Q4 2019 Earnings Call
[music].
[laughter].
Ladies and gentlemen, thank you for standing by and welcome to the Virtu financial 2019 in the fourth quarter earnings call.
At this time, all participants' lines are in a listen only mode.
After the speakers presentation, there will be a question and answer session.
[laughter] asking question during the session you would need to press star one of your telephone.
If you acquire any further assistance please press star zero.
I would now like to hand, the conference over to your speaker today, Debbie Delavan SVP of Investor Relations.
Thank you. Please go ahead Madam.
Good morning, everyone.
[laughter].
Well here.
[laughter] working or no.
Pretty.
Forward looking statements for truckers that hurts, you correctly pardon Sherman and on there [laughter] uncertainty, which maybe outside [laughter] all happens.
Our Chief Executive Officer, Mr., Alex I offer chief financial.
[laughter] prepared remarks.
Yes.
Note that our actual results financial condition may differ materially.
Good for them.
It is important to note that any forward looking statements made on this call RV Park formations.
Currently available to the company not any update or revise any forward looking statements.
Okay sounds to me I'll refer you to this point hurt in our press release [laughter] through either descriptions [laughter] contained in our California, huh, Okay and other public.
During today's call will refer to them.
Hi measures should be considered.
Supplemental to not hearing or.
And we'll measures prepared in accordance yeah.
And a reconciliation of these non-GAAP measure.
Like capture any earnings I'm curious when an explanation of why we seem to.
Well as well how management.
Yes.
With that I'll like to turn the call over [laughter]. Thank you Debbie and good morning, everyone. Thank you for joining US today in my remarks today, I will focus on virtues fourth quarter and full year 2019 financial and business performance 2019 milestones and the progress we've made towards our strategic Ci initiatives.
Before discussing goals for 2020 and the future of Virtu.
Following my remarks, Alex I off our CFO will provide additional details on our financials, including an update on or integration related expenses and expense forecast for 2020.
Turning to our fourth quarter results, which are summarized on slide five I'm very pleased to discuss our strong outperformance in the last quarter, we generated $4.08 million per day in the fourth quarter, an increase of preset over the prior period, despite significantly lower opportunities this quarter as demonstrated by.
3% decline at U.S. equity average daily volumes, and a 35% decline in realized volatility of the S&P 500 index versus the prior quarter.
For the full year 2019 virtue generated $3.8 million per day of adjusted net trading income as we pre announced last week. We also generated between 101 hundred $5 billion of adjusted net trading income nearly $5 million per day in January and our road.
Cost performance has continued into February.
Our outperformance in the fourth quarter and in the started 2020 is the result of investments we have made in technology integrating our firm's deploying strategies to new project, new products, and thereby making previously unaddressable opportunities addressable.
One of the whole milk hallmarks of Virtu has always been our relentless effort to invest in scaling and improving our offerings across both our business segments offerings that are designed to drive organic revenue growth in any environment.
From it.
We also always focus on cost optimization.
To illustrate the benefits of virtues operating leverage this quarter is 5% increase in average daily adjusted net trading income combined with reduction in expenses drove a 29% increase in our non-GAAP adjusted earnings per share of 27 cents per share compared to 21% 21 cents excuse me in the prior.
Quarter.
On a GAAP basis, we generated basic and diluted loss per share of 16 cents versus four cents insert into third quarter 2019, both driven by acquisition related costs.
I'm very proud of our performance in the quarter as it reflects our disciplined focus on achieving at executing on our strategic and sustainable growth initiatives across both our business segments.
Even in the face of a difficult operating environment.
For the full year 2019, adjusted EPS was 96 cents and and for the fifth consecutive year. We've completed our mission to return capital to our shareholders in the form of our 24 cents per quarter dividends.
Our adjusted EBITDA in the fourth quarter was $114 billion, an increase of 10% compared to the prior quarter.
As you know our results are primarily driven by our two main business segments market, making an execution services slides nine and 10 provide an illustration of our business today.
Our market, making segment our average daily adjusted net trading income income increased by 8.5% to $2.4 million per day in the fourth quarter.
This increase included a 25% increase in our average daily adjusted net trading income from global equities. Despite the noted declines in market volumes and realized volatility.
Typically as I, just mentioned a 35% decline in realized S&P volatility. In addition to an 11% decline and realize your stocks and a 15% decline indeed chi realized volatility compared to the prior quarter.
Our enhanced market Vicki performance was driven by improvements we deployed to existing strategies in both our customer and non customer market, making businesses.
The newest equities, we benefited from the introduction of Zero Commission training and the increase in retail volumes and an increase in our six so five market share in us equities.
Our outperformance in global equities. This quarter was also boosted by improvements in our European operations, where we achieved significant organic growth.
As a result of recently relaunched market, making strategies that combine the best of virtue and Casey Jay.
Our market, making segment's results included a 35% decline in our average adjusted net trading income in global sick stemming from significant declines in market volumes across these asset classes and in realized volatility across sick globally.
Specifically volatility indices for currencies in commodities, including the C. VIX Index JP Morgan G. Seven FX index, and the Gs commodities index declined 36%.
40% and 81% respectively.
As a reminder, by comparison to previous quarter experienced the highest level or realized volatility in crude that we've seen in some time the tax in Saudi Arabia had significant impacts on the crude markets that make comparison, so the third quarter very challenging.
Turning to our execution services segment, our adjusted net trading income was $1.68 million per day in the fourth quarter, a slight 0.5% decline compared to the prior period.
