Q3 2020 Virtu Financial Inc Earnings Call

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Let's remember, yes first of all good morning, and welcome to the Virtu financial 2023rd quarter earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.

I'd now like to turn the conference over to Debbie Belevan. Please go ahead.

Thank you operator, and good morning, everyone. Thanks for joining us for our third quarter results were released this morning are available on our website.

This morning's call we have Mr. Douglas you through our Chief Executive Officer, Mr. journalists, though our co president and co Chief operating officer, and Sean Galvin, Our Chief Financial Officer, I will begin with some prepared remarks, and then take your questions.

First a few reminders today's call may include forward looking statements, which represent for acute current belief regarding future events and are therefore subject to risks assumptions and uncertainties, which may be outside the company's control.

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

I want to note that any forward looking statements made on this call are based on information presently available to the company and we do not take undertake or update any revise forward looking statements as new information becomes available. We refer you to claim or at least and encourage you to review the description of risk factors contained in our annual report in form 10-K and other.

Our public filings.

During today's call, we'll refer to both GAAP and non-GAAP results. In addition to GAAP results 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 as a supplement to and not a superior to financial measures prepared in accordance with GAAP.

We direct listeners to consult the investor portion of our website, where you will find supplemental information or referred to on this call as well as a reconciliation of non-GAAP measures to the 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 thanks for joining us to review our third quarter results before we get started I would like to welcome Sean Galvin back to the Perm as our new Chief Financial Officer, Sean previously served as the Chief Accounting Officer Casey G back when we acquired that firm and he knows our business quite well.

One of the unique talent and we're delighted to welcome back to the her two family.

I'll begin today's discussion by touching upon the highlights for the quarter and then Joe and John will provide more color on our detailed results and outlook.

We'll keep our comments brief so we have plenty of time for Q1.

We look at our performance year to date, we've navigated the crisis well not only delivering record results for our shareholders, but also providing over $959 million in price improvement to retail investors.

We continue to serve as a key component to the financial markets, providing valuable services to our clients to help them access global markets locate liquidity transfer risk raise capital and analyze performance.

Our performance this quarter reflects the combination of our successful efforts to increase our ability to monetize trading opportunities and highlight the enhancements made in many aspects of our business.

We continue to find ourselves at the center of an incredibly efficient and robust trading environment. So obviously more subdued as compared to the frenzied first half of the year.

We delivered solid results in Q3, including adjusted EPS of 81 cents total adjusted net trading income of $362 million or $5.7 million per day, adjusted EBITDA of $249 million and an adjusted EBITDA margin of 68.7% year to date, we have generated.

$1.8 billion of adjusted net trading income or $9.6 million per day, and we're hours and 58 cents of adjusted EPS a record of performance for Virtu.

The underlying fundamentals of our business model remains strong and the outlook for revenue growth and margin expansion from our strategic organic growth initiatives continues to be positive.

In the fourth quarter to date, we have achieved an average daily net trading level consistent with that of the third quarter.

Elevated level of retail trading activities continues benefiting our customer market, making business as we maintain our strong market share and six so five volumes in Q3.

Our non customer facing market, making business outperformed market indicators, particularly in equities options and commodities.

We continue to see great progress in our strategic growth initiatives, which have contributed 8% of adjusted net trading income year to date and 9% this quarter.

Through the first three quarters of 2020, these organic growth initiatives contributed over $137 million of enough. The adjusted net trading income or $727000 per day.

Demonstrating our ability to grow as a firm we.

We have progressed, our options growth initiative initiatives by enhancing our infrastructure and expanding our symbol coverage. These.

These efforts have grown our average daily adjusted net trading income by 374% this year, albeit from a modest base as compared to all of 2019.

As we continue to build to build out our footprint that options, we're focusing on improving our pricing and symbol coverage to create a scalable framework that we can replicate to more venues and symbols over the coming quarters.

Expansion of our customer facing EPS locked desk has resulted in a 160% increase in average daily adjusted net trading income in the first nine months of 2020 versus all of 2019 our.

Our fixed income ETF trading provides us with significant opportunities to grow as a corporate credit market maker.

In our execution services business, we've had a number of important product launches platform enhancements and milestones as we announced throughout the quarter, which demonstrates our dedication to investing in and growing our client business through optimizing our liquidity sourcing transparent algos workflow and trade analytics and data solutions.

Heading into 2021 number two is very well positioned financially given the extraordinary results in 2020, and our multi year outlook. We are poised to continue to accelerate significant equity value creation for our shareholders.

To that end, we're pleased to announce that our board of directors has authorized a $100 million share repurchase in line with our long term commitment of returning capital to shareholders with our excess cash generated this year, we have substantially de lever the balance sheet, bringing our leverage ratio to 1.2 times trailing.

Well month adjusted EBITDA, we are comfortable that going forward, we will be able to pay or 24 cents quarterly dividend to our investors and devote a substantial portion of any excess returns directly to shareholders in the form of incremental share repurchases.

Joe will discuss shortly our revised expense guidance reflects our significant progress integrating our acquisitions, thus far and the soon to be fully realized synergies in a post co bid normalized operating environment further lowering our cost base.

Coupled with our consistent dividends and demonstrated higher earnings capacity, we believe vertu is a compelling investment in oil market cycles.

Before I turn the call over to Joe I'd like to address our practice of providing monthly preliminary adjusted net trading income estimates, which began earlier this year to see it providing more frequent updates would reduce overall volatility in our shares. However, our experience has been that monthly reporting is not aligned with the long term perspective.

