Q4 2020 Virtu Financial Inc Earnings Call
[music].
Good day and welcome to the virtue of financial 2024th 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 todays presentation, there will be and opportunity to ask questions to ask your question and you May Press Star then one. Please note. This event is being recorded I would now like to turn the conference over to Deborah of Belo and head of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. Thanks for joining us our fourth quarter and full year results were released this morning and are available on our web site on.
This morning's call, we'll have Mr. Douglas <unk>, our CEO, Mr. Joe Maluso, our co President and Chief operating Officer, and Sean Galvin, Our Chief Financial Officer. They will begin with some prepared remarks, and then we'll take your questions.
After a few or just a few reminders today's call may include forward looking statements, which represent breakfast current belief regarding future events, and therefore subject to risks assumptions and uncertainties, which may be outside the company's control. Please.
Please note that our actual results and financial condition may differ materially from what's indicated and these forward looking statements. It's 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.
And for you to of disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report and form 10-K and other public.
During today's call, we'll refer to both GAAP and non-GAAP results and 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 measure should be considered as a supplement to and not as superior to financial measures prepared in accordance with GAAP.
And we direct listeners to consult the investor portion of our website, where you'll find supplemental information referred to on this call as well as reconciliations of non-GAAP measures to the equivalent GAAP in terms of and 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 fourth quarter and full year results I'll begin today's discussion by touching upon on the highlights of the urine.
As well as some commentary on the recent market activity and then Joe and Sean will provide more color on our detail results and outlook. We will keep our comments brief so we have plenty of time for Q&A.
The fourth quarter capped and extraordinary year for Virtu.
Successfully navigating the volatile markets created by the global pandemic delivering record results for our shareholders remaining ready to service, our global client base and taken care of our of approximately 1000 employees.
I'm incredibly proud of our entire team that continues to step up and deliver on that and mix.
Unprecedented market conditions.
And the full year, we achieved record revenues and profitability of our full year normalized adjusted earnings per share totaled $5 76.
And our adjusted net trading income came in at $2 3 billion.
Our $9 million per day on.
Im, particularly proud that we maintained our discipline around cost even in a year, where we were we've talked for some merger related cost reduction efforts and we were able to achieve and impressive 73% adjusted EBITDA margin.
We use our substantial cash flow this year to reduce our long term debt by $289 million and initiated a share repurchase program I am pleased to announce that day $100 million share repurchase program that our board approved last quarter has been increased to $170 million of.
Of which we have already executed $15 million.
This is in line with our comments last quarter that we were going to direct excess cash flow to return capital to shareholders and the form of buybacks going forward. We expect to continue this trend balancing debt reduction share buybacks and reinvestment and our business.
We successfully executed against the opportunities presented in the fourth quarter as we outperformed the prior quarter as well as the overall market environment, realizing $256 million and adjusted net trading income were $7 $1 million per day, and $1 18 and <unk>.
Normalized adjusted EPS.
For the fourth quarter and full year of both of our market, making and execution services segment delivered solid performance, starting with market, making our customer wholesale and non customer businesses performed exceedingly well and Q4 and in 2020, our continuous enhancements to our trading strategies technology and asset.
And last expansion delivered substantial returns by improving our yield on the opportunities presented this quarter, which included better than average volume and levels of Volatilities that remained persistently elevated relative to prior years on the customer side and 2020, we executed over one point to seven.
And 1 billion of orders for our wholesale customers, which included providing approximately one $3 billion and price improvement to retail investors.
We provide wholesale market, making services to retail investors across over 200 platforms, ranging from retail and private client businesses of banks and global financial institutions to online retail firms, which provide immediate execution at or better than the national best bid or offer and over 8000.
Listed securities and the <unk>.
And I did state.
In addition, our non customer market, making business delivered stellar results in 2020, we saw a strong performance and a number of categories and our fourth quarter and particular around our new options desk and the ETF block business more on that later as well as our European and APAC equities businesses.
2020 also marked the first full year of operations for our expanded Virtu execution services or DDS business. Following the merger with ITG and I'm pleased to report that the fourth fourth quarter saw a record results for our DDS segment with $135 million and adjusted net trading income.
We saw strong growth across all regions, delivering a 29% increase and adjusted net trading income versus Q3.
And this business led by Steve Kubota really hit its stride in the fourth quarter and.
And we expected when we acquired ITG marrying virtues technological capabilities with Itg's strong suite of workflow analytics and brokerage service products has led to increased client engagement across the board. In addition, ves provides a stabilizing force reducing overall quarter to quarter variability in our result.
