Q2 2020 Virtu Financial Inc Earnings Call

[music].

Good morning, [laughter] financial 2022nd quarter results Conference call.

All participants will be I listen only mode.

[laughter] Copley, especially like so I keep followed by zero.

After today's presentation, there will be an opportunity to ask question.

That's a question you My press Star then one on your telephone keypad.

Draw. Your question. Please press Star then too.

Please note this event is being recorded.

I would now like to trying to accomplish over to that'd be better than please go ahead.

Thank you operator, and good morning, everyone. Thanks for joining us.

Our second quarter results were released this morning and are available on our website. Today's call may include forward looking statements, which represent virtues current belief regarding future events and are therefore subject to risks assumptions and uncertainties, which may be outside the company's control on today's call will have Mr. Douglas Cifu, our chief Executive Officer, and Mr., Joe Maluso or coal price.

Yeah, and co Chief operating officer, they will begin with prepared remarks, and then take your questions.

Please note that our actual results and financial condition may differ materially from what indicated any forward looking statements.

An important to note that any forward looking statements made on this call are based on information presently available to the company and we do not undertake to update or revise any forward looking statements as new information becomes available we refer you to their disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report and form 10-K.

Other public filings.

During today's call me well 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 measures should be considered a supplemental to and not the superior to financial measures her.

Paired in accordance with gap, we direct listeners to consult the investor portion of our website, where you where you'll see supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to get equivalent GAAP term in the earnings materials with an explanation of why we deem this information to be meaningful as well as how management.

Uses these measures.

And with that I'd like to turn the call over to Doug.

Thank you Debbie good morning, everyone and thank you for joining us to review our second quarter results before I begin I'd like to say on behalf of all of US at her two we hope that you and those you care about our safe and healthy.

I will start with a review of our second quarter performance highlights and then provide updates on our strategic initiatives. Joe will then review our financial results and balance sheet before we open the lines up for QNX.

But first an update on how we've adapted to the covert environment and how it continues to test all of us across the globe.

We understood early on that a crisis of this scale demanded that we do more than simply protect our business. We did just to support our people our clients and the communities in which we live and operate.

We pivoted quickly, enabling substantially all of our employees to work from home and I'm humbled by how smoothly. This transition was implemented and continues to this day more impressive still what the speed at which our teams deployed our technology and resources to address a wide range of urgent needs across the globe with respect to our claims and the capital Mark.

It's overall.

These improvements are especially visible when we look at our client engagement not only have we continue to serve our global client base. We've also expanded our outreach to clients to date, we have hosted over 20 Virtu University sessions, nearly all of them virtual on a wide range of topics from work flow and analytics tools algos liquidity sourcing Kroger.

That makes skills and best practices from managing a virtual trading desk to name only a few.

We've seen tremendous levels of engagement with over a thousand clients in attendance from every corner of the globe, we're keeping clients and found that up to date on how her two products services and market structure expertise can support them, while they navigate the evolving liquidity landscape.

With respect to financial performance in the second quarter as you can see from the details in our release in supplement that supplement presentation on slide two we delivered a second straight quarter of exceptional performance. In Q2. We are we achieved an average of $10.6 million per day or 669 million.

Sales in total of adjusted net trading income.

We delivered adjusted EBITDA of $486 million, an impressive adjusted EBITDA margin of 72.6% and adjusted EPS of $1.73 for the quarter, reflecting our high operating leverage.

As you will see on slide four our strong performance has also continued into the third quarter with July's average daily adjusted net trading income up in the range of $6.7 million to $7 million per day, roughly 75% higher than the daily average in 2019, and almost 70% higher than 2018.

Okay.

We are encouraged better results from market, making an execution services segments remained significantly higher than our historic averages.

The driving force behind these results are continued higher trading volumes across global asset classes robust levels of retail engagement in us equities and most importantly, the strong progress we're making it our organic growth initiatives as illustrated on slide five in the second quarter, we witnessed elevated averaged.

Daily use equity volumes as average daily volumes in Q2, 2020 were almost 80% higher then in Q2, 2019, and 13% higher than Q1.

The continuation of robust levels of retail engagement as evidenced by rule six so five volumes and equity volumes with retail trading now accounting for up to 20% of all U.S. trading volumes about twice the historical average.

Average realized S&P volatility of 32 in the second quarter, although down 44% from Q1. It remains at nearly three times the prior year quarter, and nearly 130% higher than the 2018 and 2019 combined full year averages.

As you can also seeing the slides we posted this morning retail brokers have seen continued growth in new accounts trading volumes and net new assets.

Rule six so five volume is up significantly as a percentage of overall market volume, which itself is up dramatically as well this year, while vertu share of retail activity has been consistent at roughly 30%.

There has been much media and industry speculation about the sustainability of the elevated levels of retail engagement. This is not in our opinion, a short term phenomena, but a broader structural change while the work from home paradigm has also been a contributing factor the drivers of increased retail activity are part of a long term.

Secular trend, which which has been accelerated by events this year.

Although the long term factors are the dramatic decline in transaction among the long term factors on the dramatic decline and transaction costs, culminating in the move to commission three trading last year and the prevalence of a more sophisticated and assessable trading technology.

These latest developments are opening up trading to a much broader user base activating a new generation of participants. This democratization of market access is not a new nor transitory phenomenon. It has been building for decades through major long term market structure shifts long before zero commissions and work from home.

We we witnessed major policy changes starting in the late 1990, such as the water handling rules, Reg Ats, decimalisation, and Reg NMS, which contributed to leveling the playing field and reducing explicit and implicit costs for all investors.