From which our business should be measured we remain committed to robust disclosure and transparency around our results I will be providing quarterly reports and commentary on earnings calls.

And now Joe will take you through our revised expense guidance and outlook Joe.

Thank you Doug so.

So our business benefits from both epicel against sustained increases of market volumes and volatility. However, it is our disciplined focus on expenses and capital management that enables us to return a healthy margins and acquire times and exceptional margins and returns when conditions are more favorable so future.

Turn to slide seven in our quarterly supplement we wanted to highlight how we think about the value proposition of Virtu as we head into 2021 and beyond.

The underpinnings of this outlook for 2021, our outsize performance in 2020.

In 2020 in particular, we have already repaid $288 million of debt. In addition, we have announced a $100 million share buyback authorization.

Further we are providing specific operating guidance on expenses for 2021 as you can see we're anticipating adjusted cash operating expenses of 545 to 575 million and total operating expenses of 605 to 645 million.

This run rate reflects the substantial progress we have made in completing the integration of our acquisitions.

To put this into perspective, the total annual adjusted operating expenses for referred to.

Hey, CG and TG combined was roughly 1.1 billion prior to our acquisition of each company.

Comparing this to our 2021 guidance you can see that we will ultimately realize roughly $480 million in total operating expense synergies, which is 25% higher than our original synergy estimates.

Keep in mind. This has been accomplished while growing our business and expanding global client relationships.

We've also been prudent with our excess cash flows this year on a long term debt is 1.6 billion a level, we feel comfortable with in any market environment.

His comfort allows us to shift our focus on returning capital to shareholders and plan to dedicate any excess cash going forward to share repurchases, which we think suit our business model.

Of course. This is in addition to our existing 96 cents dividend.

Given our demonstrated ability to generate meaningful adjusted net trading income and cash flows across various environments as well as our planned operating expense guidance for 2021, we would look to always target at least $2 of adjusted EPS to be a baseline earnings going forward in any info.

Filing.

In addition to our regular dividend, we plan to dedicate excess cash flow to our shareholders in the form of share repurchases.

The earnings supplement on slide nine you can see we've provided an illustration of estimated free cash flow available for repurchases assuming various levels of adjusted net trading income per day.

And our 2021 adjusted operating expense guidance to be clear, we expect for two revenues to remain volatile. However, as you can see over any multiyear sample period without the noise from integrating the recent acquisitions and with the current levels of our debt, we expect to be able to generate significant cash flows.

Which can now be dedicated to returning cash to shareholders in the form of share repurchases.

As previously announced our board of Directors has authorized 100 million share repurchase now I'd like to turn the call over to Shawn Who'll provide further details on our segment performance before we open up the call to QNX.

Thanks, Jeff and thank you, Doug warm introduction, which really fits that team.

During the third quarter, our GAAP net income was $200 million and normalized adjusted net income was $161 million.

Basic and diluted GAAP EPS was 92 cents and normalized adjusted EPS was 81 cents roughly four times higher than the year ago quarter.

Income before income taxes of $252.5 million included a $56.2 million gain net of related transaction fees from the sale of batch now Cibolo global markets.

As Doug mentioned volume and volatility of settle down compared to the first half the year, but remained well above 2019 levels and our results reflect this.

During the third quarter adjusted net trading income, which represents our trading gains net of direct trading expenses totaled $362 million or $5.7 million per day, which was 45% higher than third quarter of 2019.

Martin, making adjusted net trading income was $257 million or $4.02 million per day, 82% higher than the year ago quarter.

Execution services, adjusted net trading income was $105 million or $1.64 million per day.

Percent decline year over year due in part to the sales matched now.

Turning to expenses, our third quarter results reflect a decrease in discretionary compensation accruals as compared to the first half 2020.

Year to date, our cash and overall compensation ratios were 15.4%, 17.5% of adjusted net trading income respectively, which are in line with prior guidance.

We expect our full year 2020 compensation ratios consistent with these levels and also expect our non compensation operating expense run rate to remain around third quarter level for the remainder of the year.

Adjusted EBITDA came in at $249 million, 139% higher than the third quarter of 2019.

Continued to successfully leverage our efficient cost structure and delivered an EBITDA margin of 68.7% in the third quarter.

Joe mentioned, we have been diligent and paying down our debt, making $388 million in prepayments since the TG acquisition in 2019 and have reduced our debt to $1.67 billion.

Our finance interest expense has decreased by $24 million to $68 million year to date compared to $92 million for the same period in 2019.

At quarter end, we had $567.7 million of cash and cash equivalents.

We remain committed to our 24 cents quarterly dividend, which we have consistently paid over 22 quarters in every environment since our IPO.

Over this time, our cumulative payout ratio has been 55%, including buybacks and our just announced $100 million share buyback authorization further demonstrates our continued commitment to return capital to shareholders.

Now I'll turn the call back over to Doug for closing remarks. Thank you shown very much for that wonderful review and now we will open the call up for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

Joe Your question. Please press Star then queue at this time, we will pause momentarily to assemble our roster.

The first question is from rich Repetto with Piper Sandler. Please go ahead.

Yes, good morning, Doug and Joe and Sean.

So Mike Mike first question would be on this on your target of $2 plus of normalized adjusted EPS I'm just trying to see how we see the consensus for 2021 is a little bit higher now.

Is this how to view this to dollar target is it a floor and does it back into sort of what you view as normalize anti if you look at.

The wonderful chart on slide nine you would get a so somewhere around around 5 million anti per day.