As we grow this business and profit.
<unk> cross selling to existing clients. It is important to note that today over one third of our clients utilize multiple products or are engaged and multiple multiple regions, which drives more value for these clients and a relatively steadier revenue base for us.
The impressive results of our EES business arent immediately apparent and a year, where our market making results are so substantial.
The <unk> business is a steady revenue stream debt balances are naturally more volatile market, making business.
With 2020, and the rearview 2021 is off to an impressive start based on preliminary results are quarter to date 2021 performance remains robust and comparable to the record daily average we achieved in 2020.
Finally, touching on the markets and the beginning of the year total U S equity volume and January average $15 7 billion shares notional volume was $621 billion per day, we continue to be there for our clients and provided $134 million and price improvement in January alone.
And actually we don't expect this level of activity to persist throughout the entire year, but we are encouraged so far by the start of the year.
And I will turn the call over to Joe who will review some of our growth initiatives and progress versus our strategic plan and Jeff Alright.
Alright, Thanks, Scott I'll review, some of our growth initiatives as well as a recap.
Of our strategic overview that we presented with the third quarter results back in November.
And you look at slide seven and the supplemental materials, you'll see that in 2020, we realized $166 million or 7% of adjusted net trading income from these initiatives.
While results and these businesses will be volatile it's important to note that these businesses did not exist a few years ago.
Substantially progress this year and options and we will be continuing to expand our simple and venue coverage and the scope of our business of 2021, having spent 2020 building out our core options infrastructure.
Our ETF block business has also been of success story, we have expanded our customer facing presence, resulting in meaningful growth and net revenues as well as providing us additional opportunities to grow into corporate bonds as a market maker on.
Efforts already underway and one that we expect to contribute to revenues in 2021.
Importantly, our Virtu capital markets business is an example of how we leverage the capabilities of our EES business to offer execution services to a new segment of the market and grow revenues and late 2019, we identified an opportunity to execute at the market offerings by hiring of small group.
Orient and this area together with the execution and routing capabilities of EPS. This business bore fruit for us in 2020, and we expect that to continue to do so in 2021.
Discussing further our strategic plan that we outlined in detail and the quarter I wanted to point out slide 12 on the supplemental materials, we outlined the specific operating expense plan as well as of grid noted the potential levels of free cash virtu will be able to devote to share repurchases at various levels.
So performance.
This plan was meant to convey several things first to be specific about cost guidance as we head into 2021 when.
When we expect to conclude the integrations of the large acquisitions, we have undertaken.
And second to make clear that after the substantial deleveraging in 2020, our current overall debt levels represent a permanent capital structure, regardless of the overall environment and.
And third to be specific about a plan that through various market environments should result in our ability to generate free and substantial free cash flow devoted to returning to shareholders.
<unk> with this plan and assessing where we are as we approach the midpoint of the first quarter, we are able to increase our share buyback plan by an additional $70 million now I will turn the call over to our CFO, Sean Galvin, who will provide further detail on our results.
Thank you, Jeff and our fourth quarter adjusted net trading income, which represents our trading gains net of direct trading expenses totaled $456 million.
And for $7 1 million per day.
75% higher and a year ago quarter.
Market, making and adjusted net trading income was 321 and $2 million or $5 million per day, 109% higher than the year ago quarter.
Execution services adjusted net trading income was $135 million.
Our $2 1 million per day of 26% decrease year over year.
And full year, adjusted net trading income totaled $2 $2 $7 billion or $9 million per day.
131% higher than 2019.
Market, making adjusted net trading income was $1, one and $8 billion.
<unk> 7 million per day, 192% higher than the prior year.
Execution services and adjusted net trading income was $489 million or $1 9 million per day, a 31% increase over 2019.
Turning to expenses for the full year, our cash and overall compensation ratios of 14, 1% and 16, 7% of adjusted net trading income respectively, which are in line with our prior guidance.
Adjusted EBITDA came in at $344 million for Q4, 200% higher than the prior year quarter and $1 65 billion for the full year, 282% higher than 2019.
We adjusted we delivered an adjusted EBITDA margin of 75, 4% from fourth quarter by continuing to successfully leverage of our efficient cost structure.
As Doug mentioned, we have been diligent and paying down our debt, making $388 million and prepayments since the ITG acquisition, and 2019 and have reduced our debt to $1 67 billion.