Despite the many headlines focusing on the large U.S. E brokers levels of rate retail engagement at or well above 20% of overall market volumes are not unprecedented in other markets as that has long been a feature of markets in China, Hong Kong, Japan et cetera for many years. We believe this systemic shift will continue for the foreseeable future.

I will now cover the highlights for each segment and organic initiatives and then Joe will provide further details on our financials in our market, making segment. We saw another incredible quarter within this segment global FICC options and other benefited from extreme volatility in energy due in large part to the historic phenomena, we saw with negative crude.

So precious metals, where we saw volumes and volatility impact the spot end futures markets and currencies in our global equities business. We continue to see the encouraging results from our strong market share of six so five volumes and retail engagement today, we execute over 30% of market orders placed by retail investors in the us and.

We provide a price improvement of $308 million in Q2 and $572 million in the first half of 2020.

In our execution services business, we had a fantastic quarter with several milestones record days product launches in industry recognitions to start we posted record days the notional value traded on posit alert in both Europe and Australia. In Q2. These record trading days are a testament to the commitment we made when we acquired TG, which was to come.

Tend to improving the client experience by making the platform more transparent faster and easier to use.

In May we also expanded client access to electronic block liquidity via our new intro listed condition will offering allowing posit alert.

Canada, and us frontier algo clients to seamlessly access cross border Us and Canadian Inter listed securities and benefit by matching these two sources of block liquidity in the same security, but priced in different currencies.

Finally, we continue to receive accolades on our training tools. Most recently, our frontier execution Algo Algos earned the top score in the trades annual Global Algo survey of hedge funds featuring 31 other algo providers.

While our existing market, making business will continue to benefit from the markets new baseline level of retail activity as well as elevated opportunities like this quarter, our strategic investment in organic initiatives has contributed over $100 million of adjusted net trading income in the first half of 2020 alone or 7% of.

Adjusted net trading income compared to 75 million for all of 2019 as you can see on slide seven.

In market, making these initiatives included continued deployment of quantitative trading strategies across virtues global trading platform, our global ETF block desk in our options and corporate bond market, making businesses most of which are now making meaningful contributions to our results.

And our execution services segment organic initiatives like Virtu capital markets, which we launched towards the end of last year continues to expand as more corporate equity issuers look to tap into the capital markets via the at the market offerings and buybacks in the first half of 2020, the VCM team has.

I have already raised an impressive $1.2 billion from our public equity markets.

In addition, we completed the sale of match now to CB OE global markets. The after tax proceeds after tax proceeds of approximately $27 million will be used to further reduce debt. This reduction is an addition to the $188 million, we paid down in the first quarter, including the match now proceeds we anticipate a total of approximately.

Third million dollars, an incremental debt repayment in Q3.

As we have stated publicly it as our plan to return to targeted forward expense guidance. Later this year, we remain committed to our decision given the cobot crisis that we will have no specific reductions in force as we continue to support our people during these trying times.

Our performance thus far in 2020 demonstrates the strong operating leverage of our business model. We remain focused on our strategic priorities to continue expanding our scale and global reach enhancing our technology and growing our organic initiatives I'll now turn the call over to Joseph Molluso, Our co president.

Who will give further details on our financials, Joe Thanks, Doug in the second quarter GAAP net income was 335 million and normalized net income totaled $340 million adjusted net trading income totaled 669 million, our second highest quarter on record just behind last quarter.

GAAP diluted in earnings per share was $1.58 and normalized earnings per share was $1.73. Both our operating segments outperformed this quarter compared to declines and realized volatility market, making an execution services anti declined 17% in 13% respectively.

Against a record quarter Q1, compared to Q2 Q2 thousand 19, and indeed, all of 2018 and 2019, both of our operating segments were well above historical averages versus the opportunity.

As noted previously we have put on hold any dramatic expense reductions this year, including any reductions in force. We will provide revised 2021 operating expense guidance on our call in November.

Nevertheless, our operating margins remain very strong with year to date adjusted EBITDA margins of 73% an all time high. This includes roughly 17% cash comp ratio as a percentage of anti for the first half of 2020 versus 24% for fiscal year 2019.

We expect this ratio to decline in the second half of the year, depending on performance as we approach in year end and have more visibility into year end compensation plan.

As Doug mentioned as you would expect to the year like this we have already reduced our long term debt by 180 million at the end of Q2, our debt to EBITDA ratio stands at 1.4 times.

Further we expect to reduce our debt by an additional 100 million this quarter.

We remain committed to delivering attractive capital return to our common shareholders and this and this marks the 20 onest consecutive quarter, our virtu paying a 24 cents dividend regardless of market environment.

This is truly a testament to the operating leverage scalability and sustainability inherent in our business.

Now I'll turn the call back over for acuity.

Thank you Joe I would like to congratulate the entire her to team for their hard work and recognize their unflagging energy to step up in spite of these challenging times I'm proud of what we've accomplished and look forward to the opportunities ahead, and now with that we'd be happy to take your questions sharing.

Ready for the first question Albert Lin.

Thank you Sir.

Your first question is from rich Repetto of Piper Center quicker.

Yes, good good morning, Doug Good morning, Joe and thanks, Doug.

Doug for laying out the timeline of.

I guess, the secular goods regulatory and structural changes that helps.

So I guess, just looking at the market, making again pretty astonishing results.

Can you talk about any of the in a quarter.

Happening and hold and is.

We're two legacy can you talk a little bit at least qualitatively about the performance of.

The exchange market maker.

Yes, yes. So thanks, thanks to the question rich so as you alluded to we have within our market, making business, we have a customer market, making business I.E. The old legacy night business, and then a noncustomer facing market business, which is.

Global in nature across asset class and geographies and Thats the legacy Virtu business with some elements of the legacy night business, namely the old GETCO business, which is great.