As discussed previously this segment generates revenue those recurring and relatively stable in nature looking at recent periods you can see than our adjusted net trading income for execution services has been relatively constant between $1.67 billion to $1.69 billion per day in each of the last three quarters.
Given the contraction of the buy side execution wallet and declining volumes year over year, particularly in Europe are steady performance is especially impressive and is a testament to the value or bring to our clients trading and investment processes and the progress we've made in cross selling additional products to customers.
Quickly looking ahead to slide six you will see the upwards trajectory of our daily adjusted net trading income over the past several quarters, which has continued into 2020.
On expenses, we continue to make progress in integrating and enhancing the various products acquired in the ITD transaction and realizing efficiencies.
By the end of 2019, we had exceeded our initial synergy targets several months ahead of schedule.
Alex will provide more details along with 222020 expense guidance, but we remain highly focused as always in managing our costs and meeting and outperforming guidance.
As we recently announced we operate Opportunistically refinanced our term loan just last week to take advantage of lower rates available in the market.
I'm pleased to report that this myth that this meaningfully lowers our financing costs over the next five years to the tune of approximately $11.2 million cumulatively. The results of transaction undertaken in the past two quarters yielded a total of $26 million in annual interest expense reductions approach.
Definitely 23% of the annual interest expense from when we close the TG transaction less than a year ago.
Just two and a half weeks ago marked the first anniversary of our transformative merger with TJ.
Witness as we have witnessed over the last year. The transaction combined two highly complementary businesses and created incremental operating scale is allowing both of both our market, making an execution services segments to continue investing in offer our offerings.
While we remain open to strategic inorganic growth opportunities, we have successfully invested and launched a number of organic growth initiatives in the first year at little if any incremental costs.
You know offering a product that we deliver across our unified global technology platform adds to our scale further strengthening our sustainable competitive advantages as well as our client relationships.
The organic and integrate inorganic initiatives, we launched in 2019 have enhanced our operating leverage and increased the total addressable market of both of our operating segment.
As discussed on prior calls these and other initiatives are in line with our strategic vision do you have to unify to utilize our unified technology platform to deliver more products services and data to more markets and clients as we grow our recurring revenues.
As we remain focused on helping our clients meet the they're trading goals. We will naturally continued to uncover opportunities to strengthen these relationships by offering competitive transparent and sustainable technology led solutions.
Well, we have accomplished humbling achievements in short of a year, we remain excited for the new opportunities that await virtue and our clients around the globe.
Turning to our market Mickey segment on Slide 12, we were very pleased to report on our robust outperformance compared to the industry benchmarks for the fourth quarter.
Our average daily adjusted net trading income in market, making increased by 8.5% to $2.4 million per day in the fourth quarter.
As mentioned a moment ago via environment during the fourth quarter presented presented reduced opportunities as declines and market volumes and volatility that we witnessed in the third quarter continued into the fourth quarter. However, despite these declines in opportunities in the period, our outperformance more was more than offset by organic growth.
Both our customer facing and non customer market, making businesses turning to slide 13 and 14.
And our customer market, making business, we achieved a 12% increase in our market share of marketable rule six so five order flow as we executed on opportunities to our growing organically grow our results and when larger shares a flow from key brokers on a profitable basis.
We also saw significant organic growth in our non customer market, making business from our focus on investing in recently launched market, making strategy strategies in Europe.
Growth in our ETF block death globally, as well as developing our options capabilities.
Let me talk first about our ETF block business overall, our firm wide footprint in ETF is significant track transacting more than 2.5 trillion U.S. deak dollars of EPS in 2019.
The focus on our ETF blocked EPS was a major initiative for us in 2019 that continues to generate significant value and we are in the early stages in terms of its growth.
In addition to increasing the number of LTPS, we quote by over 30%. We grew adjusted net trading income on the desk by over 40% in 2019 compared to 2018.
Largest lead market maker in EPS in the United States Virtu is well known is a well known authorize participant and an on screen market maker.
However, creating a scalable GTF desk to serve the needs of institutions as well as the funds themselves is a relatively new priority for virtu.
Combining the global financial technology, Virtu, with the trading and distribution capabilities of Casey Gi and I TG is a winning formula.
Similar to how we are leveraging our trading capabilities and technology to offer more services to more clients across our execution services segment. The launch of our global E. T F block desk to expand our role across the ecosystem is a great example of an organic growth opportunity that resulted from the combination of virtue.
Casey Gi and I TJ. This is an exciting opportunity that favors scaled operators like virtu, who can leverage a global technology platform and data processing plant to foreign prices distribute liquidity and execute on clients needs.
That said a significant amount of opportunity awaits as we still developing our offerings in new asset classes like fixed income in our operations outside the United States.
Additionally, favorable regulatory trends, such as Mr. too and improving best execution requirements will continue to increase the addressable size of ETF TTF market further still as the global turnover and you end. The VTS continues to grow so does the opportunity for our MTF walk that globally and client demand for our services.
Options on our last call I mentioned briefly our expansion at the options I'm pleased to report that our focus on growing our options footprint continues to show results in 2019, our volume of us cash equity options increased 32% and the number of symbols, we trade increased 30% to pay.
Most of our growth and options is accelerating as our volume in January is up over 50% versus the fourth quarter and we are now quoting 13% more symbols than in the fourth quarter.
We're still in the very early innings in our expansion at the options and there was a significant amount of runway ahead as we develop our options capabilities. We expect we will be able to find opportunities to quickly deploy our scalable technology to address incremental markets, including some of the world's largest and most active markets.