Finance interest expense has decreased by $24 million to $68 million for 2020 compared to $92 million from 2019.
We remain committed to our 24 quarterly dividends, which we have consistently paid over 22 quarters in every environment since our IPO.
And our just announced $70 million increase to our existing $100 million share buyback authorization authorization fully demonstrates our continued commitment to return capital to shareholders.
I will now turn the call back over to the operator for Q&A.
We will now begin the question and answer session to ask your question and you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time of a pause momentarily to assemble the roster.
And our first question today will come from rich Repetto with.
Piper Sandler. Please go ahead.
Yes, good morning, Doug and Joe and Sean first congrats on the Super quarter here.
I guess the first question Doug is the question.
Question on all of the investors are asking if you look at the last two <unk> and three Q and you look at the market metrics of volatility and volumes and this is on slide five net.
They look very similar but when you looked at your results and.
And <unk> were up 25% quarter over quarter.
Net execution services and Steve did a great job.
But showed significant improvement and your earnings leverage was up your earnings were up 45% quarter to quarter. So how does how do you explain to investors the differences and.
And the outperformance.
And so what what really worked I guess and.
And <unk> versus <unk>.
Yeah, Thanks, Rich and good question I mean, I think look I mean.
Clearly the environment and continue to be.
Practice, and our fourth quarter Youre right on.
On the third quarter compared to the fourth quarter and there are some differences. If you look at the interactive brokers' retail engagement for example, and Q4 as compared to <unk>, which is the only public metric available with respect to.
Retail is engaging the marketplace youll see an increase and you can also measure.
The RFS volumes relative to on exchange volumes and so certainly you see some positive trends there.
As well, we continue to improve and get quantitatively better I mean, it's hard obviously to measure and separate out sometimes of the alpha from the beta if you will and we tried to do that with some of the growth initiatives and whatnot, but within the existing.
Quote unquote legacy businesses and there has to have been.
As I said in my prepared remarks, we continue to invest in technology and and strategies and whatnot. This is an organic business that you have to always be.
Investing in and getting better so I just think the firm qualitatively.
And has improved significantly in 2020, and you saw that and certainly in.
The fourth quarter, and and you mentioned it but it's worth and I mentioned it in my prepared remarks, I was really really happy with the performance of the execution services segment and this quarter I mean, theres been a lot written about that.
A combination with ITG was it going to work with clients react to.
And on HFC firm and emerging with and institutional business and the marketplace has resoundingly said, yes.
And the unique nature of this firm, where we can marry a market maker that has both technology, but also access to significant.
A significant central risk book, right and make that available and are fully disclosed efficient manner to our institutional clients is unique and clients on.
Understand the story and more importantly, they see it and their performance. So we now have hundreds of institutional investors that are utilizing virtu, both ads and agency broker, but also as a place rich to source meaningful liquidity that might not might not otherwise be as robust and is available and they could find and other places.
And so that story and that performance really is resonating with the with our clients.
Got it.
One follow up.
No.
There's been a lot of attention and speculation on payment for order flow from the media and from.
Et cetera from lawmakers.
If you had and you sort of get into this a bit in the <unk>.
Paired remarks, but if you had explained payment, Florida flow to take someone who's not as familiar with it.
And how what would points would you stress and really want them I guess to understand and do you think there of any potential changes to payment for order flow.
<unk>.
Yes, no. It's of Great question, obviously, it's front of front of mind, and we've tried very much to be front footed and talking to clients and and regulators and lawmakers about this over the years and and indeed more recently I think the issue is really there is a misunderstanding with regard to what the term payment for order flow and means that people use it synonymously with her.
Zale market, making and frankly, that's a mistake, which leads to confusion and misinformation.
Selling by its nature of it is that.
As a business, which we and a bunch of other firms are engaged and where we are providing immediate execution on over 8000, Reg NMS listed securities as well as meaningful price and size of improvement to every marketable order that comes in and so retail flow comes in and by its nature of its a little more balanced and <unk>.
Cause of our ability to offer price improvement that is better than the national debt best fit and best offer.
Retail investors on.
Our benefited from us providing that service to the tune from of Virtu perspective of about $1 three and we estimate as an industry in 2020 of that Virtu Citadel Susquehanna two Sigma and the other firms UBS that provide this wholesaling service provided $3 $6 billion of price improvement.
And to do a payment from one of them, but literal price improvement.
And off of the National best bid or best offer so a few of our retail investor Youre able today.