Great business kind of put together we're.

That from the Noncustomer business on a standalone basis, where that have them. If they had reported separately would have been the best first half in history for that business. So it's clearly everyone's focused on retail volumes six now five customer market, making and those are obviously phenomenal business, we're very proud to run and we believe that we've.

Really improved but the legacy vertu combined with the legacy GETCO businesses is just a home run it's a scaled business across asset classes geographies. It does very well and global equities and it hasn't had a phenomenal.

First half and in FICC in particular around commodities and currencies. So we continue to be.

Heavily invested in that business and to reap significant returns I would point out again part of the strategy here is to leverage the infrastructure and technology and market our understanding of market structure. If you will across all of that all of our market, making segments and so it's really just a continuation of the theme of.

Scale diversification and having a multi asset class multicurrency platform that enables us to.

To provide these services and all the different marketplaces. So that you know obviously, we amalgamate all those bids is now so it's a little hard to kind of for you guys on the outside to see it but it's been a really really strong phenomenal year for those businesses.

Got it got it.

Okay.

Second question and thanks for breaking out sort of the organic or you are talking about the organic growth initiatives ducs. The one jumps out to me is in options because when we looked at payment for order flow of what say your peer payson options payment for order flow, it's almost double what you pay.

In equities in.

They paid more and options and equities as well and it would tell me that I know, there's some pass through payments, but it would tell me. This is a big opportunity.

For revenue, there and I know you're working on it but could you just talk about how competitive the marketplaces to break into our to get back into and.

You know and what you see you know as you have the customer relationships I guess, so any color remoxy sorry, yeah, obviously, you're right and we're obviously cognizant of the amounts of rebates that are paid for options as opposed to cash equities and there's two incumbents there citadel assessment.

Hana, which are great firms, we compete with them and cash equities, obviously, we're not on the board.

Don't compete with them in options yet as I've said previously in these calls.

You know our firm was built more from a cash equities perspective, given my partner of any spot kind of background on commodities business and then in cash equities and we were not an options firms to the DNA. The from is very different we made a strong an important strategic decision a couple of years ago to take the time and effort to build a effectively a parallel arm.

Texture that would enable us to be competitive in a in a quote level environment as opposed to its simply an order level environment. Because obviously, if you look at Apple as an individual stock. It's one instrument to look at Apple costs across calls and and puts and explorations in many different strikes that literally can be thousands and thousands of instruments. So the market.

Texture of an environment that seeks to be competitive in that type of dynamic is materially different than a cash equities environment. We've got some brilliant people here. Its not you know in decipherable to us had to do that and so we have architected that and it is now operational across the major indices were not and a handful of single.

No names as well.

To be competitive obviously, we need to be scaled in the same in a way that we are in cash equities and we're getting there it is a.

In any of the year it would be even a larger stand out business the options business right because it's grown its an eight figure business already this year in the first half, but given the fact that weve generated nearly $2 billion of gross revenues. It kind of look smaller, but I'm very very proud of what the group has accomplished.

We have the infrastructure, we obviously have the low latency past between New York, Chicago and within so we're leveraging the entire infrastructure the vertu environment and as you said, we have all the relationships with brokers and they would be happy to have us be a major participant there because.

Other than the two competitors I mentioned, it's a long way downturn number three and number four in that marketplace. So with the spot where we can very comfortably could become.

Number three relatively quickly I think and and so certainly it is a key growth driver for what this firms going to do over the next 1235 years.

Got it that's helpful Dugan, congrats on the phenomenal quarter. Thanks, Thanks very much.

The next question is from Ken Worthington JP Morgan.

Hey, good morning.

So exchanges regularly lean on for two to support trading volume and activities that they've launched their new products.

As clearly as a symbiotic relationship between you and the exchanges.

Well economics look like for two at the launch phase at these new products are you generating losses on as you've got your your initial.

Startup costs.

And are you able to more consistently command higher rebates to compensate you for these higher startup costs and I guess and I'm really curious about is how things are evolving.

The economics for you getting better over time.

Or are you sort of demanding less overtime because of the symbiotic nature of of your relationship.

And then I'll tuck in to the last for the question, we're going into the launch of Memex. So how are you thinking about.

Support for them as they go into their launch.

Sure. Good question I'll ask I'll take the first one and then obviously I'll talk about Memex.

So I think the answer with regard to us partnering with exchanges around the world to launch products. It really depends on the in exchanges. So we're doing this in Asia and Europe and in the United States. We've done it with the two major futures exchanges here, we obviously collaborate with the us equities exchanges in terms of them.

Rating programs to attract our liquidity and as you mentioned you know with regard to the futures exchanges when they want to launch a new product or look alike product they'll come to us because we have scale and so we can provide attractive to side liquidity and then they can do the business of trying to bring in natural liquidity to interact.

Act with the prices that we provide I'll point out we do this as much in Asia and in Europe, and particularly in Asia as we do it in the United States and so Oh, we are in the business of creating competition I always tell people, what we want to be the Switzerland of liquidity provisioning. So although I've had my differences with exchanges around market data and whatnot.

We are commercial and we deal with them in terms of economics of that we're willing to make an investment modest.

In terms of trying to create competition and it really depends Ken on what the marketplaces and what the product is.

And how I mean as a typical matter.

Exchanges are cognizant that they need to provide that they need to make an investment.

In the form of rebates to subsidize. The fact that we know we may get picked off a bunch in the beginning.

By the age of Tees, and by others that see our liquidity and are bouncing back and forth between exchanges and as a cost associated with that and we do our best sort of prognosticate, what that will be and then come up with a reasonable basis. So I'm willing to make an investment it's never material and we don't lose tens of thousands of dollars per day.