In addition to growing these new Mark these new market, making capabilities, we continue to evaluate new markets from multiple perspectives. As a result, we are shortly going to commence being a multi asset class market maker onshore in India.
Markets in India represent significant opportunities that equities and commodities trading in our onshore operations and registrations will be important to position Virtu for success in this important market expanding our ATM block debts, becoming a market maker and options and entering India are all examples of how virtuous, adding incremental organic growth.
Nice to our existing fixed cost plan to achieve great operating leverage.
Turning now to revenue synergies specific to our market, making segment, we continue to benefit from deploying legacy KCG quantitative market, making stretched strategies on virtu technology, and incorporating legacy Casey geologic into certain virtu market, making strategies, our market, making segment achieved over $50 million.
Adjustable net trading income attributable to organic growth in 2019, driven by enhancements from the combination of KCG converted.
Turning now to execution services business on slide 15, as you can see our results for the fourth quarter were nearly flat and we outperformed compared to the more significant declines in many market volumes and volatility benchmarks.
Looking at the market environment for the full year 2019 versus 2018, you can see how the average daily turnover declined significantly across the globe, especially in Europe, and APAC, where notional turnover declined 22 and 19% respectively.
Next I'd like to update you on the deployment of a number of organic growth initiatives, we announced last year, specifically the launch of work to execution services are outsourced trading offering.
Multi asset class analytics, offering and Triton enhancements.
And others, while it's still early days since launching DCF last fall, we have onboarded clients and we have we have many more global clients in the Onboarding Q.
As a broker neutral platform Virtu SCS provides clients with a suite of non conflict. The execution services there are scaled to fit their needs.
Clients appreciate that we are broker neutral in the research provided they use like that we're not competing with their research.
We're now in the process of building our network of brokers, both in the United States and in Europe in our launching a new sales campaign for 2020 to both build awareness awareness and proactively identify and pursue opportunities.
Posit alert enhancements, we rolled out many technological enhancements in 2019, but few whereas immediately impactful to our clients as the technology upgrades as structural Shane changes, we made to reduced latency on our posit alert block crossing platform as we mentioned on our last call the upgrades we.
Made reduced latency is by more than 70%, resulting in sustained jump a sustained jump in our market share.
Multi asset class Triton.
We continue to deploy our next generation multi multi asset class Dms platform Triton about.
Since the end of the third quarter, we have continued to rollout new valor platforms and the number of migrated firms increased from 14 to over 50.
Analytics also on the multi asset class front in the fourth quarter, we announced the launch of our new FX benchmarks available within our broker neutral analytics suite.
The new FX benchmarks leverage virtues technology platform and experience as a major liquidity provides the global FX markets to provide virtues unbiased view, a fair value for a given currency at any point in time, our FX GCA clients use the new benchmarks to measure the quality of brokers liquidity and the performance.
Of algorithmic executions with enhanced levels of granularity.
For two capital markets since our last earnings call our capital markets business as onboard its first set of clients and can and conducted its first ATM trades virtue capital markets continues to focus corporate issuers that are looking for alternatives to tap into our capital markets.
Via ATM offerings and stock buybacks.
Just a few of the initiatives that we are confident at our disciplined client centric focus is creating value for both our clients and our shareholders.
On slide 17, we outline our path to higher returns, while our plan to revert to may seem ambitious. We know we have the right level of talent commitment and client support to be sure we deliver the benefits our clients expect.
As I wrap up my prepared remarks, I want to reiterate how proud we arent. The success, we have achieved for our company and for our clients in 2019.
Moving forward into 2020 across the firm, we our steadfast in our commitment to determination to continuously improve the quality scalability and reliability of our global multi asset class offerings.
I remain confident we're moving forward to in the right direction and we will continue this year as we capitalize and continue to grow momentum generated in 2019.
We look forward to providing you with more updates on our next call and with that I'd like to turn the call over to Alex to review the financial details before we open the call up for questions Alex.
Thank you Doug.
Good morning, everyone.
Doug is a heart speaker to follow next part of this call will be quieter.
I think equally as exciting to investors I'm pleased to report a strong quarter and a number of positive developments in the business. Our GAAP results were revenues of 405 million for the fourth quarter and 1.5 billion for the full year we generated.
Basic and diluted GAAP loss per share of 16 cents in the fourth quarter and basic and diluted loss per share 53 cents for the full year.
Well driven by acquisition related expenses as a reminder, our 2019 results included only 10 months of Fiveg.
Good transaction closed on March one of this year.
Removing one time integration costs and non cash items normalized adjusted earnings per share was 27 cents for the fourth quarter and 96 cents for the full year.
Well dividend for the year was also 96 cents per share.
Adjusted net trading income ANSI, which is our which is our trading gains net of direct trading expenses was 257 million for the quarter were 4.1 million per day, which is 5% better than the prior quarter in unit market conditions.
As we recently reported first quarter. This year was off to a strong start with anti for January estimated between 100, and hundreds and 5 million.
Well the full year, our execution services segment comprised one third our total anti as compared to nine and half percent for prior year.
Shift was in great part due to the acquisition of IBG, which diversifying our revenues, while leveraging our core technology.
As Doug mentioned.
The fourth quarter demonstrated to leverage and ongoing improvements in our efficiency.
5% increase in anti coupled with increases in operating expenses and financing costs yielded 29% increased in normalized EPS from 21 cents in the third quarter. The 27 cents in the fourth quarter.
A good story this quarter were improvements in our financing costs in the past few weeks, we took advantage of favorable market conditions last week, we launched and price to refinancing of our term loan.