And to pay no commission send and order of up to 9999 shares right and receive either of the NBL or in many instances better than the <unk> on that entire order. There are a lot of institutional clients that are maybe listening that I've talked to that would happily take that deal. They are sending similarly sized orders.
And similar names and they are paying at the commission and they would be thrilled if we get to touch right. So retail investing if you just take a step back at the ecosystem and what we and our competitors have developed in partnership with the over 200 on trading platforms et cetera, It's an unbelievable ecosystem that we all should be very proud of and.
And regulators and policymakers and folks that study of the market that look at that say and really look at the data right and avoid the histrionics. If you will look at that and say well that's a great system.
Really who is not benefiting from that system, and we're putting our risk capital.
To provide debt service and we get paid through the through.
Internalizing, if you will and realizing the bid offer spread as best we can someday.
Don't make any money on that business right as flow can be sharp and unit directional and whatnot and on balance we did but we've been at that business for over 20 years and invested billions of dollars and technology to make that work now some retail brokers.
Charged the wholesale market makers of fit and that's call of payment for order flow right for executing the order flow as I've said before.
And theres about a dozen or so firms that do that of the 200 retail brokers and.
Platforms et cetera that we connect to and as a general matter, we're agnostic rich as to whether or not of broker charges that are not and we look at that.
And as really as the same as any other fee right work or charge that we're going to have from connecting to any other kind of exchange financial intermediary bank broker, we're connected to hundreds of venues and banks and brokers around the world and a lot of times, we're paying for order flow and this instance, it's with a handful of retail brokers.
The important statistic is that we paid that we provided excuse me over three five times three five times price improvement if you will to FIFA rights of the vast preponderance of what were doing as a service and the industry is providing price improvement and then finally.
All of the retail brokers that debt.
Required payment for order flow do it out of standardized rate and so really the competition between us and our competitive wholesalers is 100% based on what level of execution quality of price improvement can we provide back to their end users right. So in terms of.
The ecosystem and who is ultimately benefiting it really is the retail investor.
Got it thanks for the explanation, Doug and congrats on the great quarter. Thank you very much.
And our next question will come from Dan Fannon with Jefferies. Please go ahead.
Thanks, and good morning, so wanted to tease out a bit more of the strength of the fourth quarter and what we've seen to start the year. Obviously realized vol is when you look at that slide is didn't didn't change much but retail participation is up and then you have the trading of kind of single or low price stocks and specs that are becoming a much larger part of the market.
So could you talk to some of these other factors and maybe isolate some.
Some of the more specific things that are that are really incrementally difference and this market.
Yes, yes, great question rich.
Okay.
And as I mentioned and you just alluded to obviously when you have.
U S equity volume that are.
12 billion and I think yesterday was close to $15 billion right and that's just an enormous.
Flow thats coming through our system and it's not just in the U S and U S equities and Youll see it and Canada and in Asia, where Theres, just enormous engagement and the marketplace and so all of that kind of it's not just from our retail partners debt that we're experiencing all of this.
Incremental flow and incremental engagement and I think it's really part and parcel of certainly United States.
Fed policy around zero of rates and and the stimulus and the economy and you see that globally, where folks are really engaged in and when you have zero interest rates the equities market becomes a place where there's more trading and more interest and so that just.
And candidly the great a great environment from a market maker to be participating in and.
So it's not just on the legacy Knight Wholesaling business, that's experiencing this the legacy Virtu and the old GETCO businesses, which candidly have nothing to do with retail order flow are off to a fantastic starts in 2021 as well and all of that leads to the results you see again I'll emphasize it I just answered it.
I mentioned and the answer to Rich's question, but our execution services business is off to a better start of 2021 and then.
Significantly better than what it what it did and in the fourth quarter and the fourth quarter I thought was fantastic. It was up 29% from the third quarter. So it's not just one thing, but we are certainly clicking on all cylinders here and I'm very very optimistic that that's going to continue for the remainder of 'twenty one.
Great and then just as a follow up on options market, making and you talked about 2020 being kind of laying the groundwork and the infrastructure and now increasing symbols and and the rollout this year. So.
And but it's a contributor in terms of net positive in terms of the attribute of the revenue and AA and Ti and 2020, So I guess.
And in terms of the market and what Youre participating in today versus what you think you can be in terms of activity levels or just the broader security that you can actually trade as you think about 2021, how should we think about that rollout.
