Q1 2020 Earnings Call
Okay and welcome to the Virtu financial 2021st quarter results Conference call.
All participants will be any listen only mode. So do you need assistance. Please think like conference specialist by pressing the star keep bullet point zero.
After today's presentation, there will be an opportunity to ask questions.
Please note this is being recorded.
I would now like turn the conference over to Debbie deleverage as VP of Investor Relations. Please go ahead.
Thanks, operator, and good morning, everyone. Thanks for joining us and you know our first quarter results were released this morning and are available on our website. Today's call may include forward looking statements, which represent parties current beliefs regarding future events and are therefore subject to risks assumptions and uncertainties, which maybe I outside the company's control.
On today's call will have Mr., Doug seafood, our chief Executive Officer, and Mr., Alex I, All our Chief Financial Officer, They will begin to.
Beginning with prepared remark [laughter] your question.
Please note that our actual results and financial conditions may differ materially from what indicated any forward looking statement. It's important to note that any forward looking statements made on this call are based upon information presently available to the company and we do not on church undertake any or update or revise any forward looking statement as new information becomes available.
We refer you to the disclaimers in our press release and encourage you to review the description of factors contained in our annual report and form 10-K, another public filings during today's call will refer to both GAAP and non-GAAP results. In addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income adjusted net income.
Adjusted EBITDA and adjusted EBITDA margin non-GAAP non-GAAP measures should be mesh should be considered a supplemental too and not as superior to financial measures prepared in accordance with gout.
You'll find a reconciliation of these non-GAAP measures to the equivalent GAAP term in our earnings materials with an explanation of why we deem that information any meaningful as well as well is how management uses these measures.
And with that I'd like to turn the call over to Doug.
Thank you Deborah good morning, everyone and thank you for joining us to review virtues first quarter results. We hope that each of you and those you care about our safe and well, let me start off by extending our sincere appreciation for the bravery and dedication of emergency responders.
Health care professionals, and those who leave their families everyday.
To ensure safety and maintain essential services.
I'd also like to thank everyone at Virtu for their exceptional resilience in these challenging times as well as our customers for turning to us more than ever and putting their trust and this from our people our technology and our products.
To manage their risk across classes globally as a from a virtuous committed to furthering cobot 19 relief efforts in conjunction with the Viola family Foundation, we continue to donate food P.P.E. and have made financial contributions to over 70 charities and health care facilities in communities, where our employees and clients live and work.
Worldwide. We have also pledged to match up to $5 million dollars of employee contributions to pandemic related relief efforts and families. Indeed.
Before discussing our results I would also like to highlight important aspects of virtues internal crisis response, including our responsibilities to ensure the well being of our employees to continue providing best in class service and to provide stabilizing liquidity to the global capital markets starting in mid January to prepare for any potential business disruption.
Since we initiated our global business continuity plan I began a phase rollout by early March or offices were on locked down with approximately 95% of our staff working from home.
As a global financial technology from we have the networking security connectivity capabilities in place to make this happened quickly and maintain business operations, while ensuring that each of our 1000 employees could remain at home and safe.
Our BCP team is developing plans for bringing limited groups of staff back to offer says once we have determined it is safe and our people feel comfortable to do so our approach will be methodical and generally more conservative than government issued guidelines, we have a deep commitment to the health and safety of our people and will not pressure.
Or forced folks to commute or return to the office before they feel comfortable. Furthermore, we have made a commitment to our employees that no broad based layoffs will be initiated this year and we will continue to offer support as individuals faced the implications of this crisis.
In short nothing is more important to me then the safety and well being of our employees.
During this period of extreme volume volatility our institutional customers continue to rely on our assistance to navigate a uniquely challenging global environment locate in access liquidity transfer risk and provide robust performance analysis.
Under prolong market stress Virtusas has performed as intended they are designed and diligently test it to withstand outsized levels of order flow and load. This is critical to.
Client support as well as to ensure the transparent and orderly operation of capital markets worldwide, given our scale clients looked over to for a device analysis liquidity execution services.
Developing client relationships by providing unique content and advice remains a key focus as we work to ensure clients fill connected to us into their peers more than ever despite working from home as part of this effort. We are regularly hosting interactive virtual client content sessions weve dubbed virtue University opportunities like these exciting they pick.
This is the core virtues partnership ethos, we want to empower clients to gain and retain a competitive advantage through our technology for us it's a clear when when scenario virtually the client and the capital markets all benefit.
For our retail customers, we continue to provide superior execution quality delivering over $365 million or price improvement in the first four months of 2020 more than the entire amount provided in all of 2019.
The first quarter of 2020, we will be defined by the global economic impact of a pandemic with massive intervention to support global economies precipitating record trading volumes and volatility all things considered market infrastructure handled the surgeon volumes extremely well with safeguards in circuit breakers functioning as designed.
We continue to have an active ongoing dialogue with regulators exchanges central banks in government agencies and have been impressed with the fiscal and regulatory responsiveness.
Overall, our firm has navigated this crisis from a position of strength fortifying, our leadership position and highlighting our significant role in the global markets.
Now I would like to review, our Q1 results, Alex and I will keep our comments brief so that we have plenty of time for QNX.
As you can see from our press release and supplement presentation, we delivered exceptionally strong performance I Miss admits the volatile market environment in Q1, we generate an average of $12.7 million per day or $785 million and total of adjusted net trading income more than Triple Q4 2019.