Our 1.9 to 5 billion the term loan debt was reduced by.
Reduced one half percent lower from LIBOR, plus 352, LIBOR plus 300 basis points.
We paid one they issue or discount or only 12.5 basis points.
In conjunction with the repricing.
Issued a corporate family rating for Virtu, which was much higher than the existing term loan issuer rating, while reaffirming the issuer rating.
Corporate salmon you rating reflects virtues quoting Moody's franchise, the technology, driven provider market, making and related execution services et cetera.
We're pleased to have this rating.
In addition at end of January we did a fixed to floating interest rate swap lock in a lower interest rates five years, when a billion of our term loan.
Thanks to.
The fixed to floating LIBOR spread out West in addition to the 525 million swap.
We did effective duty beginning in the fourth quarter concurrent with the conversion of 6.75% senior secured notes.
I will not size term loan and subsequent paid down this net 25 million up the term loan.
Cumulatively, we paid down 75 million of term loan since that acquisition.
As a result of these actions as you can see on slide 19 will pay fixed effective rate, 4.37% for five years.
In one and half billion dollars of our debt. The remaining 400 million outstanding term loan will remain floating and indexed to LIBOR, but it is spread that is now 50 basis points less.
As reported last night as Doug mentioned earlier cumulatively. The result of the financing transactions undertaken in the past two quarters and debt pay down yielded a total of 26 million in annual interest expense reductions.
Or approximately 43% lower annual interest expense run rate.
These savings amount to approximately 10 cents per share.
Yes in earnings.
What convenience on slide 20, we added a recap of the key terms.
And covenants of our term loan some investors had questions on this please note that there no ongoing leverage covenants or interest coverage covenants on this loan.
Okay switching to expense synergies.
Our integration was ICICI is proceeding well as can be seen on slide 21.
Through the fourth quarter, we realize how did the 37 million of synergies slightly above our original total synergies target of hundreds and 33 million.
We're not done.
We are on track to reach the higher end.
The increase synergies guidance of 182 million by the end of 2020.
This would put us on an operating expense run rate of 155 million per quarter.
Compared to pre merger combined rate run rate for Virtu, and ICICI up 200 million for.
The 155 million third quarter is an average run rate for the year.
We expect continuous improvements throughout the year with to last quarter of this year or the exit quarter expenses being lower than average.
Annualized we expect our total adjusted operating expenses to be 620 million.
This year down 22.7% from 802 million spent by virtue and ICICI in 2018.
Last full year before the merger and this yields to 182 million savings that I mentioned.
A couple of minutes ago.
Wrap up for your convenience.
On slide placed 344.
So we presented a GAAP yet again you know your initial direct expense low artist finding revenues. So then show adjusted net trading income, which is a key measure we used to track our business.
Then showed the rest of the gap between now.
Then we layer in EBIT EBITDA and adjusted net income and adjusted EPS to give you a conclusion you have these key measures. We presented these measures presented these measures in the past, but we think this laying out it's easier to follow and this part of our efforts to make virtu easier to what the stat.
In the next few months, we'll start publishing monthly data to provide.
Use investors view into our multi market making activity.
And we will plan to note about key developments in our business with these releases.
Finally, we declare customer in 24 cents dividend for the quarter, which will be paid or March to achieve.
Now I'd like to turn the call over to the operator for questions and answers.
Thank you.
And as a reminder to ask a question you any to press star one on your telephone to withdraw your question pressed upon the key.
Please stand by law, we compile the Kevin a roster.
And your first question comes from Rich Repetto.
With Piper Sandler.
Yes, good morning, Doug and good morning out I guess the first question is on on the market, making results dog and slide 13.
Which shows the rule six so five.
Marketable volume I guess, you know what's it seems like it's highly correlated with the results showing.
Volume and market share and proven from Twoq and I guess could you go a little bit deeper on what might be the drivers of that and then.
I know, we get some other extraneous factors like zero commissions and how sustainable is it going forward I guess.
Thanks. Good question. So a couple of things one I've always said on these calls and I've said in my Investor rounds that market share is not to be all envolve market share with profitability is to be all end. All so we could have a significantly larger market share across the various asset by asset classes and geographies in which.
We participate but that wouldn't entitle tightening bid offer spread and proffering liquidity at a price that's not ultimately profitable to the from a we think we can do that very well better than competitors, because we've got to scale fixed cost plants et cetera, et cetera. You know you guys know that the story, obviously us equities is our largest asset classes bullet is.
Asset class World. So we spent a lot of time iterating on it and improving.
Within us equities, our customer facing segment, all the or the rule six so five segment is a significant portion of our business. It's what we we acquired as part of the night transaction.
And as we've said many times on these calls and in sessions with investors, we spend a lot of time investing in one replatforming strategies and migrating them to Virtu technology.
And some of them are to post trade analytical solutions, we think that help that trading and then as well a constantly iterating on the strategies to make them better more performance and give a better results to our end users in the form a price improvement, but also enable affirmed to be profitable as part of that.
You know, obviously, we're competing with great firms to get market share from the 200 or retail brokers. So we can do that in a profitable way, we'll do that and think of that as same store sale part of the strength of the combination of virtue.
He is our ability to internalize a lot of that flow across desks and across asset classes. We've got.
A lot of Noncustomer market, making businesses once we internalized that order. It. So we can do with it as we choose because we've given the customer price. So those are the kind of antecedents. If you will end the rationale for the combination of the business and so we've done better internally by investing certainly from a macro perspective rich and.
You hit on it the implementation by the large retail brokers have zero commissions has driven more retail volumes the retail volume overall was up.
