tax out there 0.1% of value on stocks and bonds and 0.1% payments on derivative contracts. Just curious your latest thinking on that and how you could see that impacting the ecosystem and how that would impact for Ts revenue base.
Yes, I tried very hard not to be political so I will do my best not to insult anybody.
In terms I felt that pretty miserably, but this is obviously a disaster not just for.
The financial markets, but for the United States, I guess that was pretty political.
It's really a tax on on pensions in the middle class and for one case, that's ultimately who would pay it.
We've seen very direct evidence of that.
In in Europe in particular, where they put in place and FTT actually exempted at market makers to keep the efficiency of the market going long and ultimately it's the pensions pension schemes that go along with which is why are we scratch my head when the unions are in favour of this because you would think their members if they really understood who end up paying.
Transaction tax they would be violently against that it really is a tax on the middle class I would point out that.
Vice President Biden, just this week.
And his staff put out a statement to that effect. So this is not a left or right issue. This is not political issue.
This is really a common sense and what's good for the markets and what's good for America kind of issue. It's an absolute disaster I think the empirical evidence is very clear.
That marketplaces that have done this have just seeing liquidity fleet to other marketplaces, Sweden did this a 1994 on a Friday on Monday, the derivatives business move to London, and Sweden has never recovered so.
Again.
This is to me not a political issue. It's just what's the empirical evidence show and what are you trying to accomplish if you're trying to rune.
Parts of the American financial system, and put a tax on the middle class and on pensions than you are accomplishing it if you're trying to.
Celebrate the greatest financial market in the world in your opinion than you're not doing a good job. So at the end of the day I think obviously you can tell by from my remarks. It is catastrophic really a bad idea we've been very vocal on that I think the U.S. chamber of Commerce put out a great study on this very recently and I think.
Reasonable people I guess can different a lot of issues, but the empirical evidence here globally suggests that there that this just doesn't make any sense, so I'm very optimistic that.
When level headed people look at this on both sides of the aisle. They were realized that we should be celebrating our capital markets not trying to describe them.
Great Thanks to the color.
Your next question comes from Rich for pedals from Sandler O'neill. Your line is open.
One last quick question, our retail priority from the CBS we.
Just trying to see I know market makers have taken more market share of those limit orders from the brokers is this a pass through or how would it would it impact.
You Doug.
Yes look I mean look I always commend folks for trying to be innovative and responsive and whatnot. I mean look I mean, we have we run a non customer to customer. It can business. We have institutional retail customers I think there are a lot of folks.
That are unhappy about this on the institutional side, because again, you're in a public market place, you're creating a priority mechanism, which seems unfair to them I think we do a very good job servicing our retail customers. It's early days, but there has not been an avalanche of orders being.
Posted there I mean candidly Richard will have no impact on what we do and no impact on our business I think it's.
CBS , we give them credit.
There are good people, we work very closely with them, obviously I disagree with this initiative because I don't think it makes a lot of sense and I think they're trying to solve a problem candidly that doesn't exist, but give them credit for trying to be competitive ultimately it has no impact on what we do day today.
Got it thank you.
There are no further questions at this time Mr., Doug can you. Please turn the call back over to you.
Thank you very much Jacqueline and thank you everybody for participating today, we look forward to speaking with you again in February when we announce our year end results have a great depth.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.