Okay.
I'm also pleased to report that this strong performance continued into the second quarter with Aprils average daily adjusted net trading income up about 8% first the FERC versus the first quarter for an adjusted net trading income range of approximately $284 million to $290 million or 13.5 to 13.8 million.
$1 per day. This has meaningfully ahead of Q1 results as illustrated on slide four.
These results were driven by a number of factors some of which we have some of which have a compounding effect on each other while there are many nuances. The recent market environment is best summarized by looking at changes in volatility volumes and retail engagement.
It is important to consider the impact that volumes and volatility often an indicator of wider bid ask spreads have on our businesses.
During the period, we observed a five fold increase in realized S&P volatility volatility and nearly a 70% increase in us equity volumes over the prior quarter retail engagement surged early this April and early this year and spiked in April continuing a trend that began in 2019 with the move to zero commissions of course.
We saw a similar surges in volume volatility in global markets, an asset classes as well, most notably in our commodities business and specifically on our crude and global death and goal to death globally.
In addition, our FX business saw significant growth in the first quarter, leading to quarter over quarter FIC results that increased over 200%.
While the environment presented increased opportunity our record setting results significantly benefited from previous investments in several strategic growth measures as evidence from our overperformance in the first quarter and our sustained performance into the second quarter.
As we have discussed on prior calls the investments we've made in scaling the K CG quants strategies globally, our globally TF block desk and our options market business. Among other initiatives have contributed in have contributed in prior quarters when volumes and volatility spike the strategic initiatives as well as our continuous enhancement and global.
And asset class expansion contribute substantial returns for our by improving our yield on each subsequent opportunity.
Our low fixed cost structure drove significant margin expansion as normalized EPS was $2 in 5%.
2005 cents up 659% from 27 cents in Q4, and adjusted EBITDA totaled $570 million, 400% higher than the prior quarter and 32% higher than our adjusted EBITDA for all of fiscal 2019.
Our adjusted EBITDA margin was an impressive 74% in the first quarter.
As you can see on slide five our market, making segment delivered record breaking results in the period with anti soaring more than 335% over the previous calls.
And our execution services business, which includes fixed and recurring revenue sources, we recorded an increase in anti IL, 27% over the prior quarter.
No increases and market volumes and turnover benefit both of our businesses increases in volatility and wider bid ask spreads compound the opportunity for our market, making business and drive outsized returns.
Because we're a global multi asset class platform. These results were further pronounced as the recent macro volatility rippled across the various asset classes end markets, where we operate.
Our risk management and market, making technology functioned as designed and we maintained our disciplined focus we did not take on new or outsize risk as we manage an avalanche of orders and executed record amounts of shares which on many days exceeded three and even 4 billion shares per day.
Us equities.
Given the exceptional market volatility in late March we concerted prudent to Opportunistically supplement our short term borrowings broker dealer borrowing capacity by $450 million to ensure that we're able to meet the liquidity demands of the global markets and provide execution services to our clients. The 300 million dollar facility provided by our found.
Under Vincent Viola has not been drawn upon and is set to expire at the end of September.
Some aspects of the market, maybe starting to settle down in recent weeks. However, many drivers remain very strong in Q2 to date average us equity volumes and April remained over 80% higher than last April and VIX was over 30.
Growing retail engagement continues as one of the largest drivers of our market, making results as has been reported retail activity is at or near historic highs and recent disclosures from the major discount brokers indicate this trend is continuing.
As I mentioned in April we delivered $13.5 million to $13.8 million per day of adjusted net trading income and 8% increase over our average for Q1. In addition, we have sustained market share growth not just in our us equities business, but also in virtually every other market globally.
We view our performance this quarter as integral to the vertu value proposition.
Constraining the versatility of our platform and the sustainability of our business model in calmer markets, we deliver significant margins and profitability by controlling costs and maintaining a high level of service to our clients.
Add to this the outsized returns we realized an extraordinary environments like Q1, and you can appreciate the attractiveness of earnings model, those who are familiar with our business understand that our growth is not linear but rather follows an uneven pattern correlated to market volumes volatility and customer engagement. Our growth is comprised of a solid but expanding.
Foundation of recurring and consistent high margin revenues and calm markets with outsize returns during busier times.
These outsides gains may obscure the growth of our baseline earnings, but our foundation is driven by organic growth from existing businesses, which include servicing our clients liquidity and execution needs plus new strategic initiatives that have increased our baseline over the past year.
These initiatives include expanding our presence in new products and markets driving operating efficiency, optimizing our capabilities and driving client growth.
These organic growth initiatives delivered attractive gains in the first quarter, comprising approximately 8% of our anti in the quarter as compared to the negligible at the end of 2018, specifically as we shared on last quarter's call. We're starting to realize the benefits of our investments in our ETF block franchise at the end of 2019 I'm pleased to report that.
We've seen significant growth in 2020, our year to date average daily PNM has increased over 285% and we have already realized 27% more piano. In 2020, then we did an all of fiscal year 2019.
We also achieved significant results from our introduction of Quants style, Casey strategies into new markets and asset classes and there is significant runway in this opportunity as we continue to scale. The business. In addition, virtue capital markets, which assists public companies looking to rate primary capital raised over $500 million of equity capital through.
At the market offerings, so far this year as client activity accelerated in the second quarter as issuers looked to access our public equity markets to raise additional capital.