And that benefits the firm.
Because that's more and more of an addressable marketplace. The other significant part of a zero Commission world is flow segmentation. So when you have brokers now they're not getting paid on a per trade basis. Their interests are 100% aligned with the market maker not just virtu, but our competitors just segment flow.
So which may be more toxic may be more professional in nature and candidly more difficult for a market maker to handle.
We don't have any magic elixir around large large correlated orders that really are more institutional in nature than retail and so when you aligned the interest so the retail broker with the market maker you can have a better performance, we can allocate our price improvement dollars.
More adroitly two real true retail orders that are deserving of those are those dollars and not get run over frankly by orders that may come through a retail pipe, but look feel and smell and an awful lot like institutional water. So thats. The a long winded answer to your question of the various inputs that led to a better before.
Permits and that has continued in the first quarter rule six so five volumes are all public you can see that you know the zero Commission phenomenon has driven more interest. Some of that also is when you see stock like Tesla that retail in particular is very interested in you will see a spike in activity.
Thanks, that's helpful to upon the the segmented flow.
I guess my one follow up would be on the expense side and Alex you talked about it and I'm glad you pointed to the very low end to the expense range high end of the synergy range.
But as you talked about an exit quarter that was low.
Because you look at the quarter 159 million of adjusted expenses.
You know so that's only slightly 16 million higher than that 620, and what you did say it was.
According to the exit low so can can you just talk about what the incremental expenses that are coming out whether it be I guess from my TG in 2020, and how the fourth quarter might be you know like then exiting low quarter.
Right. Thank you rich.
So we expect to make improvements throughout the year.
Which is why I referred to the exit quarter being lower for example.
Communications and data expenses.
We expect a meaningful amount this savings as a final run rate at the end of this year, but we're layering in these savings were expectation of these savings across the year.
3% first quarter, 5% next quarter, so forth a similarly, we find ourselves an accidental landlord.
As a result of two acquisitions. So we have quite a few office spaces that we no longer need I'd have to rent out that takes time and that gets layered into the results across the year.
And there are other similar examples.
Okay, Alright, that's helpful. Thanks, Alex.
Yep.
Your next question comes from Ken Worthington Worthington with JP Morgan.
Good morning, this like taken any funding for Ken Worthington.
Wondering.
Maybe more comments on the competitive landscape with chemo electronic market makers and high frequency trading firms with using staff in light of your number we had a challenging market conditions given the volatility does this at all or change the competitive landscape and where do you see competition going forward. Thanks.
Yes. Thank you for your question, Yeah, but really what you are seeing playing out is what we have been talking about.
Really since we went public which is the virtues story, it's all around scale, if any and I.
Envisioned this from a dozen years ago. The mantra was get it get big can be multi asset class, a and multi geographic as quickly and as it is a low a cost manner in which you can because we recognize that bid offer spreads were going to collapse, we weren't thinking about commission wallets, but commission wallets, we're going to compress.
And so we've built a very large fixed cost.
And a technological company financial technology company that can process, a lot of widgets across asset classes and geographies like we did that on purpose because if you're only focus in a single asset class or if you're waiting for volatility or if you have a quants strategy that is working in a particular marketplace. Those things are going to ebb and flow, but ultimately your cost.
They're going to continue to get to increase look at what the exchanges are doing look at the need to invest in new technologies around microwave et cetera, and so if you don't have that global scale, if you're not truly Matt a multi asset class.
You know you're very strategically limited in what you can do and so you've seen I'm not going to comment on specific firms because I have no information other than when I read the paper the same way you do but if you look at affirm that is limited only to U.S. equities are from that's focused on fixed income or just FX are limited only to the United States I.
I would argue that they're very strategically challenge over the next three to five years and scale in firms like Virtu. When there are other firms that get this mantra as well firms like virtu are not only going to be the survivors, but we're going to be we're going to prosper because.
We've built this fixed cost plant, we have always always managed it.
Four times of a famine and when there's times a feast you see the outsized returns that we can generate and as Alex just mentioned.
Regardless of what 2020 brings in terms of opportunity set on the revenue side I can promise you that there's one thing that we control with costs and we will exit 2020 with a significantly lower cost base. Then with then when we entered it.
And all of those incremental dollars will provide significant operating leverage and operating scale to our model. So thats really what you're seeing that theme will continue.
Because the world is just.
Getting more and more competitive and you need to continue to invest in these new technologies, which aren't cheap.
Thanks, a lot.
Thank you.
Your next question comes from Dan Fannon with Jefferies.
Thanks, Good morning, So I guess my first questions on options curious as to kind of what's changed to allow you to grow at the rate. You are is it more Justin we obviously know industry volumes are up but you're obviously participating in that more so than a year ago.
No I mean, it Dan that's great question I think it's really two things one is as I just mentioned the scale the firm.
We are global and so we are in all these different marketplaces, but more importantly, we invested in the last 18 24 months in a scalable options architecture.
Transacting and being a market maker in a quote base as opposed to an order based marketplace is very very different and so we had to take our architecture, which was really geared more towards the order based environment either equities markets of the world's in the future markets of the world.
And transform that into a truly scaled options capable a firm.
We have a lot of competitors that have years and years of a head start and so we're playing a little bit of catch up but most importantly, we have the scale. So we have the low latency connectivity that one needs between Chicago and New York, We had to low latency connectivity around around Europe, and Asia and the Korean market were connected to all these places so the incremental costs.
Yes.
Bus getting into these various options markets around the world is frankly de minimis. Once we have the technological footprint. So we made that investment.