Yeah, Yeah. It's a great question I mean, we are and very very early innings and that business right. I mean, we frankly did not really even half of business in 2019. So I'm very proud of the strength that we made in 2020 I said numerous times on these calls.
It required and entire infrastructure Bill price are very very different DNA to be a market maker and options and it is and and cash equities not from our understanding of the marketplace perspective, but just simply from the the vast nature of the symbology and the quote said youre going to have rates of quote quote level of business as opposed to on <unk> level.
Right. So it was very very different so I.
We're kind of building the car if you will assets going down the road and at the same time, making money and typical kind of virtu fashion, So I'm very.
Impressed and happy with the results that we had thus far.
We have barely scratched the surface and we.
We are focusing as you would imagine and the high value targets, obviously, the index products, right, which which trade significant volume there are a thousand or so individual names in the U S that half of options. We are trading about a handful of those right. Now. So we are in the process of scaling that business, yes to use a baseball analogy whichever.
And like I said, we're in the dugout, we have our fleets on.
And maybe we're on the on deck circle, we swung a little bit and we're just getting up to that so there's a lot of room here there is.
A number of firms that are of great entrenched incumbents.
Providers of liquidity.
And so we don't have any aspirations to be number one anytime soon but certainly we can be and the mix and we're beginning to see positive results and a true kind of virtu and fashion. So it's a very profitable business, but it's one that we continue investing and we're excited about the growth prospects flow.
Okay.
Yes. Thanks.
And our next question will come from Ken Worthington with Jpmorgan. Please go ahead.
Hi, good morning.
And you highlighted the two dollar base earnings run rate and it wasn't that long ago. When we were seeing sort of a dollar of of earnings.
Can you talk about what's giving you comfort that that $2 run rate is really the right number and I'm sure. It's a combination of new business greater efficiency and maybe some other things that have changed in terms of mix, but bring those together to help us get the confidence that the $2 number is the right number.
Yes, Hi, Joe one of what you're trying to ask of them first and then I'll jump in yeah sure Ken look we put out there.
At grid and debt in the third quarter that showed here is of different levels of net trading income.
We can earn in terms of EPS and then what we can earn in terms of what we can do in terms of share buybacks I think we have confidence in it to answer your question because when we look at the history.
Virtue of plus KCG plus ITG.
And we look at it across multiple environments you, even if you go back to when virtue and public in 2015.
And then you look at the peaks and the troughs and then you look at our operating expense guidance, which we feel pretty confident about where we've historically been very good at.
I have a hard time coming up with a trough scenario that that doesn't get us from Q3.
Through the long term that's why we highlight the fact that we generate a lot of cash flow. We're levered appropriately the excess cash that we're going to be generating from we've got $170 million authorized today.
And the future again.
Our board to authorize it but I would expect that if we generate excess cash we're going to be returning it to the shareholders of one form or another so that's the.
Yes that is the reason why we have confidence that if you look at if you look at we are of trough was it was and a year 2019, where we acquired mid did a major acquisition.
And that the volatility and volume levels were at multi year lows. So I feel pretty confident thats trough and I also feel pretty confident that we're going to meet our expense guidance and when.
You put all of that stuff together and not even counting the growth Ken and not even counting some of the stuff that we've got on the table in terms of growth just looking at the firm as it is I feel confident in that number.
For once I will actually be pickier, and Joe Melissa and I'm not known for pets.
We're confident and I am confident we are doing it.
Doing it and then we had a fabulous fourth quarter I see significant.
<unk> internally and honestly the growth initiatives kind of great.
We've always been.
Religious about expense management and I think we are we on.
Honestly I've always had religion around our balance sheet and returning capital so.
All of the components are there.
And we started on this journey in 2017 to expand the footprint of what we thought could be a fully integrated global financial services firm that debt did a lot of things really well and and.
And some things we hadn't even started and where we're going to start those and build the firm organically.
And really be of differentiated different kind of player on the marketplace and you're beginning to see the fruits of that labor I guess is the right way to put it against a backdrop that is very positive so I feel real.
Really excited that we found incremental ways to scale.
And the infrastructure and the platform that we have and it's always always spend the virtu model that Vinnie and I envisioned when we started on this journey of about 13 years ago.
Perfect and then maybe to follow up on Ricky's question since the same quarter flow. Unfortunately is a topic day sure.
Maybe one way to approach it payment for order flow, we're regulated out of existence tomorrow.
My base case, but if it keeps coming up what would be what do you think would be the impact on your your earnings.