Our longer term strategy of acquiring large financial service firms adjacent to the over to core business streamlining enhancing them technologically and operationally from the inside was again validated in the first quarter.
Our results are more than just a function of market volumes and volatility higher retail engagement remains a key driver of our customer market, making business, which has benefit benefited from the growing trading volumes fueled now by zero commissions and more recently, new as well as season traders working from home and taking advantage of market volatility.
As you can see from slide five IB K., our shares traded and our rules six so five volumes reflect this trend in Q1.
Slide six illustrates virtues, increasing participation and rule six so five volumes as we have continued to grow our market share by competing on execution in service quality, especially in his exceptional times.
It's important to understand that addition to the consistent base of recurring profits. Our business provides the opportunity to be long volatility a natural hedge to the market producing outsized returns in times of market disruptions plus a longstanding track record of returning capital to shareholders.
We remained committed to delivering an attractive capital return for our common shareholders. Since our IPO. We've returned 65% of capital consistently paying a 24 cents dividend for 20 straight quarters. This rate of capital return increases to 69% when including share repurchases.
In addition, as we demonstrated in 2018 2019, we will be responsible with the net cash we generate by diligently repaying our term debt.
In light of the returns this quarter, we plan to prepay 200 million of debt before the end of the second quarter saving an additional 8 million in interest expense. We will continue to apply our free cash flow to reduce our term debt to lower debt to adjusted EBITDA with internal management target of two to one by the end of 2020.
Alex will provide more more detailed revised 2020 expense guidance, but in some we remain committed to disciplined expense management as demonstrated by our previous track record related to expenses. However.
As a result of the global pandemic and our commitment to our to our 1000 employees globally. We have increased our cash compensation this quarter to reflect onetime assistant payments to employees related to covert 19 higher than targeted head count as a result of our decision to defer any reductions in force in 2020 as well as an increase in our cash.
Comp accrual related to our outstanding anti results to date.
I am excited about the outlook ahead, the attractive fundamentals to our business continued to persist and our ability to convert opportunities into results has strengthened as a result of our integration efforts and strategic investments.
Since our inception, we have built a highly respected global franchise powered by the best people in the business and our scaled singular multi asset technology platform.
And now I'll turn it over to Alex who can provide further details on our financials.
Open the call up for question Alex.
Yes. Thank you Doug good morning, everyone.
Thank you for joining us in these unusual time.
I'll just touch on the financial high points as I know many of you want to get to the QNX.
In the post quarter GAAP net income was 388 million.
And a record setting 400 million normalized adjusted net income.
Also record adjusted net trading income, which is our trading gains net of direct trading expenses was 785 million.
GAAP basic and diluted earnings per share.
Yes, $1.80 cents and removing one time integration costs and noncash item normalized adjusted earnings earnings per share was $2.05 per share sorry.
Turning to slide 11.
We remain committed to maintaining our disciplined focus on expense management and achieving our previously stated operational goals long term.
We revised our guidance for occupancy overhead and cash compensation.
Reflect an increase solely to cash compensation for the reasons Duck, just mentioned, including an increase.
Sensation accrual as a result of our significant outperformance today.
As you would expect in operations and that men, we had a substantial decrease and travel expenses in the post quarter end.
And we expect almost no expenses for travel and marketing events for the second quarter.
As Doug mentioned, we plan to repay 200 million of our term loan that during the second quarter further reducing interest expense by 8 million per year. This is in addition to the $10 million of annual savings.
Secured earlier this year, when we repriced our term loan.
Finally, we declared a customer 24 cents dividend for the quarter, which will be paid on June 15th of this year.
Did that.
Great. Thank you Alex before we move to Q and I would like to quickly note that despite our outperformance. So far this year, our strategic priorities remain unchanged, we will continue to deliver liquidity and value, adding products and services as we adapt to the market's evolving needs.
Our or already sizable scale affords us the unique ability to continue growing our capability without increasing overhead.
First quarter illustrates that our focus on constant incremental improvement has enabled us to realize stronger results at each opportunity and that our global multi asset class scale allows us to participate and multiply those opportunities and service more clients wherever they are.
As we can front the latest challenges we remain focused on disciplined risk management operational excellence and investment in scale technology and infrastructure that is ubiquitous across asset classes and geographies. All contributing factors that helped to ensure that virtu is prepared for whatever comes next to our employees in our clients. Please.
Stay safe, we'll get through this together and finally on a personal note as we announced earlier this week, Joe Maluso will be returning to over two.
We all are thrilled by this development and no one more than me you'll be hearing more from Joe on our next and subsequent investor calls.
Operator, we're now ready to begin the nice session. Thank you.
I will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before passing the keys.
Withdraw your question. Please press Star then too.
First question today comes from Rich Repetto of Piper Sandler. Please go ahead.
Yes, good morning, Doug Good morning, Alex and.
Also welcome back yard hopefully listen to the call.
Congrats on the.
And in quarter.
And.
Thanks, and all the disclosure as well. So my first question is on page six Doug when you look at in the April disclosures helped tremendously when you look on page six.
The rules six so five shares looks like April.
Shares or pretty close to March.
And it seems like when we look at I.B.K. our shares they were down a little bit more like about 20%. So I just want to get a better picture retail.
Peers at the retail you're right to the overall retail.
Broker base is trading.
Yeah.
Relatively flat with with March if thats, it and see if thats the correct view.