Over the last two years, we feel very good about where we are from a technology perspective, we know that we are a ahead of the pack when it comes to latency and risk management and cost of execution. So now it's just a question of having the right personnel rolling out be strategies to these options market, which has not an easy circus trick ended up itself, but I'm very very optimistic.
That we can grow this business organically.
Got it and then just to follow but I just want to clarify on the expense guidance. Obviously, the slide says 620 to 650, but.
I think prepared comments you said 620 is the target to low end.
Yes sure yes.
Okay, great. Thank you.
Hi, Dan.
Your next question comes from Ken Hill with Rosenblatt.
Hi, good morning.
Kind of questions on the preliminary results you guys kind of mapped out the adjusted net trading income for January at 100 to 105, I was hoping you can kind of parse apart.
Maybe what parts of that were related to some of the volatility.
And what was kind of maybe more of a kind of ongoing portion of your business in the run rate moving forward and then also got to ask if you could provide any color on the February activity through the first part of the month here.
Yeah, Yeah, well look I mean, it's always difficult to separate the week from the chaff right I mean, clearly volumes in 2020 are higher than volumes in a enough for the certainly for the fourth quarter and for the vast majority of 2019 and that helps us I would comment and note however that.
Realized volatility.
You know has not significantly spike you would think given the macro events out there.
With this horrible virus that certain circling CIRCM navigating the world and et cetera that you would see a spike.
Significant spike and realize vaulted you've seen some of it but it hasn't been as dramatic as one would think and so a you know I'm very bullish on our performance we continue to do well in global equities and the other asset classes. The execution services business has seen it uptake an uptick excuse me in a lot of that is volume driven and I did say.
So thats kind of the color I can give you there obviously, we have the quarters still.
Has about 35 ish or so trading days to go so I don't want to prognosticate too much on where it's going to end up I did say in my prepared remarks that February has continued the pace of January which is.
Good for us to see but again, it's still a less than half of the way through the quarter, but I'm very optimistic in bullish about our performance I think 2020 because of all these macro events, we've got to U.S. election going on.
We've had this contagion the issue and you. It just seems like there is going to be more volume and volatility for the first time in Europe, we had a week, where the notional turnover was more than 30 billion I thought Europe had forgotten the how to trade for awhile, So you've seen glimmers.
A resurgence of a marketplace, coupled with our organic growth in our better performance really that's a in a reduction in cost that's the multiplier effect from the Vertu model.
Got it thanks for the color there.
Had one also on kind of capital with the refinancing complete I know you mentioned some changes in covenants going forward with leverage ratios can you talk about the capital priorities and maybe any additional appetite for acquisitions in the space right now.
Yes, just for clarity there, where there were no covenant changes organic there was confusion I'll put it nicely from the last call.
That somehow Virtu had.
Maintenance covenants, we do not have and have never had any maintenance covenants. So the maintenance the leverage target that I enunciated are just that they're just targets just hard news there's zero.
Financial exposure, if you will revert to the loans are extended to 2026 right. We just reprice them again reduced our interest.
Burdened by $26 million in the last six months so from a capital structure perspective. This firm is in great shape that being said you know as historically, we did in the night transaction and we announced when we bought I TJ you know that we thought that were $125 million of capital synergies, we've already we've already paid back $75 million.
From the ITD transaction, you can look at our balance sheet, which we put out today. There was a significant amount of cash on the balance sheet at the end of the year a good chunk of that is excess and as we continue to combine broker dealers from a regulatory perspective, both here and abroad. You know, we will free up that cash and and payback from that I'm not a guy that likes to have a lot.
<unk> debt against the company, but given our performance and given the friendliness. If you will have fixed income market I feel very very confident about our capital structure out I don't know if you want to add anything.
Pretty much as okay.
Thanks.
Okay. Thanks, Thanks for taking the questions.
Thank you.
Your next question comes from Alex Kramm receive yet.
Hey, good morning, everyone I'm just wanted to ask the.
January February 1st quarter question, a little bit different can you maybe just talk about how the mix may have changed a little bit all of its basically consistent with the fourth quarter and I'm asking for example, because you know energy volumes have been really rock solid in the first quarter, so far and I know, that's historically been an area, where you've made a lot of money. So just just Q.
As you can give us a little bit more color on maybe somebody other businesses now they're trending.
Yeah. This is I guess is the problem with with giving a January numbers, because we're doing a financing I give a little bit you guys always want more Alice [laughter].
Look I mean, I always some mix stupid, yeah, exactly that and I. Appreciate you got a job to do I get it I get it look I mean, our market, making business was up substantially from the fourth quarter not surprisingly I'm a lot of that is.
Phil driven by U.S. equities, because that's a large portion of the marketplace you can see with the six so five volumes are it's no surprise.
It will be no surprise to you that you know the performance in that segment of our business continues.
Continues to proceed I think Oh.
I'll highlight again, your our European equities business post method to.
Was really kind of a kick into teeth, having dark pools and broker crossing that works effectively being outlawed by mid two and so you know we've seen we continue to see growth and an uptick there on the execution services side I commented before that a lot of that is volume driven right and Europe really how to down year.
Last year in terms of volumes that really impacted particularly the historical.
Hi, TG business, which was very dependent on European volumes, particularly in our in our alert product.
In Europe, and so you've seen a bit of resurgence there as European volumes again tick back to more than 30 billion notional turnover per day, so and as well Asia alert.
As experienced an uptick as well so I think it say, it's really all of those things again the quarters, you know less than halfway done. So I don't really want to comment more on that I just wanted to give you guys.