Yes, rich, it's Joe look I think at least $2, it's a target.

We chose the levels on page nine if you look at.

Where the combined TG KCG and virtue would have come out over the past five years. So thats why we started with five there 5 million a day and you can see that produces 215.

And we're comfortable with that show up $2, a round number target that we're comfortable with but I'm glad.

Would you like to slide nine because we chose those numbers we chose the lowest number there based on historical data, which would which would.

If you if you owned it.

KCG and virtue.

The first day of five years ago. It we're pretty comfortable that thats, where it would come out yes, I think Britain rich the bigger point, we're trying to make is we've made these these large acquisitions.

They were difficult there are significantly larger than legacy BRE to firm. There is an enormous enormous amount of wood to chop both on an operational basis on a technical basis, and just getting it right even from a footprint footprint perspective, and then obviously a lot of work to do on the balance sheet, we borrowed and repaid billions of dollars and now were at the.

Point, where we have a normalized footprint going forward, we have an operating expense base that frankly is incredibly compelling given the legacy companies that we acquired in the amount of expense that we've extracted and this company has always always since we started in 2008 many of myself in a cash machine and we will continue to be a cash machine.

Jean.

And we provided these illustrations of where if you look at historically, where our adjusted net trading income was comment what it generates in terms of EPS in this very clear expense guidance and then a very clear direction from my board and from this management team that excess cash has always been and will continue to be returned to shareholders in the.

Form of our dividend and now in the form of incremental buybacks, we think thats an unknown attractive story over the next few years, which is how we look at the firm.

Okay very helpful. Thanks, Doug and Joe the.

My follow up question would be on expenses and I know this is unusual.

According to the expenses in the quarter were a little bit unusual, but it looks like the compensation you were trying to sort of level out the the compensation for the year, but if you take that 130 million.

In in comp.

And you annualize that you still well below.

You are well below the guidance range for next year, and even if you use and I sort of missed the comp ratio guide, but use 15%.

You'd still be well below if you would have had a rather than the nine of 15%.

Comp expense ratio in the quarter, you'd still be well below so I'm just trying to understand the.

The guidance for next year is there any more synergies to come out and.

Compared to the run rate in this quarter.

Yes, rich, it's Joe I'll take a shot at that the guidance for 2021 does reflect additional synergies both.

Both in compensation and communications and data processing, it ops and ADMET right. So it does reflect.

Further synergies I think thats the point when I went through in the script that when you compare this to the synergy targets. We were we're exceeding those and I think next year is the year, where we would sort of stop counting the synergies because we would we would say or caveat that deferred reserve or you are substantially fully integrated.

But yes, it does reflect further synergies.

I think.

We've made clear on prior calls that.

This year, we pause some things in terms of the synergies given given the krona virus situation, but yes. The F Y 2021 guidance in there. It does include further synergies.

But I guess the question is if you take the 130 this quarter.

Annualized you get 520, and again it was a low comp ratio but.

Im just trying to make the jump to the expense guidance next year being in the 620 million range around the Maryland, you answered. It when you ask the question relates to comp accrual is is obviously much lower this quarter.

Given where we are given what happened in the first two quarters of the year. The first two quarters of the year, we accrue to a ratio pretty much in in the last two quarters of the year, we generally accrue from a bottoms up as we go through our comp cycle. So the difference there as you can see in our cash comp ratio this year.

This quarter is 10.4% total comp ratio of 9% I think thats the lowest we've ever done year to date, we're at 15.4 and 17.5 I think on the last call.

I mentioned that we would end up in the mid teens on a on a.

On a quarterly on a annual basis this year.

For cash comp and so thats kind of where we're headed but the answer to your question is is is an eight a. lower third quarter core.

Court compensation accrual.

John I.

I wouldn't annualize at third quarter number now I understand what you know.

Understood. Thank you. Thanks, Thanks Mitch.

The next question comes from Ken Worthington with JP Morgan. Please go ahead.

Hi, Good morning, Thank you for taking my questions.

Maybe bigger picture I believe your retail business works with more than 100 brokers and I know, we focus on the bigger ones.

The trend over the last year has been the migration to Zero Commission. So the question is how many of the 100 or so brokers that you deal with have gone to zero and do you get the sense that more are willing to migrate in this direction to the benefit of trading volumes or bird too or is this trend really all played out at this point.

Yes, it's a great question and thanks for asking and I think if you look at the University of firms that we receive a wholesale sixtyl five eligible order flow it really sort of divide them into.

Kind of two buckets, if you will and there is the what I'll call the.

For lack of a better word the discount old discount brokerage model.

And clearly you're right you know the what was the trade now merged into Morgan Stanley et cetera. They have all gone to Zero Commission model Theres about a dozen or so of those.

The Robin Hood, the train stations great.

Clients of ours, and then there is a whole range of what I'll call more arenal kind of full service wealth management buyout firms candidate by the way to describe it and are.

Their commission rates are probably all over the map and some of it may be blended with you know acid advisory fees, and whatnot et cetera et cetera.

You know very well because you know jade.

JP Morgan would be one of those and so theres.

Theres literally hundreds of those globally that we deal with not just us based firms its firms in Canada, and Europe and in Asia that have you at retail.

Retail eligible flow that we have relationships with and so looking at both of those buckets, it's sort of divide it that way, so again, where we're agnostic as to the form of the the client that then that obviously, we look at the flow and measure its toxicity. Its attractiveness and then we can determine what what level of price.