And maybe participation and the wholesaling of markets. So maybe let me go through that scenario like give us our.
And our investors comfort that this may not be that big of deal for you even if it went away.
And candidly I don't think there'd be any direct impact of Virtu right. I mean, we would continue to be the wholesale of that we are presumably there'll be more of a shift of price improvement and the vast preponderance of.
All of our clients and soon including some of the largest names that you know today don't take on charge for payment of Florida flow So from a virtu perspective.
And there wouldn't be any change I think the wholesaling businesses of remarkable business I didn't really understand and until we bought night and now obviously now that I'm on the inside it's just incredible what these guys at night had built up of the prior 20 years before we got here I think actually no but from a policy perspective, and this is why <unk>.
<unk> and people that have studied it and look at the data.
And including most recently at the FCC and whatnot and then I've looked at it understand that.
That payment for order flow of the rebate. If you will is important for innovation and you've seen incredible innovation and this industry and on.
The last couple of years through zero commissions and what that has meant in terms of democratizing. The marketplace. I think the focus really should be now and this next generation and now that you have all of these incremental people accessing the market I think that's of great thing of a big believer and and transparency and and democratization of marketplaces and that's what virtu.
As always been about.
If we focus now on education, and disclosure and things like things along those line that could make the marketplace, even better I think thats really the solution not just.
Irrationally quote unquote banning something because we think it's bad or it distorts the marketplace.
I've never seen a shred of data.
Net validates that that assertion I understand people have emotional reactions.
To the name and whatnot, it's no different than the fire storm of innuendo that was created in 2014 with the publication of the book Flash Boys, but when people really took the time working with us and other great market participants to Peel back the onion and it was kind of a big nothing.
Really there was nothing there there was a lot of smoke there was zero fire a guy sold a lot of books and the marketplace Didnt really change at all right same thing same thing here I think when people look at what the marketplace has done.
And what has been created for retail investors and this country, where they can literally on a smartphone.
Or a laptop or an iPad whatever it is push a button and buy 1000 shares of Tesla right at were better than the national best bit of best offer for zero why would you change that.
No reason.
Thank you and just a tiny follow up does that it does team of Florida feels that disappeared would that drive more volume to the lit markets or do you really think price improvement.
Just keeps it the status quo.
It's not I think it would keep the status quo. It's not just the price of from a member to service it as a service like where there is of guaranteed execution Trust me if things go wrong and when they go wrong they end up.
On Virtu and the other wholesalers balance sheet, we are providing of guaranteed execution to hundreds of market participants and.
And if we have an issue and Eric we've missed price something.
And there is a and outage of Wi Fi and New Jersey.
Covid things along those lines, we still make good on those prices right. So we stand behind the service that we're offering to our on users and some days that painful and when the market is unit directional and and aim and 80% of retail investors of buying or selling something that is painful but we're still there were still there were always in the marketplace.
Alright, so people need to differentiate its not just this is not the easiest business, where we're just kind of clipping coupons I wish that were the case, that's not the case. So it's both price improvement right, which is meaningful and $3 $6 billion debt came out of the bid offer and back to investors that's meaningful and.
And secondly, literally billions of orders and not just this firm, but all of our competitors firms serviced in 2020, it's just remarkable the ecosystem and we stood up and a time of of incredible pressure on pandemic and work from home and not one of US went from our obligations to our unused and very proud of what we've what we've all of an industry.
<unk> did in 2020.
Awesome. Thank you.
And our next question will come from Alex Blaustein with Goldman Sachs. Please go ahead.
Hey, good morning, guys.
Okay, sorry, same same topic for maybe a couple of more minutes. So.
I mean, given your comments around just the significance and how robust the retail trading backdrop has been.
It's difficult to separate the mark can make and activity kind of whats legacy Virtu and that kind of the legacy market maker versus whats retail related but I was hoping you can help us size sort of the percentage of market, making revenues, it's more directly related to retail trading for you guys and then just building on the last discussion.
And if we already see and environment, where retail brokers either decided to start more of kind of internalization on their own or route to exchanges more because 50% of the volume is off exchange and some people would argue that that's a negative for price discovery, how would you model need to respond to that.
How would you adapt to prevent revenue attrition.
Yes, yes, I think there's a couple of responses to that first of all of them. The notion of of REIT of off exchange trading growing as obviously factually correct in terms of share count. If you look at the notional size of what's traded off exchange, it's actually significantly lower than the than the share count.