Sense, because we had disclosed January as part of our refinancing efforts that.
We are seeing a resurgence of of opportunity set a across the market.
And you know I think look at some point, we're going to soon as I've mentioned, we're going to be putting out monthly revenue capture.
And in a in index. If you will that is the spoke to virtu to give you guys a little more insight into the business Alex's working on that and once we get our 10-K filed will sit down with you guys and kind of take you through that so we give a little more clarity into how we're performing.
Month to month and you can see the capture ratio is when you're gonna have to be all kinds of great questions going for.
Right Fair enough and then I guess secondly, just stay consistent with always wanting more you you'll have that impressive ETF slide obviously your deck, but but the one thing that's missing is any sort of revenue indication.
So I assume it's pretty small still but maybe you can just tell us how much roughly this business is contributing today due to the overall business and then maybe more importantly, like how do you view the total addressable market. They are maybe in terms of revenues and how you are you really think you're gonna be gaining gaining share as it is it just do being better than others.
In terms of technology that being aggressive on price so little bit more color would be helpful. Thank you, yes, yes sure I feel good in fairness you know when you have a company has got more than $1 billion and net revenues things are going to look smaller comparison I'm very proud of the business. It is you know a single digit percentage of what we do right. So it's they know what.
Eight figure business ended grew 40% last year was an eight figure business the year before right. So it's not insignificant business and there's grand scheme of things. It's her to style in that it's not overstaff and scaled and use of technology and good risk management, all those kinds of things and and I'm a big believer in the gross the growth excuse me of.
Have a passive products around the world and we've been a valued partner.
Frankly with ever of every.
Yeah issue or there is out there and so the the addressable market is large you're very familiar with it there is a number of competitors out there.
And if you look at the total addressable market of being you know Andrew is telling me somewhere in the neighborhood of $25 billion to $30 billion globally trillion excuse me you know.
During the year we.
Around 10% of that pass through the Virtu pipes, either on a screen or through in our Q system and whatnot. So it's really a building up that capability, we've never been in RF Q or block style.
Market maker.
At legacy Virtu night never really did it in any meaningful way outside of the United States and so we're very confident that we've built a product suite in the United States. That's very successful the revenue number I gave you is from before is 99% U.S. and as we move that product to Europe and Asia in a virtue style.
He with just a handful of people. We think we can be competitive for two reasons. One we have the lowest fixed cost plant out there and to thanks to our great friends that I TG in Europe and Asia, then here in the United States. We have an unbelievable distribution network, we have very very talented TG former IBG employees.
In the U.S. Asia and Europe in particular that have real subject matter expertise in EGP market and have real distribution, our friends at I., TG, where as I like to refer to them as sort of like a human our acute machine.
Before Virtu got involved with them they had a significant ETF business I give them all the credit in the world without a principal trading capabilities, some marrying virtues principal trading capabilities with the trusted distribution capabilities and network that the talented people had.
Good day bucket to include Canada, as well it would be in Canada, where this is significant GTF marketing ICICI previously had been a bit of a market maker up in Canada. That's a recipe for success so combining.
The technology and risk management, a virtue with the acumen around actually how to trade blocks in response or excuse that night broad and marry that with the distribution of by TJ I think thats a game winning formula.
Alright, thanks for the additional color.
Thank you.
Your next question comes from Kaimon Chung with Evercore.
Hi, I'm. So I appreciate your comments on the performance of global Fig, maybe I'm, just looking a little more color just what drove the softest them, particularly maybe provide any color on the progress with the cross sell opportunities with them.
Market access such as like you have products.
You touched by yes.
Okay.
Yeah, I'm sorry, the first part of the question was about global fix and the performance in the fourth quarter that what you're asking me Yeah, and then just maybe just an update upon cross with cross sell opportunities that you're most of the punch it.
Sure sure got yes, so look I mean.
The fourth quarter was disappointing in terms of the performance of global FICC. However, if you look at the indices right.
Particularly around volatility.
You know it was it was the opportunity set was was very muted to put it mildly I mean.
The I think this is someone told me. This is the lowest volume volatility that one has ever seen in the FX market in something like 20 years in the fourth quarter. So we're not alone in that paradox of trying to squeeze you know juice out of a lemon that that unfortunately without a very robust limit in the fourth quarter. So.
I think thats, a little bit the marketplace looking but again I come back to hey, we're a scaled very efficient market maker. So were FX business. Although it struggled you know it's got a dozen people in a globally. So it was still if you will have very large contributor.
To the bottom line here in terms of new products in the NAV product in particular.
The sales effort there has been nothing short of terrific to our friends at market access are very enthusiastic about it I think it's a unique product because frankly from what I'm told that no. One else really has something that is as real time and robust.
And so in the market access for two partnership is working out to be everything I thought it was going to be in that so.
And then just maybe shifting gears just want to get your thoughts on.
Things like fractionation isn't directing that.
You foresee that business longer term.
Yes. Good question. So look I mean, all of these things are intended to drive more participation into the capital markets right and we encourage those things loans are done in a thoughtful transparent way, where investors know what they're getting themselves into.
So you know fractional shares is obviously a symptom of a marketplace, where you have companies there are not doing stock split thread and people find a challenging the come up with a couple of thousand dollars to by Amazon that type of thing. So that's obviously.
The good incentive from our perspective, right, because it's driving new participants into a marketplace.
Where hopefully they will get experience and then become more significant participants in a mark but those are all good things more perspective. So we worked very very closely with our retail partners to ensure that they have a product that they can offer to their end users that is as you know.