Improvement, we provided and whatnot. So it's a very nuanced business on a customer by customer basis, and we're always looking for that next.

New entrants.

That new wealth manager over in Europe that may not have a relationship that's really a service business. We're in as much as the price improvement business.

Got it so close to the isn't more benefits still to come from zero commissions.

As you know do you think these other firms are going to migrate lower lower either in the U.S. are globally, the benefit you or or has it really just played out.

I don't think it played out I think you know the.

The theme of price compression and everything in the financial services market is you know we're not we're not the game's not over all right. So if you have a full service broker that's still charging you havent forbid $300, a trade or something like that I think thats going the way the dodo bird.

But again I think those firms and again this is not my business model you know this better than I do.

They are trying to sell a full range of services. If you will to their investors, which is very different than the approach that some may be more online from take so I think overall, it's going to continue to be price compression I think that is a very significant tailwind for us I think those firms will be more and more.

We're dependent on the expertise and the service of a firm like over two and our competitors to provide the necessary best execution order routing and in the case of her two and our competitors meaningful price execution, and therefore value to their customers.

You really seeing that effectively that function of maintaining best execution guaranteeing price improvement.

Has essentially been outsourced to virtu and a handful of other firms that are very very capable of doing that whereas the the online brokerage committing the wealth managers, obviously are performing a very different functions. So as you see the pie kind of shrinking on that side, they are going to be forced to not invest in the.

You know the spend millions and millions of dollars that we do to be connected to now the 15 National Securities exchanges in the 16 or so options exchanges, the United States and the rest. So I think that trend is a positive for a firm like ours.

Okay, Great and then maybe just for Joe.

Joe now that we are in the more normalized trading environment.

Can you talk about how you're positioned for two to more efficiently get capital when you need it.

You secured a pretty expenses.

Line during the peak of the crisis.

The balance sheet is in great shape, right now, but you're making it more efficient we've got the buyback announced.

Can you talk about your ability.

To to.

More efficiently borrow if the opportunity arises again, where.

Market volatility is up activities up your participation is up and you and you want to drive more business.

Yes look I think we've done a number of things first of all I'd say on slide nine the target range available for share repurchases accounts for.

Not only adequate capital, but a cushion right. So we feel like in our account in our cash and capital management.

Going forward, we have adequately allowed for.

Not not just adequate cushion so that we can take advantage of opportunities where needed.

On the expense of wine you referred to is gone right. We don't we don't have that anymore, we don't need it.

We have substantial.

Borrowing capability in with our settlement bank on a self clearing basis and access to the balance sheet of great institutions like JP Morgan through prime brokerage relationships.

Weve importantly, we've consolidated.

All of the legacy broker dealers, which I think is is kind of one of the most important things.

We entered this year, we hadnt done that and that work that.

That hard work has been done so.

We feel very very good about where we are from not only a day to day standpoint.

But you know should we be in a position to take advantage of opportunities or need more capital. We have it just in the past sales.

Several days with some of the volatility post election, we've we've we've been more than fine in terms of in terms of capital.

Okay, great. Thank you very much thanks.

Okay.

The next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Good morning, great. Thanks for the question.

I wanted to touch on some of the organic growth. Some of these organic growth initiatives you guys highlighted on slide six.

Maybe maybe help me understand.

The trends this year and I understand it might be a little difficult to complete we got to separate the two but.

See we had an incredibly kind of robust trading backdrop in the first part of the year I'm, assuming that kind of boost at some of these revenue initiatives the organic growth initiatives and you've already got to think about what what these would have been without Houston volumes and volatility we saw in the kind of currently part of the year on an EPS third quarter numbers.

If you guys could provide that might be better run rate and.

And then more importantly, how should we think about building on these organic growth initiatives into 21. So I don't know if it's I guess Q3 annualized and bad level, maybe is the way to frame it.

Yes, I think that's a very very fair way to look at it I mean I think as.

As with many things you have to slice and dice the various initiatives. So like you know is.

In this environment had we not invested in Recalibrating, if you will our options infrastructure and taken.

That initiative starting in 2018, we likely would have had you wouldn't have seen we wouldn't have been able to capitalize on any of the opportunities. This year in 2020, Alex So I think thats one thing.

As well on the ETF desk.

We've made significant advancements and beef up that does but certainly.

The marketplace dislocation.

Particularly in the fixed income arena in the first and parts of the second quarter were very very significant and you know obviously the same thing with the KCC strategy. So yes, it probably would be an interesting way to look at what this looks like in a couple quick what more normalized environment to look at what we did in Q3 and maybe annualize that.

That number so.

I think thats, probably the right way.

To approach it its always hard in our business is kind of separate out the off from the beta if you will.

But I think the the.

Bigger point here is.

We are very capable of continuing to grow this firm and these are marketplaces, where the you know the total addressable market is very very significant right. I mean, you obviously know what the options rose like in he is here and around the world. The same thing with with block ETF trading. So these present.

Really significant opportunities for us to continue to grow the firm.

Got it and then so what is the number in Q3.

Yes, a little bit.

Yes, sure, yes, we have that number at.

9% in Q3 of our of our adjusted net trading income right. So we just do the math Threesixty two got a 9% at 362 this yeah.

But we got it okay.

[laughter], where you can probably do that.

The the other question I had three guys back to Richard.

Rich's question around the two dollar earnings number as kind of the floor. So clearly you have the benefit of history of these companies combined on a pro forma basis to kind of run the analysis much longer kind of term that weekend, but since the deal closed clearly you guys were at around $4 million for the mudra per day and trading income.