So I think it was like 41 on odd percent. If you will of trading Notionally is off of an exchange rate and remember you can have low price names of trade of 1 billion shares and a day and that distorts again, there's a lot of mistaken information out there that would distort the Trs count and that's the first of all of the second thing is of Trs is not.
Wholesalers right, it's a big banks Big banks, excuse me doing and institutional block of dark pool right. So it's not just political retail 605 club and just taking a step back again, maybe it's my libertarian view of free markets, but people send orders to places where they think they get better.
<unk> and better service right. So.
From my perspective, if folks want to send orders to two of bank of to a broker to a wholesale or whatnot. That's their prerogative and we should be encouraging that there is plenty of execution and volume that happens on an exchange and there's no magic number and no study I've ever seen that demonstrate okay. If it all of a sudden tips from $49.
51 to 50 149, the universe begins to spin and the other direction. That's just you know.
You know what I think that is right mistaken information lets put it that way so from that perspective, I think I feel very good about where we're at and kind of.
And how the ecosystem will sustain itself the point I would like to make though is and we don't separate our businesses and we're not going to separately disclose what this and once that becomes even internally. If you will it's really an amalgamation.
Are the legacy <unk> business and.
And the quote unquote retail business doesn't not also trade and dark pools and exchanges and all around the world and other and other marketplaces right. Alex So it's not as simple as saying, Okay X and Y is related to the flow we get from brokers and indeed the reason the strategies are successful is because we have this and.
Normal kind of quarter Copia of orders that we're getting from retail brokers, but we're also getting from other broker dealers right and are linked business and we're also acquiring on an exchange on a dark pool and all of all get kind of thrown into our central risk book. So it's not as simple as kind of sort of separating it out and really what we're seeing is the backdrop.
Backdrop of excuse me of increased volume and activity and the marketplace right together with together with the improvements we have made.
Not a coincidence that one night and virtue of combined right. We've seen over the last couple of years through some great hard work and wonderful people here, we've seen improvements and our strategies and our performance and so.
And against that backdrop, we will continue to see.
Measurable improvement internally and of <unk>.
Lot of times that does get kind of lost and the in the beta if you will of the marketplace, but overall, we're not sitting here like reliance if you will on a single client or two it's really the entire business wrapped together.
Okay I got you.
And maybe shifting gears, a little bit Joe one for you I wanted to dig into a little bit on the stock based comp dynamic it is up materially year over year, obviously revenues are supporting that but just curious how you guys are thinking about stock based comp compensation going forward.
What is the annual share creep from from equity based compensation and when it comes to the buyback is the goal to neutralize debt equity based comp share creep or we could actually see a decline and the share count.
Yes, I'll start there and then.
Between me and Sean and I think we can we can handle the.
The stock based comp questions on.
On the on the buyback look.
We've executed half of the original authorization so we've already.
Bought back $50 million work at.
At about at about $24 of share.
And we look we are going to look to be in the market on a continuous basis.
Got an additional authorization for for $70 million just based on how things are going so far to be consistent with what we told you we're going to do and.
And I think it's important that we'd be in the market on a continuous basis.
And and look at it over the long term, which is kind of what we've what we've always done so I think I think that's.
That's part of what I think.
So I would look to actually have the share count go down.
The.
In terms of the <unk> grants and our stock based comp itself.
You should see that on a continuous basis going forward look like.
I think the third quarter more or less.
And fourth quarter, we had a true up because we changed the feature and one of our and our plans to just make it consistent so we had a little bit of of catch up there from prior quarters, we didn't bother breaking it out of that as a separate items because it's added back already.
And we just added of retirement feature.
And that caused a little bit of of catch up.
John is there anything else there.
I think the other thing I would point out is so our comp is up year over year. So a portion of our stock based comp is expense and the current year. So there is a portion of that debt immediately.
And as we've had great success and our business in 2020 of our overall comparable from an equity standpoint and from a cash standpoint is up year over year versus 2019. So that is certainly one of the components fly 2009 2020 exceeds 2019.
Great. Thanks for the debt.
Thank you.
And our next question will come from Chris Allen with Compass point. Please go ahead.
Hey, good morning, guys, great quarter and I appreciate the granularity on the on the expense and buyback outcomes for next year.
And I did want to follow up just on those response around and focus on education disclosure.
And I'm just wondering what the regulatory focus has been.
Since the recent issues and Gamestop and other stocks.
And they're looking at capital levels, adjusted the broker dealers and they're also focused on capital and so the market makers.