Transparent and efficient as possible. So that these new participants can enter into the marketplace in a way that they feel good about so all of those initiatives are ultimately products that we work with our retail partners to help fashion and ultimately, we think or beneficial for our business.
Thank you.
Thank you.
Next question comes from Alex Blostein with Goldman Sachs.
Yes.
Oh, Hi, since June including foreign earnings.
You talk about the I mean, now, but can you give that deal seeing and when I want to tubing focused.
Moving on the marketing side on isn't on the agencies.
Oh, thank you.
Yes, So obviously were public company. This is an f. the.
Complained forum so there are no plans or.
Nothing pending right now I think look what I said in prior calls is I'm very comfortable with Afirma is right now we have a large suite of products on the institutional side, we cover everything from appreciate the post rate and everything in between other than exchange, we own a piece of an exchange as you guys now on the market making side.
We are global and multi asset class and we firmly believe we can get into every other asset class, we want to be a in inorganic fashion.
We're doing that fixed income we're doing it option.
If there is an opportunity to accelerate that growth.
By doing something that is a strategic and accretive right to my shareholders I'll always look at it so not surprisingly because we have a currency and we have.
You know a track record of execution and Mr. Rosenthals joined us.
For for you know this is one of his purposes and mandates here you know we've been inundated with opportunities and we will continue to be inundated with opportunities because the world is getting a lot more efficient and as.
I was asked in the prior question. There are firms that will are struggling and we'll continue to struggle again, we're not going to do anything that we don't feel really good about that is not keenly additive and strategic to what we're trying to do.
And it's not a you know either immediately or very imminently accretive to our shareholders. We don't need to do anything right. So we're going to be an opportunistic purchaser I'm a big believer in doing that because I think we can create a lot of value for our shareholders, but ultimately that's the beginning middle and end of every discussion how does this benefit virtu how's it going to make.
As a better from does it provide us an opportunity set we otherwise wouldn't have available to us and from a financial perspective.
Is it is it accretive.
To our results and we have the capacity to do this we have a currency and we've got borrowing capacity to do this and that's the important mandate for offer.
Thank you.
And your last question comes from Chris Allen with Compass point.
Good morning, guys I wanted to drill into little bit the lose share gains of six so.
I was wondering if.
Yes, you are doing anything differently to gaining good rental share or the payers were pulling back in when do you think that was due to the market environment or something specifically from a competitive perspective.
Yeah. It's a good question I mean, it's always hard Chris to say you know again is it is it wieder chaff right is it the fact that we've gotten better right and so we can we can sustain a.
A more acute price improvements schedule. He you know were collapsing the bid offer more or is it.
You know a competitor frankly, just as had enough because they're losing money in providing this price improvement I think it's probably both.
I want to repeat again for the home team time. This is a very competitive.
Very difficult business to be in if you're not scaled if you don't have the benefit of 20 years of Knight capital and you don't have a low latency very adroit.
Technology platform you can't be in this business, we are providing real price improvement right better than the national best fit a better best offer to like 99 percentage or so of the orders that we.
Then I come to virtue and I don't have the final numbers, but we provided somewhere in the ZIP code 350 or more million dollars or price improvement in 2019 in 2018 that was $433 million. So anybody to thinks that these orders come in and we just kinda clip a pending on them is spending way too much time on Twitter right. This is a very.
Every very difficult business to be in and so yes competitors, you know ebb and flow, but ultimately because we're a scaled firm that's multi asset class and can internalized that a lot of this and have great people and great models and now great financial technology, we think.
You know that that ultimately scale be get scale and we're going to continue to be a winner in this space.
Ladies and just one quick follow up I was wondering if there's any kind of market anomalies that you guys were benefiting from recently I'm thinking specifically about so which is you mentioned earlier I know you guys are sort of take advantage of these anomalies I was wondering.
Getting back the question sustainability moving forward.
No I mean, I wouldn't call Tesla, Mark I mean I'd.
Trades the way trades right now I don't comment on individual stocks and I have no.
Frankly clue why tricks await does I'm, a micro market structure person.
I I think people overstate Oh, my God Thats Gracas test was trading when it has really sharp moves like that it's not easy thing in the world for market maker to handle right. I mean, we again, we don't have a magic elixir around rate in predicting the direction of markets. You know, it's a very very challenging to do so there are plenty of times.
You know.
Where we might have a portfolio that's long something in the stock move the other way and we lose a whole bunch of money right. So it's not like.
A single instrument ends up being a significant part of what we do it's really the full compendium of all those into the oldest instrument. The reason I mentioned Tesla is because it it did drive a significant amount of volume that's really the key this firm is really about spread capture right and about volume and then volatility so when there's more volume when I look on the screen.
And then we print a 7.4 billion chair day, or an $8 billion day and Europe is doing 32, God forbid 38 billion notional maybe it'll hit 40 again right. That's a good thing ultimately for the firm and we've invested a lot of money time and resource over the last three years to ensure that we continue to get better quality.
Individually and then quantitatively that were there to capture this volatility and volume as it appears episodic clear unfold.
Thanks.
No no more questions at this time.
All right I want to thank everybody for the partners for their participation I wouldn't be remiss. If I did not think Andrew Smith for as many dedicated years Investor Relations has not been taken over by by Deborah Who's not going to provide enough. It Andrew still with the farm Bill deals a lot of market structure and runs a lot of products for us. So thank you Andrew and I look forward to talk.
He would you guys next quarter. Thank you. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Oh.
[music].