Yes. Thank you. Thanks rich thanks for the good question. So overall it was a good article about that this week or that I saw retail as a percentage of overall market volumes housing has increased substantially in its probably driven by the two factors I mentioned in my script.
Zero commissions when you can do something for free I guess people do it more often.
And number two cents vast preponderance of folks are working for home or at home there's more opportunity.
To trade during the day, so that has driven retail as a percentage of overall market volumes and certainly we have seen an uptick in our market share because of that but.
Correct the norm could share in April is similar to what it was in March.
And we continue to be competitive so that.
Continues to be a driver of our of our profitability in our growth and again I've often said on these phone calls.
Market share tends to be over overstated in over in People's focus on a lot and we could we could increase our market share dramatically, but that would make us on profitable right. It is a very competitive market. There are three or four other great wholesalers out there that that.
We compete with everyday.
And we're competing on execution quality.
In the form of price improvement in service, obviously biggest we're providing guaranteed execution. We are the market centre and so we we try very hard to provide that great customer service, but also do it at a.
In a manner that is both attractive to our clients and their end users.
I gave you a pretty outstanding amount of price improvement that we provided in the first quarter just boggles My mind, that's not reflected in our financial statements at all that's literally Prince that go to the clients and users that they see on their conference.
And we do that no matter, which as you know again.
Marginally profitable to us on individual trade and then overall, given our scope and scale generates outsized returns.
Great and one follow up Doug.
Thanks for the sort of the guidance on what you're going to do with the.
Excess cash you generated as far as paying down debt. So I guess my my question would be just on the sort of the cash puts and takes.
Consumption in the quarter, you set up the revolver, but you didn't draw it down.
I know clearing requirements I believe.
Jumped up as well, but could you just go through sort of the trends and has that all a lot reside.
Declined.
With still elevated volatility, but not like March.
Yes, yes. Thank you great point I mean, obviously when there's increased volatility in the world.
All of the clearing houses and prime brokers that we deal with them in warehouse wherein.
240 different marketplaces, and 37 different countries as a market maker and 50 countries as a.
As an institutional broker. So there is different rules and different margins and cross margining and whatnot and obviously, we strive very hard to be as efficient as possible that the vertu hallmark with our capital, but clearly when has increased volatility in the marketplace. You see it you cover licensee may you see when when when crude prices.
Go negative obviously, they're going to increase their margins and so we have to be prepared for that as a firm and allocate our capital accordingly and so.
The NFCC here in the United States, and see EMEA and ice and clearing houses around the world certainly we saw elevated.
Margin requirements.
And we adjust our trading on the market, making side and then do our best on institutional side too to to deal with that in the most appropriate fashion, we thought it prudent in March.
To obtain additional liquidity for a broker dealer, including the 300 million from my co founder Vinny because frankly, we thought if this continues there is really going to be more outsize opportunities.
And.
It's easy one phone call.
If you obviously understands the opportunities we'll do it on an unsecured basis and so with a no brainer.
Fortunately or unfortunately, probably on your perspective, the market calm down on the opportunities have cited somewhat from March and so we havent had a need to draw on that we have substantial cash in the firm generated from the profits that trading profits that we generated so were in as flush with liquidity provision position excuse me.
As we ever have been in the 12 years that I started vertical but again, it's nice to have that ability to draw on that if we see opportunities around the world Rich, where we want to allocate our capital because again, it's not just us equities right. It could be currencies. The gold market has been incredibly attractive and crude everybody watches.
TV and sees what happens so that gives us a great opportunity to provide two sided liquidity in those marketplaces and generate some of the outsized returns that you've seen in this quarter and in an in April.
Got it.
Congrats on the great quarter in that you would your family the team I'll stay healthy.
Thank you very much rich I appreciate and same to you.
Operator next question.
Operator.
Debbie you on phones.
Hey, guys, we stand alone.
Dan Fannon.
Please go ahead.
Hi, Thanks.
So just you obviously highlighted just printed a record quarter highlighted a bunch of positives I guess, if you look across your business globally at product level is there any kind of sub sector that didn't perform as well as you would have thought given the macro backdrop. We just went through as we think about April anything that has had.
A meaningful change we've seen energy, obviously be a bigger part I'm sure given what's going on oil, but anything you would point to Thats maybe not.
Performing as expected.
Im racking thanks, Dan for the question I'm racking my brain to try to give you an honest answer as I always do and.
Obviously, I get a daily weekly monthly.
Report of how we're performing against budget and everything was up double if not triple digits in the first quarter. So it's hard for me to.
Appointed anything that that Didnt perform from Asian, and European equities.
Obviously, the us equities, Canada.
Mexico, Brazil, and certainly our FICC business were all up.
Significantly from from the fourth quarter of 2019, so the honest answer is no I.
I mean certain.
Asset classes in areas, where.
More exceptional than others, if I would point out one thing, but other than that and you're right in April.
We saw this unprecedented volatility in.
Particularly in spot crude on the CMH, which we.
Anticipated I give a lot of credit to our energy desk down in Austin and the head trader, there's just a genius young man.
We were way ahead of the possibility of negative prices and how that would impact our ETF trading and ripple through and so we were very very well prepared as affirming handled it very well is very proud of that.
Great that's helpful.
Just.
Clarifying on the expense pickup.
75 million dollar number in one of the agents. So if you could break down the three buckets in terms of the increase.
Associated with the categories, what you disclosed.