Trying to create competition, but I'm willing to make that investment it's completely under the immaterial in the Grand scheme of or two but we try to be a good collaborative partner with exchanges around the world.

With regard to Memex.

Again, I am speaking only as a board member and on behalf of Virtu I was getting trouble because people asked me Memex questions and then I say something stupid. So I will do my best not to say anything stupid Jonathan calendar is a great CEO should half came about MMX, a virtue will I mean, where a founding shareholders an investor in mimics we believe in the business proposition behind Memex.

To try to be somewhat disruptive in the U.S. equities market and create a venue that would be low cost.

Very transparent and would provide a great product and also would be an advocate for what we thought would be the member's interest in Washington, that's the whole predicate behind Memex.

Obviously, we have obligations to our clients were regarding best execution and to the extent we have flow that is subject to best execution requirements, we will always be cognizant and respectful of our regulatory obligations. So we're not going to go post order there in violation of those.

Relation of those obligations, we do have a fair amount of discretionary flow here and certainly a tie would go to memex in those regards and so we're going to everything we possibly can within the bounds of our best execution obligations to be supportive of MMX you'd have to as Jonathan what his projections are but certainly given the size.

Coke and scale of our of our operations and frankly all of our partners in the Memex initiative, we know our friends at Citadel.

Flow traders Jane's Street, all the big banks I mean, there's a lot of institutional support JP Morgan et cetera behind it and again everyone's going to tell you. The same thing subjective best execution requirements, we all want to be supportive and we all want to see Jonathan and his team and memex be successful. So I am I'm very very optimistic about.

City to provide no a new voice and to provide value in the equities world.

Great Awesome.

And then just on the institution.

Like industry volumes this been sort of a divergence between retail and institutional trading activity.

Really since coded.

There are some signs that retail is slowing down are you seeing indications that the institutional side, which is slow in many products is starting to rebound at all.

And what do you attribute the more pronounced pullback in the institutional trading.

The trading of institutional products. Thank you, yes, it's a good question and certainly.

Overall market volumes have been very elevated this year right. So a pullback again is relative to volume levels and 1918 in 17 and things along those lines. So.

I think look a lot of the institutions. What we were hearing certainly during the real dramatic days of March and April.

You know if they were difficult markets to trade I mean, it's hard to the real economy, sometimes isn't really Marriott.

Mirroring if you will what's happening in the marketplace right. So I think.

You know a lot of our larger asset managers were sort of sitting on the sidelines trying to trying to see what was.

Where this would end up frankly and so.

We did see an explosion of of retail activity that has continued as a percentage of overall market and as I said in my.

Remarks, I think that is you know.

A secular change not a cyclical change.

In other marketplaces as well you see retail trading of futures and things along those lines and so it wouldn't surprise me if we started to see.

You know some runway the CMC and others are going to be launching these mean these micro M. M E mini micro products to make them more assessable to retail so I think there's going to be a healthy balance.

Between retail institutional but look I mean, we shouldnt Kid ourselves I mean institutional investors are still the 800 pound gorillas in my view that we support that move these marketplaces that still provide.

70, 580% of the flow so I think.

Folks on CNBC like to talk a lot about retail and whatnot and it certainly is great for our business, but at the end of today. This is still a marketplace dominated by the large pension funds hedge funds and asset managers.

Great. Thank you very much.

Your next question handsome Dan Fannon of Jefferies. Please go ahead.

Good morning, this is actually James skill filling in for Dan. Thanks for taking your question.

So.

Just wanted to take it back to retail obviously with record levels of engagement and you're highlighting the staying power. This trend I'm just curious if this is an area.

Where any of the regulation might impact I know that Theres, a bloomberg article out highlighting potential risk of in Florida slowed due to some of the Fccs new proposals. So just curious if you agree with that characterization and then just kind of if you could talk more broadly about the p. fall outlook.

Yeah, I think frankly, I think the Bloomberg article just kind of missed missed the point as a lot of these articles do because there.

Folks don't have the context of what's going on I mean, the the six so five regime, which is embedded in Reg NMS right. So its regulatorily been codified.

You know for over 15 years now right and it's been.

Examined by FINRA and the FCC for over 20 years right. This is not some new.

A paradigm in the marketplace and I think what folks Miss because of the fascination with.

Critical payment for order flow is the exceptional amount of execution quality in price improvement.

99% of orders that come to vertu end to the competitors.

Our price improved also off of the National Best bid and best offer. So you have literally millions of folks that are coat retail investors that are paying zero commission to access the us equities markets and are receiving prices better than any institutional investor can receive.

That's that's the headline.

Right and we provided over $500 million Virtu did have price improvement off of the Mmboe the national best bid or best offer and we're 30% of the market. So you can do the math as to what my friends at Citadel Susquehanna and to segment did so you know a billion and a half roughly dollars of value was.

Shifted from the market makers directly into the pockets of retail investors in terms of price improvement in institutional investors don't get that benefit they pay a commission.

And they are happy to receive the and Mmboe. So.

Any regulator that looks at that that looks at it through the lens of reality and understanding the markets as opposed to politics and nonsensical headlines, we'll look at that and say Oh My God what a system. This is.

I can go on a computer I can go on on an iPhone and for no money I can get a price better than some large pension fund or asset manager, what's wrong with that.

There's nothing wrong with that as everything right about that but again its eighth caught in the dynamic of the political environment, which obviously I'm aware of.

And that's why we try to highlight price improvement statistics, but you don't see an article that says virtue citadel Susquehanna to segment provided $1.5 billion of price improvement in the first half of 2020, maybe there's a reporter listening to this call and perhaps we'll get that article tomorrow I'll take the under on that that but at the end of that now I have zero concern.