The majority of 2019, and obviously, they've got a pretty big boost this year given limited the app itself in an event that you guys do slipped below five per day.

On a call at annual average basis is the take away from the conversation should be like look theres enough things on the expense front you still are willing to do to get you to the two dollar number in EPS.

Yes.

And that does.

Yes, I think you you've articulated very well obviously, there is a lever around incentive compensation, which is pretty significant right and we accrue as Joe said to a percentage and then to a number later in the year Youve seen the the ebbs and flows of of our comp accruals. This year. So certainly.

No I don't like to think of a number of less than $5 million per day.

You're right 2019 was kind of an extraordinary year in terms of just lack of market opportunity.

In terms of volumes and volatility so again I would like to stay away from trying to prognosticate around what marketplaces will look like.

And I'm very optimistic Guy as you know and going back as Joe mentioned in his remarks to our 2000 from our 2015 IPO forward much more of the quarters and certainly more of a year is that not have been above $2. If you pro forma this expense base, that's kind of the point, we're trying to make which.

As we've done it's not really pretty when you make the sausage I've been told not that I've ever made sauce HIV a lot my life and I really like when the sausage comes out right. So we've been making sausage for the last three years and now we've got this beautiful how basa that we're all going to enjoy for the next number of years.

Yes, I would add I'd add one thing to that as well is that you know.

The premise of the question is that you know in any one year right. The point that we're trying to make on that dedication of excess cash flows.

Just share buybacks is that.

We can continually reset that bar higher rate in any year. If you look at the outcomes over the past five years and as Doug said use this cost base and then take the the net trading income of of the of the firms together.

You get a.

A year, where there is a trough, but you also get a year like this and you get some other years that were well above five and if we're going to be able to take the substantial cash flows in any one year five.

Buy back stock in any kind of 2345 year period, that's going to add up when you look at those numbers on slide nine and.

And you're going to be able to reset that bar. So that even if you are in a trough year hopefully you are above $2.

Yes.

Great. Thanks very much.

The next question comes from Dan Fannon with Jefferies. Please go ahead.

Thanks. Good morning, So wanted to talk about the retail and the elevated levels of engagement that's been happening.

If you think about the profitability of that order flow and how that's changed or have there been any changes into the requirements of price improvement that you have to provider wonder just discuss the kind of competitive backdrop, there and maybe how the economics or shifting as a as a result.

Yes, it's a great question and obviously, Dan we monitor it you know if not hourly but for sure it daily weekly and monthly and I've I've.

To discuss this before on prior calls with regard to.

You know the vast preponderance of the benefit if you will and the clinical payment were providing is in the form of price improvement and every counterparty broker we deal with.

Direct order flow to us or to the competitors, the citadel's and Susquehanna's of the world based on price improvement. That's that's the first and most important thing and so obviously think of that is kind of cost of goods sold and there is a little bit of a game theory right between us and our competitors as to the more price improvement even more.

We paid for getting quotes for the water.

Improving off of the National Best bidder best offer than the more order flow, we are going to get.

However, not all flow is the same by broker and certainly even by symbol end by time of year, and et cetera, and clients on the brokers kind of move around and around so we're always constantly measuring the various toxicities. If you will the sharpness of the flow.

Not all retail flow put that in quotes is retail some some of it is professional trading farai a flow that tends to be a little more correlated with other market participants and harder to handle and some of it is larger size et cetera, you get all those metrics I would say overall and now since we have bought Knight capital. The business has had periods, where it's more competitive.

We're compare.

Competitors decide to ratchet up if you will the execution quality prepared to give and then they struggled with profitability and then come back down so I take a very long prosaic look at this which is why I strongly have urge all of you guys not to focus on basis point moves in market share. They don't really mean anything.

Don't really mean anything or what really at the end of the day, what I focus on is do we have happy clients are we providing good service right do we have market share from.

All of our customers that is meaningful to us and to them. So we have meaningful partner of theirs and then obviously is the net after paying this price improvement and in some cases payment for order flow.

We have positive is it a positive net experienced otherwise were born providing guaranteed execution not getting paid for it and that's silly.

So there.

Theres, a back and forth here and all the other players that we compete with their also economic at animals. They don't have any magic elixir, our magic algorithm that we don't have right. We all kind of are doing the same thing and we're all providing great service and value to the marketplace. So I know this is a little hand wave you have an answer but there is.

It is inflows around competition the business continues to be very profitable for us on a net basis on a gross basis, it's incredibly profitable and as I said in my remarks, we have paid put that in quote on our financials, we've provided back to our retail customers.

$950 million of price improvement this year, so think about how powerful the predictors any algorithms. If you will that were in the night from that we acquired are right and that number doesn't appear in our financial statements I wish it.

We were able to keep all of it but thats not the deal we have with our with our customers and Thats. The the service that we provide and that's why this structure is fully embedded in the ecosystem of the financial markets and is there to stay exchanges can't do what we do and that's why these orders get sent us.

Okay. That's helpful and a couple of more clarifications on just expenses. So for Fourq you I believe you said the comp ratio is going to be flat, but I assume thats with the year to date.

Ratio and then next year, Joe you mentioned more synergies. So is there a way to put a number around the synergies that you still have to take out of the business I assume some of that just delayed because of the cold and stuff that you Didnt do this year, but.

Talk about that and then also what is kind of a normal baseline level of growth for your expenses in kind of a.

Inflation is there is there a percentage we should think about or is there are always some level of decline that we should be thinking about when the opposite.