Yes, I mean, we have revised guidance.
In the supplemental materials and I'm trying to find one page it's on.
And so we.
We don't give that level of granularity between.
Alex what does it on.
It's on page 20.
On page 20, so we typically don't.
Okay.
Now please get out Hugo.
The 75 million you referred to is.
The incremental bonus accrual that we did on top of the.
More standard run rate to reflect outsize performance.
Yes.
Through the roughly $2 million that we paper Im pleased to a system.
With that grown fires issues right.
So of the increased guidance then you'll see we accrued a lot of it already in the first quarter and that was really reflecting the larger than anticipated head count because of our commitment to our employees number one and two is as Alex just said.
To recognize the outperformance so.
Okay. Thank you.
Thank you.
Your next question comes from Ken Worthington JP Morgan. Please go ahead.
Hi, good morning, and thank you for taking my questions.
I think most interested in where you see.
Cobot 19, possibly leading to more lasting are long lasting changes to the trading ecosystem that might in Spanish benefit for to even after volatility in volumes returned to more normal levels. You have a number of initiatives that seemed like they may benefit more substantial sustainably gosh sustainably some clarity.
Here your thoughts on on sort of the longer left.
Yeah. Thanks, Ken that's that's a great question you know it's interesting I mean, there was a couple pieces.
That I've read about this Moreover shift towards off exchange style trading and more of a need for block liquidity.
And that manifest in a couple of different areas around our from and I think that is something that you will see here.
As a continuing.
Phenomena as people.
Trying to manage risk over the next year or two and as a central banks.
Need to de lever and return to some normalcy over filling the blank I don't know if thats a year or two three could be five years right who knows how long this is going to take in how long.
These programs that it virtually every central bank in the world have put in place and so that means that in us equities.
What we do both in our Ats is and then as a market center will continue to grow that especially means and we saw a huge uptick in in need.
On our ETF block desk here in the us and our nascent ETF block desk in Europe and Asia for.
Unique.
Block size liquidity. It also is manifesting in what we are seeing and we're not good at marketing. So we call everything the something else so the FX, which is.
Direct streaming of FX VF direct streaming of treasuries and fixed income products. So all of those are subsumed within the results you see.
But certainly we have seen a significant uptick in demand for unique.
And competitive liquidity across asset classes, and I think that is.
Something that we'll continue to manifest as people try to navigate how do they manage their portfolios and move in and out of them adroitly without impacting a market I think thats a much more challenging thing to do with the overlay of this unprecedented.
Global crisis, we're seeing but I don't even god willing when that begins to abate. There's still is the overhang of literally trillions and trillions of dollars.
That and that has been and we'll continue to be placed that needs to be priced and then ultimately digested throughout the system in every asset classes that manifests itself. So I think now that's where we've really invested.
In the last couple of years since we made the KC GE acquisition and they have that DNA and they had the distribution that we didn't really have at the legacy vertu from and so that was in the back of our heads obviously, we never anticipated a global situation like this but but just really expanding.
The tools that we have an all in our toolbox to provide two sided liquidity has has proven to be very very keenly important in this new environment.
Great. Thank you.
Then maybe on the competitive landscape, we had seen firms that might be considered your peers, either shrinking or shutting down in recent years reacting to maybe the more limited volatility off which to trade.
What extent are you seeing these competitors start to bounce back like if that from was shrinking I could see them growing pretty quickly, but if they shut down.
It would take time so are you seeing.
How are you seeing the competitive landscape evolves was it look like today versus what it looked like the day before volatility really started to spike and our new.
Competitors sort of successfully entered the market again.
Yes, I would actually think that right now, particularly given.
The volatility in the world and answering the question that rich had posed earlier the demands of central.
Counterparties and Counterparties on a bilateral basis for a more margin and costs that scale is more than ever a premium and so.
Firms.
That are.
Scale are limited to an asset class.
Are going to continue to in my view to be really challenged and I did very very difficult to get trading credit to get capital to have PBS NFC Oems in this marketplace, where there's been some well publicized losses.
From FCM Zen clearing brokers or they're going to be very lows I would think to take on new competitors and they're going to be very theyre going to be looking at their client list as every bank and broker.
Isn't the world and we do right to coal from that client list smaller firms that are sub scale undercapitalized and pose outsized outsized risk reward returns to those clearing broker. So I think again the winners of as I've said many times on these calls I think the winners.
Ultimately of this.
Race, if you will is going to be the large scaled multi asset class integrated financial institutions that provide.
You know market, making services execution services across asset classes geographies, it's no different than any other business because we take this massive fixed cost plant that we have built.
Across all these different exchanges and we're now using it both for on an agency and a principal basis and we're using that same DNA.
For our work flow products as well the backbone of Triton and analytics are are on process of being ubiquitous with the backbone of what we're doing Triton that type of scale I think is going to be paramount for success in an ever increasing.
Competitive marketplace, where.
You just need that scale to invest and continue to keep improving I mean, we don't separately breakout what our R&D is right I mean, obviously, we have a capex budget and we expense what we spend but we spend hundreds of millions of dollars a year in my view on technology. Both in terms of gear, but also in highly talented engineers that do not.
Nothing.
But try to make us more efficient and able to provide a better service either as a principal or an agent and that R&D spend is spread across all in current future products that we have not just equities, but all these other products, where we think we can scale opportunities.
I hope that answers your question, yes, yes. Thank you again.