That.

There'll be some type of regulatory focus I spoke to the FCC at length about this they understand it and they applaud the environment as well.

Understood. Thank you.

Your next question, Alex Kramm applicable.

Hey, good morning, everyone.

Can you just give us a little bit more color on what you're seeing in July I mean, these are still very nicely elevated levels, but obviously that down little bit and from the twoq. So maybe by your businesses, what what you're seeing in retail what you're seeing and some of the asset classes on the market, making side and infusion services will be really helpful. Thanks.

Yes. Good question. So yeah. We've we've tried to provide the monthly guidance there and give you guys a view into it and so look I mean, it's as I said in my script I mean, it's still highly.

Elevated our results are at least from.

2018 end 2019, and so we continue to see a healthy.

Dose of six so five volumes and us equity volumes that are significantly higher than that historical which is great.

So it gives us a lot of kind of runway into the third quarter and the rest of the year I mean.

I would point out also that we're seeing you know episodic volatility in volumes and other asset classes I mean.

Again, I'm not a fundamental investor by any stretch of the imagination I don't by individual stocks and I don't give investment advice, but there seems to be a real interest in precious metals. These days and so we've seen real increased volumes, Alex and in gold and silver in particular, we've seen for the first time some volatility.

And in natural gas and increase in natural gas prices again, and maybe it's weather related or the supply related again thats not.

Not my focus and then lastly, there continues to be a real focus on on corporate fixed income and corporate fixed income EPS, which Fortunately we had because of the acquisition of night and the Replatforming of that ETF business and some great people and that ETF business. We're now at a.

Again participant and so we've benefited from some of those volumes again, a lot of this gets overshadowed by the emphasis on on on six so five in in the last thing I point, an option volumes are highly elevated it as well.

And maybe that's due to competition I think theres 16 option venues now and some and obviously I mentioned the two great market makers that provide great value and great service. So it's not just it's not just us equities not just the U.S. and it's certainly not just a single asset class all of that kind of you know a compilation if you will have volumes involved.

Totally leads to our results in July.

Soda saw the tail end of the of the real volatility from the the initial shock of the cobot crisis, and so I think that results in the second quarter, but I'm really encouraged that we havent seen dramatic falloff I mean, it is the summer as well right I'm not sure I guess people may be ready at the Hamptons anecdotally you see some seasonality.

In the business and as a little bit of that but it hasn't been as dramatic as in prior years.

Okay, great. Thank you for that and then shifting gears a little bit when I look at that list of organic opportunities one other things that I may be missing.

Is it kind of just your efforts to its across more off your volumes internally at between the market, making business. The retail business. The you institutional business can you just give us an update where you stand on that maybe any sort of quantitative.

What's been happening there on those efforts and maybe how much that is contributing if there's a number you can put on that.

Yeah, No. That's a great point I guess I don't consider that an organic opportunity in Hawaii and is not like it's not like as a new asset class. If you will that or sub asset class. So I apologize for that certainly yes that is a keen important part of what we do so for example, our friends that run the are.

Our two capital markets business the at the money offering business one of the I mean, why why would an issuer come to vertu right. We don't have research Pheno. Most these companies probably never heard of us before yeah, we've got more.

Market share, but what we really have is the ability to internalize across those orders and so the fellows that run that business came here frankly because.

One we've got obviously, good electronic products and understanding of market structure, but secondly, because we have.

This this cornucopia of of of.

Slow here that they're able to internalizing cross and so if you consider corporate issuer listen I'm going to you know.

You know raise at $20 million few and half of it I am going across internally and is not going to any price impact any stock that's a powerful selling tools. So yes, we're doing that I don't have a number I probably wouldn't give it the anyhow in my head, but it's it's it's a significant part of what we do and it helps both institutional business.

The ATM business, the virtual capital market than the market mix I would call that an internal revenue synergy Alex as opposed to like inorganic.

Growth opportunity that you can sort of say is zero and then you're going to.

Grew to a specific number.

Tierpoint. Thank you.

Thank you Alex.

Next question, Ken Hill other than that.

Hey, good morning.

I wanted to build on that last question just talking about the new initiatives there.

You.

I mentioned it was about 7% organic.

What about 7% in the first half I think thats down a little bit from 8%, one kian I know nitpicking, there, but I'm just kind of curious how much macro factors might play a role in that maybe what areas between like option DTF blocks.

On strategies capital markets might perform better or worse than your legacy businesses more normalized environment.

Yes.

Yes. Thank you for recognizing that your nitpicking, because I concur with your with your characterization of the question, but I still like gets all answer.

$100 million in the first half of the year I'm very proud of that.

It would have been.

A larger percentage if the rest of the business hadn't done as well I guess is that the smart answer I can give you to that and you know that already so.

I think look the ETF block business is being is going to be is a global business as bill for the long term has had benefited from volatility sure, but it certainly would have contributed.

Nearly as much as it has contributed this year in a normalized environment we have.

Great Technology, we got some really really great people that we inherited from the night transaction and we've added to them and most importantly, there were people don't understand is we have distribution what night and gave US was distribution. We have thousands of end users that need liquidity that want to do larger than exchange screen size.

As liquidity EPS and now we know who they are and they know who we are so thanks to our friends and colleagues from the former I TG and night business. We have sales folks we have distribution. We've got you know European pension plans that never would have.

Lit up over to it in our Q environment, because they wouldn't know who the heck we weren't now now lighting us up so that is a a long sustained opportunity for us and obviously the same thing.

With options and frankly with everything else, we're doing there so in a normalized environment. It probably would have represented Ken slightly more.