Yes in terms of the expenses and the expense guidance.

But the if you look at the.

Original synergy targets, if you add up.

The synergy guidance I think on KCG was 250 million round.

Round numbers and TG was 133 million.

In terms of mid point, so we're guiding.

Total expenses next year six so five to 645.

So I don't know what the differences in terms of the last up to be achieved but it's going to mean that were instead of achieving $384 million were going to achieve $479 million using kind of mid points.

And I Hope you go through the mechanics offline on that but but the synergy guidance.

In terms of run rate.

In the next quarter, but just to be clear glad you brought that up.

We would expenses, we would expect cash cost to be to be flat quarter over quarter third quarter fourth quarter, so not quarter to date.

And then long term, we've always go as Doug said.

In a down year, we do have the incentive comp lever a substantial portion of our of our compensation both.

Both cash costs and share based comp is is incentive comp. So we do have that lever.

So we would we would and we have in the past and will in the future flex if if if need be in terms of communications data processing work or other expenses. You know, we've always guided those to grow and kind of low single digits low to mid single digits really.

And I wouldn't expect that to change.

Great. Thank you.

The next question is from Chris Allen with Compass point. Please go ahead.

Morning, everyone.

I wanted to ask a little bit of execution services I'm, just trying to think about why that would be down year over year, just given the low volume backdrop, we see it.

Yes. Good question Rich a couple of reasons. One is do you have to adjust about $2 million a quarter for a match now, which we disposed that we sold out say dispose of cohorts we sold.

As you know to CBLI right so that that.

19 to 20 comparison and then.

With this business in particular.

And you can look at the old MTG filings.

More than half of this business is outside the United States. So you have to look at other than us equity market volumes us equity market volumes were down 21% quarter over quarter, Europe was down 22% kind of down 13% right and we outperformed each of those metrics in each of those sub regions, but unlike our market making business.

Whereas you know were.

More more of a global equity for that effect from number one and then obviously more of US equities from thanks to the legacy freight legacy Knight businesses, you know our.

Situtions business is much more regionally bound I'm sure somewhere I think in our financial statements in the 10-Q.

Footnote, we go through the kind of the regional breakout of our of our paying out a lot of that is on the institutional business. When you look at Europe, where volumes are down 22%. If you go look at like block volumes in Europe in particular, they were way down and the same with if you look at the FINRA data on block volumes in the third quarter, the United States.

Block volumes were down significantly so that really then disproportionately hurt our posit alert business, which is our block business. So a lot of adequate the group actually had a really solid nice quarter, but.

But given the the marketplace, obviously on a comparison basis. It certainly looks like it was down significantly.

Yes.

And then.

Just on the timing and pace of buyback suite includes to start immediately.

And I mean, you expressed the the $5 before so the $40 million to $60 million range should we be assuming that the minimum for next year will be roughly $10 million per quarter.

Yes, Joe here look we would we would get started right away.

The authorization.

It will be open for a year that doesn't preclude us from kind of doing more.

In in next in the next year as results come in.

But we we there's no reason for us to kind of tying them out.

Quarter to quarter, we would we would be as aggressive as we think prudent depending on where the share purposes.

Got it.

And just a just a cleanup question. The other revenues 70 million list amounts now 58 spent $12 million is much higher than normal slightly lower than those goals.

We had to mark up one of our investments.

We have an investment in a pts in Japan that is doing very well and you.

The accounting rules require us to mark to market and so that that's not a cash.

It's not a cash.

Gain, but it's a nice investment for us.

That business EPS over there is the Pts over there is doing exceptionally well, we're very happy and proud to be a partner with Sci in it.

Operator.

Yes, Mr. Allen are you done with your question I believe you said sorry, okay. Thank you.

The next question comes from Ken Hill with Loop capital. Please go ahead.

Hey, good morning.

Just had a quick one on open technology. So your data as a service platform so being given update there. It seemed like you had a lot of potential given all the data you guys have.

Interact with so im just kind of curious if you could give an update on how sales might be progressing there what client uptake looks like Ken hi, investing in data kind of longer term there.

Yes. Thanks, its great question, Yeah, I mean, we're very excited about it we think that the future of the delivery of.

All the wonderful services that we have on analytic side, we don't separately breakout workflow in our Ve segment, but its a.

The response to the marketplace. We put this way can has been very very Uh huh.

Positive because we were giving clients what they want which is access to their own data our analytics tools on a platform on which to undertake that rather than sending them. Some.

Non manipulate a bull flattened PDF file or something like that right. So is it has the advantage of Odyssey.

Given the clients what they want and it also reduces the manual functionality. If you will of of the analytics business. I mean, that's the vision that we have for that business. So it is.

The client response has been great. We've had client wins be cost of it obviously given what's happened in the market maker decide it tends to get to work by the market, making returns, but I'm very very happy with the performance of that segment.

Okay I appreciate the details there thanks for taking the question.

Thank you.

The next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

Hey, good morning, Thanks for taking the question, maybe just going back to some of the points you are making earlier about pricing compressing across financial services across the industry I just spoke about earlier and from state meet become more dependent on market makers like Virtu. So I guess, how do you see industry structure potentially evolving and could it make sense strategically for a firm like.

It seems to be part of it.

Financial services firm to help them better capture more rents across the overall ecosystem as the ecosystem compresses and or do you think there could be any conflicts there that could preclude any such combination how do you think about that.

Well here is what I would say, obviously, Oh what'd I love running this firm are great independent from we've got a whole all types of levers and growth initiatives and whatnot and you know I don't worry about.