Thanks.
Your next question comes from Alex Blostein of Goldman Sachs. Please go ahead.
Great. Thanks, Good morning, guys.
Couple of questions around capital and liquidity for you just building on some of the prior comments I guess you made this morning. So I guess first what are your current plans with respect to tapping into credit provided by credit line provided by Venezuela. So you, obviously being down $200 million of debt. So should we think that.
That's really going to be kind of the luck. The next layer of you acts and liquidity.
And then secondly trading capital increased to $1.6 billion to $2 billion from $1.63 billion last quarter, not surprisingly, but curious if you could talk about the average trading capital over the course of Q1.
Hello, Yes, yes, yes.
Yes.
Great. Thank you so.
The just so we don't mix apples and oranges right. So we're paying down $200 million of our term debt. We had roughly 1.95 billion of term debt that we had incurred for the case digi and the DG acquisitions. The same playbook. We file we followed excuse me in 2018, and 19 bought case being 2000.
And in 17 borrowed a bunch of money.
[music].
Extracted synergies we were blessed with some good returns in 2018, we use the proceeds from.
That trading and as well proceeds from sale of an asset to amortize that that down to under $1 billion, we re borrowed.
To buy TGP and we're now in the process of doing the same thing right so free cash flow.
After dividends and Capex.
Goes to amortize debt and we've always had this internal management target, which we've articulated a one and we're darn close to that right now thanks to this quarter.
And if the second quarter continues the way it is will likely be under that plus we're amortizing. So thats, how we run this firm and we will continue to run this from Thats put that on the sort of permanent capital structure side.
He just so we're very clear we entered into the vial of facility and.
Additional hundred $50 million to our other broker dealer facility that we have us with the syndicate of seven banks to provide us access to liquidity for settlement and from margin in case, we needed. It well you know the world changed.
After the fed intervened in late March and the markets kind of settle down volatility went from realized the ninetys down to realized in the Thirtys and 40 still elevated still very attractive to us but certainly.
Less so than it was in late March we had no idea at the time, when we took those steps whether or not the market was going to what's going to continue the way that if it did we thought it would be prudent to have that.
So that we could take advantage of all of a lot of the opportunities where we're seeing after the ETF market in particular were incredibly dislocated.
And those are capital intensive businesses to put on positions with the significant returns and so I think it highly unlikely given where we sit today.
That we would ever need to draw on the vial of facility because at the end of the quarter. As you mentioned, we've had we have more trading capital in this from than we ever have.
And we have a boatload of cash on the balance sheet and then access to.
Our regular broker dealer facilities and the revolver at the parent.
Which is undrawn right now so we're sitting in a capital position that is good as I can ever remember since I started the firm with Fannie and in 2008 and so.
Absent some.
Return.
Of.
80, 90, VIX, which is not other rental possibility I.
I don't see the need to tap into that so we will continue our our plan similar to what we did in 18 and 19 as I said to to amortize term debt.
And to pay our regular dividend.
Great. Thanks for that and then my second question is just around again kind of staying on the capital topic for a second.
I guess get given the need for capital and volatile times can you talk a little bit about how you manage allocating capital between the market maker and the customer business in ex gas services.
Yes, that's a great question Greg question so.
I mean, obviously.
At the end today, I sit and see all the the various books and businesses. We have we have regular way capital allocations that we typically do to our commodities desk, our our energy desk.
Alright, Thats all through Prime brokers, we know what the.
Margin requirements are going to be from the great Prime brokers and we do business with and then in the US equity segment, which is the only segment we self clear.
We and along with other firms, we've obviously reverse engineered what DNS Ccs.
Margin.
Now they calculate margin right. So we try to stay on top of that in the institutional business, a little bit different right, because you're getting orders and from clients and it can be a little and you're not really controlling what orders are getting and what the margin ultimate is going to be we have built and NSC see market calculated for that someone will receive apparent order.
I think all brokers if they don't do this they probably should do this we can kind of price that that order and say, okay. Well here is apparent order for X hundred million dollars of the security based on its volatility here's what would the NSC, we think they're going to charge us in terms of of our margin and so therefore is the commission rate acceptable does it compensate us for the capital that we're going to apply if.
Not we've got risk controls and credit limits with all of our institutional clients. So im not.
Freight if you will have of of applying those risk limits I mean.
No broker I think should have unlimited risk limits with respect to clients and so we manage that intelligently looking at what at particular order is going to cost us and then what the relationship is with the client than what the commission rate is that just good business on top of that we do have a good relationship with a third party clearing firm.
And so we have.
Good to significant percentage of our institutional business today, Alex we faced with a third party clearing firm so they have the.
And obviously, we paid that right. So there's the union Yang of having to pay that broker right, but again, we're using their balance sheet then for volatility so.
I think going forward, we will continue this hybrid model on the institutional side, where we will self clear some and we will we have one relationship now we'll probably added a second relationship as other broker dealers do.
To sort of have to clearing partners that interim in times of volatility in regular times.
We can use.
The good offices, if you will have those of those clearing brokers to partner with us on our institutional business market, making will always self clearing because there is a heck of a lot easier obviously to control your own risk control your own positions as we've explained but on the institutional side I think going to more of a hybrid approach is probably the right answer.
Great. Thanks for all that detail, yes, thank you very much.
Your next question comes from Chris Allen Compass point. Please go ahead.