As a percentage of our overall.

Adjusted net trading income in the last thing, which we haven't talked about it but we mentioned in the slides is the taking the night quantitative style strategies and bringing those around the world, though it thats certainly.

Is not really dependent at all on because none of it is us oriented right. So it's really.

What's happening outside the world and that continues to grow into expense.

Okay. Thanks for the detailed there.

My follow up is really on match now and the decision to sell that to see the I'm. Just wondering as you think about those assets match now is kind of Dean noncore and you decided to get rid of that Youve decided in the past, though to keep other assets like posit mean, what was it about that market might have to fill pay the decision to get rid of that maybe find a better home at sea, though.

Yeah, I think look everything is kind of market specific and so.

It's not that it's non core it's a great business and frankly, we were a customer on the outside it's what attracted us to TG, Brian in the guys up they're doing phenomenal job.

But effectively it's an exchange it saying, it's a highly regulated.

Mark Exchange in Canada, and that's how I rock.

Up in Canada, God bless them Thats how they.

Characterize it and so there was really no strategic benefit to avert for her to to own it.

Unlike in HTS here, whereas regulated by the FCC, but.

Alex Kramm had asked the question before in terms of internalization, that's how we internalized a lot of is done through the ATM. So we couldn't function.

Without having posit and the ability to internalize.

And cross institutional and retail orders and ATM Wars, and whatnot and so it's really part of the functionality of our institutional and our market, making business, whereas match now was was walled off and frankly it was an exchange I will add parents medically.

That we were thrilled to death that our friends.

At the Cibolo wanted to buy it because it introduces real I know a third competitor up there.

We're as I said in response to a question earlier, we are believers in creating competition in every market place and so you had obviously that income in Toronto, and I guess nasdaq's up there, but this really interjects.

Third exchange group as a competitor up in Canada, and Canada is a very important integral part of what virtues, all about and having a third grew up there that can that Ken.

Be dynamic.

And there and efficient global exchange, operator, Thats ultimately in our interest as well so thats certainly played into our thinking with respect to it would be better if they operated it and we were a customer as opposed to us just being a customer treating it at arm's length, even though we owned it.

Got it makes sense thanks for taking the questions. Thank you.

The next question wholesale Chris Allen of Compass point.

Morning, guys first.

Well, depending on which you will begin later on today.

Second thank you very much.

Yes.

We could use the luck so thank you [laughter].

One of them to get that to the organic growth opportunities maybe.

Hopefully cream in a different way.

In options market, making can you give any color where the the awarded to clear stand from a market share perspective were you guys. Currently are and how that's evolved maybe over the last year.

Yeah, well gosh I don't know exactly.

This is all public information. So you guys to presume we look it up as well, but like I said don't Susquehanna are probably.

80 ish percent of the market something like that I mean, they're great firms they've been doing it for a long time and we're still really really early we don't have a six so five business up there excuse me in the United States. So we are.

Market, making on exchanges right now, Chris and so there's an opportunity for us to go there certainly.

You know the retail brokers would be thrilled if we sent to them Hey, we're open for business, but we know what that means because we do it in cash equities across 8000 names. We can't just go to them and say hey, we'd like to be a market maker in Tesla in spy and you know it doesn't work that way right.

So until we're ready to provide real service.

And you know two sided basis across.

802000 names and all the strikes and whatnot.

No, we're not going to waste the goodwill associated with our relationships to do that.

My point earlier in response to Rich's question is that we have all of the infrastructure to do that the brokers would welcome us because we're a trusted partner in cash equities and there's an opportunity now the incumbents. There are great. You know brought firms that are going to continue to be great brought firms I think we carve out some small.

Sharon will probably come at the expense of numbers, three four and five and that kind of thanks.

And are optimistic, but it's not going to happen tomorrow, but there its a.

Our long term medium to long term plan for our firm.

And I would point out let the venues that the 16 exchanges every single one of them has reached out to US and said, we're thrilled to have or two involved were top 10 now in a handful of those whereas before we weren't even on the map. So we're doing it delivered to what we're doing it internally we're doing it with our technology, we're doing with our great people that we've moved over.

We'll make some smaller external hires but the margin of that business is the same as the rest of the margin of this firm. So we've made investments, but it's throwing off 70% plus EBITDA margin underwriting.

Got it and then.

Justin the in the.

So five market share are you seeing nice bounce back and it seems like it's stabilized there you see more opportunities to gain share there or should we just think about this more is just.

Industry driven in terms retail activity moving forward.

Yeah, I mean, I think look.

Again, we compete with I'm very complementary of all these firms right because the real great firms.

And sit at all as number one in in the six up by business and has been for a long long period of time certainly since we bought we bought night and.

I have no reason to think that we're going to supplant them on an overall basis do we focus even this 200 individual relationships Chris right. That's the one thing that I think people Miss and there are institutions around the world not just the big three four or five.

That.

Send flow. So we're focused all of those we've got a great broad sales team, it's truly become a global effort one of the by now have folks in Europe that are context on 65 business that may know some.

Small European.

Retail banks that we act as an institution for they have wealth management clients that want to buy Tesla Nicola.

And we can offer front door guaranteed execution of those trades during U.S. hours, obviously right. So again this is not a business where on particularly focused on though I want to be 33, or 34, 32, with 31% I want to be high I want to profitable I want to provide a good service I want to provide really good price improvement I'm very very comfortable where were.

Right now.

Okay. Thanks.

Thank you.

Then Herbert.

Hey, good morning, Thanks for taking the questions.

Services side, and maybe particularly infrastructure work flow and analytics and just if you have any takeaways from the environment over the last five months or so and how that might impact your growth opportunity or trajectory thoughts from here and any shifts and strategic priorities.