That and game I keep my head down and we run this firm with intensity and on an operating discipline et cetera et cetera, as the comments I made before I think are just a natural evolution of the markets towards efficiency. What this firm has always been about one of my partner bidding and I started this firm. It was always about if we fast what's your secret sauce.

Hey, Jeff Telus, and I say that whole bunk, it's really about operating discipline and scale and efficiency you have to be the best been invest off or how do you do that.

Everything that isn't geared towards producing that best fit in best offer is a waste of time. So offices, you know all that kind of although all the accoutrements are a waste of time focused on the technology and innovation to be divested best offer and that's the most of this firm and will continue to be the deepest of this firm add marketplaces have gotten more competitive.

AP as commission rates have gone to zero as spreads has compressed as a positive trend for our right because we can be the most efficient and always will be the most efficient provider of that price either as principal and now as an agent right that was the strategic evolution of our firm as an agent and so I think larger financial.

Institutions, who we have wonderful relationship, but I never Morgan Stanley is not a competitive or to any form.

At all JP, Morgan et cetera, Goldman we've worked exceptionally well with each of those firms we provide a service in a function to them and they provide.

Now than more services and functions both to us and to the ecosystem at some point in time could a large financial institution look at us and say Wow. These guys do all of that globally across asset classes geographies as a principle, if an agent and they really have built a hell of a mouse trap here and the run rate expenses that is x. and we're spending.

You know 100 times X to do how did the same thing.

Sure that I could see some very very very smart person.

Person in the C suite somewhere saying that at some point in time I don't worry about that I got in a day job to do.

You know someone smart like you had a big institution like more now they can write a great paper about that and maybe it will have some debt.

Okay, maybe just changing gears as a follow up question. Thanks for the color there on on execution services, maybe you could just remind us of what portion is transactional that's driven by volume and activity versus what portion of the execution services revenue would you say is more recurring in nature.

I'm looking at Joe to see if we break that out and I don't believe that we know we don't break that out I mean, there's there's a.

A good portion of its volume driven you know I would call you. If you look at it over time Michael.

Michael the comment I'd make is that is that when we bought GE and really scaled up this business.

Yes. The thesis was that it was going to be volatile and it was going to be driven by volumes.

But that it would be less volatile than the market and.

I think that's that's been proven out.

You know I would describe the entire revenue base not necessarily.

There there are recurring elements of it but but I described the whole revenue bases re occurring as opposed to.

Market, making which is really kind of driven by by volumes volatility as you know.

And if I could just sticking to the other one follow up there on just a point any sense on how you expect that revenue pull to grow on the execution services side as you look out over the next couple of years.

Yes so.

Obviously, the volume element to it as I mentioned in response to Chris Alans question, and even Triton, which is a workflow solution for which we get a subscription fee. There is a transactional element to that right. The more widgets that go through our Fms the more we get paid by the street. So you will see we do disclose on.

In our in our update.

You know that.

That we have a volume driven percentage if you will to some of our work flow business.

So I think that was a wave of the future frankly is towards more of a subscription financial technology style model. We've looked at each of our customers and said you know if the commission dollars. We're getting are not significant to justify the spend in order to maintain it we're going to need to put you on a subscription type amount.

And the street is accepting of that the buy side as accepting of that globally. So there's more of a trend. There again is a longer sales cycle. There were also engaged with you know a number of folks on the sell side smaller broker dealers and some midsized tier two broker dealers that need more of a holistic sell side solution as any.

Almost complement and so that would be against subscription driven so that's something we're very bullish on longer term, but right now the mix of the business is still the vast preponderance of it is transaction driven.

Great. Thank you.

Thank you.

The next question comes from Alex Kramm with you be EPS. Please go ahead.

Yes, Hey, good morning, everyone I'm sorry, if this was already asked but on the expenses for next year can you give us a little bit of a quarterly flavor I guess the reason why I ask is I know you mentioned earlier that there is still some synergies to go through I think a lot of that is the I guess the layoffs that youthful did that you didn't do this year. So is this one of those that you.

Patients were January 1st those layoffs happen and then the cost basis fully reset or is this going to be a process over a 2021.

Thanks, Alex now this is going to be a process.

Again, we could talk about the mechanics offline, but I think the other way I would.

Laid this out is just kind of scaling down.

Our you know I mentioned I answered someone else's call on going comp you know I would you know just quarterize the comp I think that that's the best way to do it.

And then some of the other things they start higher, particularly overhead and then scale down as we abandoned leases and kind of continue to clean up and some of the.

In some of the.

Acquisition, you know excess offices and things like that but I quarterize carbonite it scaled down the.

The.

Other things, starting a little higher and ending up.

With a lower run rate.

Okay Fair enough and then just just quickly.

Obviously, you decided to no longer give monthly.

And John if I heard this correctly.

But you made some quota today's column and so if I think through what we've seen so far is it fair to assume that October was running below and the election than made up for it and some of the trading activity around that or any other flavors you would give us to what you've seen so far this quarter too can you give us a better idea of Oh, we.

And how we are making money right now.

Yes sure.

I'm happy to address that I mean, I think again as I said in my prepared remarks, you know, we try and we try to be responsive and frankly, all it did was in my view engender more volatility in the stock, particularly around the August results, which I thought was not helpful to building long term value around our stockholder base frankly could you know I talked to a number of our long.