Morning, guys I just wanted to ask about how the opportunity set is kind of evolved for March through kind of present day.
Mid March to the yen basically everything was taking on all cylinders, albeit retails improved since then.
April it's a combination of very strong retail activity crude volatility still healthy realized volatility in equities.
You know in your prepared remarks that you see some tailing off so maybe you can give some color wonders of tailed off what's remains strong right now in terms of beginning in May we can see that on the retail side thinking as crude tail tailed off and how do you think about maybe the different market opportunities right here right now.
Yes, good question, Chris So.
Yes, you're you're spot on I mean, the last two weeks of March were as volatile and active period, certainly as I have I mean I was the from had started during the financial crisis and obviously, we lived through the 30 exciting minutes of the flash crash, but nothing nothing was like those last two weeks in March.
It's just in terms of the sheer magnitude of the volumes that we were seeing and this is not just us equities I mean, it was beginning the day M&A basically was living here for too so I was seeing.
When the Australian market open to Japan, and then obviously through the European markets and also throughout the day.
I think our our US equity segment tends to overshadow, what we were seeing an FX and we put in some of the volatility metrics in there and so.
Certainly in the second part of March we saw a significant.
You know just unprecedented level of volumes and volatility across all segments that continued in April in still in levels that certainly compared to.
All of 2019, and indeed large parts of 2018 and all of 2017.
We're still significantly elevated right. So it's.
We are.
I guess.
Where you stand depends upon where you sit right. So we're looking at realize volatilities in the Thirtys and 40 isn't kind of saying well. There you know there they are depressed, whereas a year ago. We were looking at single digit realized volatility right. So the marketplace is still incredibly.
Volatile incredibly active and it's not just.
Obviously, a lot of press and a lot of TV.
What was it was taken up by in April around crude but again, we're seeing this in end market places around the world. So certainly isn't as high as at the end of March now and so the only my only point in the comments was that.
While we don't have realized volatility of 90.
We're still in the Thirtys and forties and it's not just headed in one direction we've seen.
Spikes up and down in realized volatility as well so look I mean, the second quarter started off very very well and realized volatility.
Is up.
228% or so as compared to 2019, FX volatility, which actually I talked about in the last call with as low as we've ever seen that's up 30% right. So all of these proxies.
Globally more significantly elevated as compared to 2000 2019, and I have no reason to believe given the uncertainty of the world We live in.
You know that we're all facing that any of that is going to change in for the remainder of 2020.
And maybe beyond.
Thanks and just.
A follow up question you talked about the good though to the targeted leverage ratio kind of thing about things longer term.
Just wondering how you're thinking I mean, obviously strong results right now the led to lose continuing how are you thinking about capital deployment longer term.
You are seeing any opportunities in terms of inorganic growth has the opportunity said change at all in the current environment for the reasons you cited before in terms of competitive pressures.
Yes, yes, great question so.
Obviously.
Im a big believer in you borrow money you pay back in my personal life I don't have any debt right. So thats, how I kind of look at the firm and when Vinny and I started we said that was kind of the mantra, we always applied let's keep it lets put in cash and keep our debt very very low so I'm very much committed as we did in 18 and 19 to amortize our debt, we're going to pay 200 million.
Dollars back.
This quarter parents statically every hundred million dollar saves roughly $4 million of interest right. So there's a.
As a increased income statement.
Effect to with doing that.
After that we have bought back stock in the past.
Essentially to kind of keep up with the stock that we're issuing two employees. So we'll look at that.
As we go forward and then with regard to acquisitions and I've always said.
We want to be very very strategic about what we do I think the two transactions we undertook KCG. We're both very very strategic in that they expanded our opportunity set now that we're a big a larger broader from a larger brought a financial services firm I still am of the view.
That there are things that could be important strategic to us.
Either an area an asset class, where we are not.
But they have to add that scale or complete a product suite right. So if it's.
On the institutional side.
I have a really nice CMS product, we've got some analytics products were trying to make those multi asset class. We've got in our Q platform. We have all those products right, we're making them better our their products or services on the institutional side, where we could kind of filling the hole that we don't have or ask class. We don't have those are the types of things are going to look at in terms of how has the market.
As for M&A change I would think it's incredibly difficult right now given the fact that the world is remote to contemplate a transaction I'm a big believer when we make acquisitions that I'd like to go to the target and do kind of my own due diligence by walking around and digging into things and obviously that's impossible right now so I don't know how you get a.
Feel for a company. So I think M&A is going to be very very tempered.
Just purely due to the logistics and then obviously sellers were not the only from Im sure financial services from that that probably had a nice.
Quarter, and a continuing so people's expectations will probably be elevate and thats typically a as a former M&A lawyer I can tell you that typically not a good thing for acquisition. So look I'm very comfortable where we are Chris we have all types of of organic initiatives going on we've got a lot of system still from the.
TG transaction that we need to decommission and a lot of work to do so that's really what internally focused on.
We listened to people, we we continue to get phone calls with things like that and it is a part of our longer term focus but right now.
You know when we can get or organic contribution of 8% in a quarter like this that's pretty cool that's pretty cool. So that's where we're going to continue to focus on.
For the remainder of 2020, just getting a lot more efficient the lot scale, because as I've said a couple of times answer the questions I don't see this.
This this market and these conditions changing.
Significantly for the near future because there's just so much uncertainty in the world and so much risks that needs to be price.
Thanks, Good luck with you.