Yes. Good question, so I mean I was very.

Obviously, resiliency and scalability and latency are always issues, particularly when it comes to your workflow infrastructure business right. So that you were talking about Triton.

And I TG net right in that which are the effectively the backbone for a lot of our buy side clients I mean, thankfully we have rolled out some improvements to the to Triton, We had launched a rolled out Triton valor, which is our new version of Triton and so it held up well.

In the in the crisis and with the heightened volumes and so I continued to be a fan of that business because it's a recurring revenue subscription business and it's a little counter cyclical if you will.

To the market, making business, obviously in a year like this where the market maker is doing exceptionally well could it get it can get overshadowed, but it's a steady business. The analytics business same thing we brought out rolled out a lot of of.

Improvements, we've created a platform, which we call the portal, which enables clients to effectively use our tools, but then have their own information in their own environment.

And work with it there and we've gotten great feedback from our clients and again.

TG with the market leader in global analytics, certainly in global equities, we've done a a good job I think of trying to make that multi asset class and so it's a steady subscription base business that really buttresses. The relationship with these you know a hundreds of of asset managers and pension funds that used.

Those services 18 of the top 20 global asset managers in the world, Our Virtu analytics customers, which is really pretty remarkable and none of them sled because of.

HFT and all that kind of stuff that some of the critics. We're concerned about so I'd like to businesses a lot it scales nicely off of our understanding of market structure and financial technology and again, it's a nice a bit of recurring subscription revenue that is not entirely dependent on transaction volumes.

Thanks for that and then as a follow up Bob.

I understand that debt pay down as a priority, but could you just give us your latest thoughts on potentially doing a special dividends at some point.

Yes look I think as we said.

We already paid off 188 million.

I think we've got this quarter given the asset sale of Max now.

In other planned.

Excess cash flow, we will target another 100 million.

That will get us to almost 300 for the year, we'll see where the year ends.

And then make that.

Seasons that I think we've always.

I said that in a year like this we will use that to de lever Thats why weve always told their various constituencies your credit investors rating agencies et cetera, you kind of look at virtu through the cycle.

Your demonstrates that and we're we're kind of good to our word with the with the your credit markets that in a year like this we will de lever and I think you're seeing that I think when we.

Approach the end of the year and look at how much we've de Levered and look at kind of Ari our cash flow and obligations.

We'll definitely take a look it at that and all those things will be on the table.

Including including buying back shares it makes sense.

Great. Thanks for taking the questions.

Thank you.

Next question, Alex Blostein Gold Oklahoma.

Hey, good morning, guys. Thanks.

So just another follow up on that next Doug can you help us conceptualize what the success of that next meeting for Virtu financially.

So any measure our like 1% market share gain and you ask our equity flux, what does that mean income lower trading cost for you guys.

And I know might be hard to quantify but anything that would be helpful.

And longer term, how do you think about sustainability of the benefit or.

Do we think of them to venture these sort of competed away.

Got it tied at the that spread for you now passing those benefits down to the cost remark from an execution services perspective. Thanks.

Yes. Thank you.

Well Memex is obviously, a great idea because Goldman Sachs as an investor in it so Goldman only does smart things.

And so we thank you for that Alex.

Look I mean, I think the best way to quantify the benefit already has been that in the last two years and certainly we were we were helped.

With the regulatory environment, where we had a chairman of the FCC, Jay Clayton and ahead of trading market spread Redfern that I'll be controversy over second we're actually doing their job and read the 34 Act and concluded.

That.

[music].

Market data and.

Other services in facilities of an exchange were subject to review and approval by the FCC kind of what the law says in the FCC was kind of ignoring it for 10 years before that and so as a result, we didnt have we havent had any material market data or connectivity.

You know.

Price increases in the last two years, so as far as I'm concerned Memex has already paid for itself.

Right, we don't separately break that out Alex as a part of our communications data et cetera.

But I can tell you that.

Increases kind of came in like Clockwork you know here, 7% here is 8% here is 12% and thanks to call. The Ceos of these places and say how how does that work I can't call Fidelity and say Oh by the way you know I'm, increasing the bid offer spread by 12% that doesn't work. So we've had success already so I am through.

Filled with with how the marketplace has responded and that was always our intention to have a marketplace solution that demonstrated that you can run an exchange more efficiently and so a.

Thrilled with how would that has kind of come out and some of it obviously was helped by having.

Clayton and Redfern.

Interpret the 34 act in a way that I thought we should have been interpreted for years.

In terms of again their market share and all that stuff and I don't speak for them. We can talk to you know Jonathan calendar about what his plans are he's doing a fabulous job they've got a great team there.

We'll virtu have significant market share there, yes, but we have significant market share on every exchange in every ats in the United States will it be materially more than other exchanges I don't know it depends on what the liquidity looks like there and frankly, how we can make money but.

You know, we've we're excited that it'll be a new type of exchange I think the technology that they developed is going to be special Tom Fay the COO there.

And so they're going to have very low latency deterministic sick.

Highly deterministic technology, and very very transparent, which is all we ever asked for.

And so we're excited we think virtu, we'll be able to make very good efficient markets there would be highly profitable.

Right and then just a quick follow up around M&A opportunities you guys haven't talked much about on this call today, but I think in the past.

Doug you talked about significant scale benefits that merger can bring two or two potential target.

The current trading bags are being as robust as is.

Deletes, how many opportunities for you skol participant yourself being somewhat accurate maybe on imminent ICANN and the comment.

[music].

Yes look it's a good question I mean, we've certainly been approach by a lot of people I think folks look at the environment and and now it's no illusion right people come and say well look how great I'm doing in 2020. My response is okay well.