Our you know partners investors have been with US frankly, some since the IPO and and my conclusion was this is just encouraging more shall I say day day trading work or quarter to quarter style trading and Thats not again, it's obviously, that's where part of the ecosystem, but that's not really what I do want to date.

To date wire wound care data they were trying to build long term value as we've laid out here. So that was the idea behind that and certainly we will continue to give some color.

Yes, I mean October was more of a muted, but when it came to buys volatility, but we still performed.

I thought exceptionally well.

And obviously these last few days around the election.

I saw some comments from.

Global trading at JP, Morgan and I would echo exactly what he said I thought it was very very well articulated which is it was a really really busy period for us, but it wasnt it wasnt chaotic and crazy.

So that is a good deal of uncertainty still around the election results in that.

Both at the White House, and the Senate and whatnot, so they'll continue to be some volatility, but as the market gets more conviction around that I'm excited that we're seeing increased volumes. Obviously, we've seen an up market. The last couple of days I think mark was down today, So I am to be very optimistic about what fourth quarter would look like just given the marketplace, but more.

Finally, all of the investment that we have made and the growth initiatives, a really really bearing fruit and I think that.

Cash has come through.

The first half the year and in particular in this third quarter.

All right very good thanks. Thank you.

The next question comes from Kaimon Chung with Evercore ISI. Please go ahead.

Hi, Thanks looks like has been asked and answered, but maybe just looking for a little more color just on the progress on the part two capital market, maybe the type of that pipeline of activity here, yes.

Yes. Thank you very much I mean, I'm very very happy with that initiative.

The guys that right or just super Super talented and really have outperformed even my lofty expectations for how that would integrate with the rest of the firms I'm very very excited about it as we put in our investor presentation.

It's really across industries I think what we've successfully done is leveraged two things one is well three things one is.

Our market share that we have right, which is really compelling to companies because they see that hey, we're number one in their stock and we're number one in their industry. So there has to be a lot of natural crossing flow. That's the first thing. The second thing. We obviously have a tool kit in terms of Algos in terms of alert.

So that the guys running the team ATM business and trading.

On behalf of our clients can effectively internalize and give a great outcome as measured by analytics tools to the company and then the third thing is obviously, we've got a great group of guys running that business that have long term relationships with issuers of all sizes and strikes.

You know that that can you know that want to use our services. We've also undertaken for the first time going up the Canadian issuers that are issuing of United States as well as another growth opportunity in that having a.

Scaled very very well regarded office up in Toronto helps that so truly is a as a firm wide.

Endeavor that has really borne fruit this year and I'm excited about how it's going to grow again, it's just part of the theme around efficiency and technology, making markets better.

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Thank you.

The next question is a follow up from Dan Fannon with Jefferies. Please go ahead.

Hey, Thanks for taking my follow up just wanted to ask about.

Debt pay down going forward here, you've obviously got a lot of flexibility with where the balance sheet said so from a modeling perspective, just kind of assume you're comfortable at these levels. And then also you know M&A, where you guys have been so successful obviously the buyback is new but how do you think about M&A in this type of environment that less of a focus.

Or less from a priority given.

Going to what you're seeing from some of your organic initiatives, Yeah I'll take the first part there good question.

We've we've decided that as we came up with that you target cash flows available those.

Those only reflect what what we'd be required to pay back from our.

According to our debt covenants right. So when we acquired GE, we entered into a new credit agreement and you know, there's basically guard rails around the the amount of leverage and if we have a great quarter.

We are required to offer a repayment to our to our debt holders.

So we've modeled that in but you're right, we shouldn't model any voluntary.

Any voluntary debt repayments, because we are very comfortable.

With the billion six notional in terms of our M&A strategy going forward or what are our CEO answer that [laughter].

Yes, Dan we we obviously strategically grew this firm through a a lot of hard work and two wonderful acquisition that where I have been very successful from a product and a growth standpoint, obviously from an expense integration standpoint, it differently were very very accretive.

To our shareholders. That's the number one priority now that we have this fully scale from I've said on prior calls we are going to be the bars. The bar has been raised we're going to be very opportunistic around.

M&A, we've got something really special here because were a large scale player with a public currency and so I. We will continue to look at things examined them see what strategic see whatnot, but.

No.

A lot of the targets that we look at this year look at their 2020 or even the first half.

Half dozen 20 and annualize it and said you know give me give me or multiple based on that and I said well or give me your historic multiple based on that it will I'm not trading at Lindbergh multiple so I think the marketplace needs to kind of calm down in terms of a from an M&A perspective, I think people I need to look at companies on a normalized basis, and then conclude whether or not strategic.

Really they fit in and then I've said every time I've answered. This question I will not do a transaction that is not accretive to my shareholders because I'm a big shareholder we've got something special here, there's not a company that I could think of that has a product or service that we can't we're not doing right now we're not we can't build on our own right.

All right Thats. The key you know we are a fully scaled financial services firms. So we will be opportunistic we'll try to be good part.

Partners with folks, but we're going to do what's in the best interest of our shareholders and my board with Joe Sean and I are big encouragement concluded that right now using the extra cash on our balance sheet to buyback stock is the best way to provide value to our shareholders and thats going to be our ammo for the foreseeable future.

Great. Thank you.

Thank you very much operator, I believe we have no more questions in the queue I'd like to thank everybody for their time and attention today and we look forward to speaking with you.

In early.

The April March yes, something like that will will give the earnings Dave I wish everybody, a happy and healthy conclusion to 2020, we will talk to you that thank you.

The conference is now concluded. Thank you for attending today's presentation you may now disconnect.

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