Thank you.
Hi, Ken if you have a question. Please press Star then one next question comes from Condom Chung of Evercore. Please go ahead.
Hi, Thanks for taking my question.
So the revised operating guidance for this year on the onetime cost related systems payments into sort of in the headcount reduction decisions.
So when and how you're thinking about the expenses going into next year, where maybe you.
Guidance Okay.
Yes. Thanks. Good question, so look I mean.
If you put aside cash compensation you look at the other.
Areas of running this from I mean, we have been very very disciplined about and we've met all of our synergy targets and we will continue to meet though so the guidance for 20.
Would you see right there is consistent with what we had put out before.
Next our employees and.
I see no reason why that would change in 2021 and beyond his long running this from and I intend to run it for a long time. So that is just how we will always run this firm with regard to cash compensation I've articulated.
The reasons why I'm, a big believer in our people I'm, a big believer that.
You don't put people before profits I think the two of them work hand in hand, and so this is a situation where this firm can and is doing important things 4000 people in all of their families and then the greater communities and so we will be very focused on that in 2020.
Assuming the world returns to normal see then you know.
Well, obviously addressed that in 21, 22 and beyond but for right now.
We're doing what we think is the right thing and certainly in my conversations with any on the board.
Have everybody's buying and support for that because this from.
Can and will continue to be an important part of a lot of People's lives.
Internally and externally and Thats why we elevated our guidance for that.
Thank you and then just one quick follow up but once you maybe update on mimics so they got the green light from the FCC.
Any change there given the environment and just given the consolidation and discount brokerage if no I mean, I think look I mean.
Yes, again I'm not speaking form Amex I was getting trouble when I speak from MX, because it will come out I'll speak from X. I'm, just a board member and and an investor but couldn't be more excited about it right I mean, Jonathan calendar as an awesome CEO, great management team I think they're going to.
Launch in September as they've announced and then we've got FCC approval I think the determinism.
And the efficiency and the transparency and the simple ness of that have that exchange is really what.
I envisioned when we help put this syndicate together the fact that.
We got Goldman Sachs, and Jane Street, and JP, Morgan and Wells Fargo now to come in as well I. It's just to me is just complete validation of why we wanted to start this I've lost track of how many banks brokers and market makers. We have I think is 10 11 or 12, but it literally is who who's who excuse me.
Of American capitalism in American financial market. So if there is not a better indication that people are excited about this.
Initiative in that it's going to work then that I don't know what else we could demonstrate right now so couldn't be more excited to be part of it and continue to support Jonathan the great management team over there.
Thank you.
Thank you.
Our next question comes from Michael Cyprus at Morgan Stanley. Please go ahead.
Hey, good morning, Thanks for taking the question just wanted to circle back on the capital markets business you had some ATM offerings in the quarter I would just hoping you could talk a little bit more about that the initiatives that you're putting in place and what sort of aspirations do you have there how meaningful to the speed to virtue over the next couple of years.
Yes, yes, I mean timing is everything in life as they say right. So as I said on a couple of calls ago I Didnt really even though what an ATM business was no exist at them, obviously needs to be a corporate lower so I get it.
When I met the guys that have had really where the godfathers of this business. If you I was just blown away by their passion intensity and how strategically that fit into vertu.
And how we could.
Offer that as a solution to our clients what do I mean, well we've got.
Great order routing capability, and really understand capital markets and more importantly, we have unique liquidity right. We've got really unique liquidity within the firm that we could offer not only our institutional clients, but now you know corporate clients that want to sell securities. So timing is everything the guys got ramped up at the end to 2000.
19 in in the first quarter and then in April of 2020, they really just rolled it out in earnest and would there is great need out there right now.
From a capital markets perspective, and a good chunk of what they do is unique liquidity where.
Effectively.
We're able to internalize.
[music].
If you will a corporate against either internal flow that weve getting we're getting on the market, making side from a retail clients or other institutional clients so effectively.
Able to.
Satisfy those needs internally and then also obviously we're good at routing it out. So we did this with virtually no incremental costs. It is an example of our scale all of the accoutrements, where they're at complements our existing clients in our existing capabilities.
We think we can grow it up to Canada, as well, where we've got a fantastic franchise. Thanks. Thanks for the the TG acquisition, we can do very easily.
Jay DS cross border offerings down into the United States and so very excited to grow this business, we got a bunch of programs in place and.
A couple of guys running that business that are just a.
World Class and hungry to grow at so a great example of how we can grow businesses organically here with with literally zero or very little incremental investment.
Great and just as a follow up question, maybe just on the client style strategies that.
Brought in from PCG, if you could just talking about some initiatives there what's been done so far in and what sort of next on your to do this in terms of rolling yes.
Yes. Thank you that's a great question, so I've talked about this on other calls.
Yes, when we acquired Casey G., we open up the covered right. Obviously, we knew about this U.S. customer base retail business, but boy they had built.
A great infrastructure for rolling out.
More Kwan style strategies that had application outside of all of us equities and for reasons that are important that really hadnt been physical ized. Upon if you will in the case UGI environment, well virtues got technology and if there's something were very good out its physical lies in getting things done right and so we took the great team that they had there.
Paradigm with Vertu style technologies convert to market makers and said, okay, let's see if what we're doing the I'd say, it's works Encana works in Asia works in Europe works across other asset classes and so.
That's not without a lot of hard work a lot of.
You know.