If you valued vertu with 2019 multiple off for 2020 EBITDA.

The stock should be 82, and unfortunately, it's not right. So were we understand the ebbs and flows of the marketplace.

We're very smart context did buyers.

We're in every just about every asset class and geography, both on the market, making on institutional side. We've done two very accretive very very strategic acquisitions that added a lot of scope products services and value to our shareholders and we're in the process of tucking. Those then we will continue to look at things continue to be.

Constructive.

I wouldn't say I wouldn't forestall.

The possibility that we would all it's difficult to get a feel for a company when you're zooming with.

10 to 15 people as opposed to going to visit.

Big believer in tire.

It is cultural and the reason virtuous successful is because of the culture that we've had many and I started here adverse to that we really believe in.

And it's difficult to get a feel for a company over resumed or a chat or this or that and so it's a challenging environment for that.

And I.

Well I said.

Many times before and I will repeat we will only do a transaction.

That Joe and I and the rest of the senior management team and our board agrees is strategic to US and is is accretive to our shareholders that we don't we have plenty of goods and services and plenty of scope here in a lot of work organic opportunities, we don't need to go reach on value in on price.

Based on anything so Jonathan spending that.

No.

Alex is a that the environment to Doug's point is actually increased the amount of.

Opportunities, we're seeing but you know as Doug said it in the environment also causes expectations to kind of.

A little bit.

Different than they were last year.

Got it.

Next question is from Michael first of letting Carol.

Hey, good morning, Thanks for taking the questions.

Services side I'm, just hoping you could peel the onion back little bit more maybe give us a little flavor of how much of the 117 million of execution services revenue in the quarter wins from more contractual driven revenue streams verse.

So as revenues that are a little bit more functional of transactional activity coming through how that has evolved over the past couple of quarters and as you look out over the next couple of years, how do you see the growth dynamics differing between the two what should we be thinking about there.

Yeah.

Joe one as you answered the first part of it they like to give the yeah look I think as Doug said the other the when you break down that business the kind of workflow technology analytics piece is a steady steady business.

So we would expect that yet the contribution there kind of remain constant.

And and Gary grows over the long term, but that is pretty much constant. So so I think there any variability you see there.

Israeli due more to kind of the the environment and the business mix, especially between.

You asked Europe and in the rest of World. So I'd say that you see there that's.

That's a decline I would I would attribute to really just just business mix, especially outside the us.

And any thoughts on growth for the more transactional side as you look forward. So it sounds like the.

Recurring side more steady any kind of consistent growth a little bit over time, but what about the transactional side. Yeah. I think look I mean, I mentioned in my prepared remarks that.

We have spent a lot of time and invested a lot of money.

In making a great algo suite product that the street is recognized I mean vertu exists on the institutional side because of execution quality and service, but because of execution quality. We don't sell research corporate access prime brokerage all the things that all the great things that all the big banks do in the medium sized banks and other.

Brokered products need to be differentiated on execution quality market impact and understanding of market structure and thats, what we built on the market, making side, we thought it would make sense and translate to the institutional side and indeed. It does we also have scale right and so we're the only.

From I think that will I don't know this have a single ubiquitous.

Crossover with nuance for different market.

Places, but if you're a globe full trading from anyone access Japan.

You know.

The.

European markets, Canada, the U.S. Latin America, you're going to be using the same each of the marketplaces, but it's going to do essentially the same thing and so there's going to.

Be.

That comfort.

It's it's you know efficacy of across the.

The scaled very efficient.

Well, that's a went to we're building that's what we've already built enough that we've already launched I don't think and it can also be across asset classes because of what we do an FX and and and we also can provide pre and post analytics, because our analytics platforms and you can have dms because of Florida.

Products are there and we've got a lot of great sticky clients that.

That that resonates with.

Great feedback.

We.

Suite of the year, if you will in Europe.

Hello out of marketing and sponsorship and that kind of stuff. The proof is just really in the putting in I would add.

Growing up.

Getting business again doing those divert to win.

And the suite of products and technology, we have here, we can do those businesses and have them be version.

Without having to add any.

Real cost and infrastructure, that's the key that's really where this but don't you don't recognize that.

For can't.

But just fine and we're driving a little PT boat.

Got it and.

I'm, just curious how you're approaching and.

And thinking about and frame sizing the magnitude and 86 million of EBITDA on the quarter and debt Paydown, because maybe about a third of that's it seems like you do have capacity to pay down a bit faster. So just curious how you're thinking about that and it's the EBITDA number the right now.

Pay down.

Well it is I mean are.

When you look at our free cash flow you start with EBITDA.

Our capex remains kind of and then our cash taxes are what they are so it is.

Hey, kind of goes back to the Grand bar.

Bringing that we've made with the with the current market, it's as we financed or kind of.

Obligations to pay down debt and we have a desired.

Pay down debt and.

Four times debt to EBITDA.

Current trajectory as I said is another 100 million this year.

It wouldn't be surprising if we were closely.

The one at the end of the year.

And that through the cycle.

So I don't expect given the implant on it being one but I think that will be very comfortable.

A comfortable.

Thanks to consider.

Additional debt Paydown include.

And other things you would do it excess.

Yes so.

We don't have a specific target looking at where we are I think when we're going to end up close to that and then.

We'll we'll we'll decide we want to do great. Thank you.

Thanks.

It was the last question ill turn it over to you for that.

Oklahoma.

Thank you Sherry and I'd like to thank everybody for taking the time and for all the we look forward to Inc.

Gauging with all of you again in early November Thank you very much.

Ladies and gentlemen, thank you for joining.

Okay. So now offer and may disconnect your telephone.

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