Do you think potential solutions are just suitability requirements are on options and margin lending just and.
Any thoughts on that would be helpful. Yeah sure. Good question, Chris obviously.
And we're in constant contact with regulators because that's what we do we are proactive in terms of.
Talking to FINRA and the SEC, because we want to be good actors and and transparent from our perspective, we have of about $1 billion or more so and our and our broker dealer.
This type of situation doesn't really impact us because as a market maker, we can control of our positions right. So at the end of the day, we're ending flat or maybe it will be notionally long or short various names but.
It's certainly we can control of our own positions of the market mix and that's a much different scenario and our institutional business, where obviously clients are sending us orders.
We have a hybrid approach there we don't self clear all of that business.
Three very large partners that we work with here.
Here in the United States, where we've effectively outsourced and corresponding clearer a bunch of our clearing of that business. Because they are obviously, we could get large blocks of orders institutional clients Werent really trading those names and size. So it had.
No real impact of any sort on our capital.
During this time period, the reason I mentioned education and suitability because I think those are appropriate topics right and there's been a lot written about this influx of new investors traders wherever you want to call them and there are obviously are concerned and some of these products on.
On the options side can be a little more complicated than just buying 100 shares of X y and Z and that kind of thing. So I think that's certainly within the purview of <unk>.
Regulators to ascertain whether or not.
Theres been appropriate education, and indeed, all of our clients that provide these services are saying the exact same thing so I think.
And there is unanimity of interest and concern around it I think.
A lot of the clients, we have had wonderful tools on their website of gone and looked at a bunch of of I've actually learned some things by you know.
Playing around on various websites and things like that so I think theres a lot of great information out there I think as an industry. We can always get better and I, certainly think that will be a focus of regulators.
Okay and just.
And the dead horse and the regulatory and political front, but the pushback, we get on the stock and.
The team of order flow one of the outcomes.
Specifically and just the potential for really big brokerage and the startup of internal laser and.
And just maybe some of the challenges that would come with debt.
And so probably the outcome regulators do not want but any color on that and then any updated thoughts on of F. T. T. Obviously and the headlines now thanks, Yes, yes sure. It's of Great question, Here's what I would say and I kind of answered it and in response to a prior question and.
A huge misunderstanding out there that somehow if we had a flow from one broker X Y Z that somehow magically we would make a lot of money. It's actually not the case. The reason of night business that we inherited at Virtu and wholesaling business is so successful is because of this giant.
Our client base that we have both here, Canada, and Europe, and even some Asian clients and send US This frontier front door retail. So if you are a single retail broker and you think you can internalize your own flow Mike.
And thank God and from my experience of seeing how we react and respond is that you will be you will make a huge investment and you will be sorely disappointed. The reason. This business is successful and has been successful is because of the guys are designed and a long time ago right and the people and have run it long before we even got here, we're smart enough to.
Realized that it wasn't just getting the one broker that's why it was called Knights of the round table you needed the whole round table and when you got the whole round table and the table kept getting bigger and bigger than you could build of profitable business you become the marketplace. Chris that's the important distinction I think the folks on the outside don't understand so one of them.
Here and I've talked to investors about Oh, so and so.
It's going to internalize their flow ive seen and myself. Okay. One that's going to be a nine figure plus investments to actually make that happen to it's going to take years three it's going to be not successful because of the reason I just articulated and then four.
And it creates conflict and other issues with regulators and why would you want of Baader right do what you do really well. We're good at that you are really good and something else, we can work collaboratively and business together and Thats how.
And how the ecosystem is evolving.
Great color. Thanks, and then any thoughts on the transaction tax of which I.
So on and we'll probably put the probability.
And just coming from the headlines on that.
Yeah, well you can imagine I have a lot of thoughts, Chris and I will try to be.
And the mature about high response, I mean, the state transaction taxes on.
And I understand the pressures of these governments around their deficits and whatnot.
And obviously as a form of New Yorker, who now has a residents and new Jersey I certainly get it.
I will tell you that the notion of of transaction tax and Newark.
And I'll use the word foolish because I know, what we would do I would shut this office and we have and office now and short Hills, New Jersey were going out of Florida, and we would just leave the state of New York, We would never pay a penny of New York State transaction tax and Stacy Cunningham.
Lesser said the same thing that you would just move and New York stock Exchange. So state transaction taxes, I think are foolish and they just don't make any sense and the governor of Texas, who I was honored enough to meet.
Earlier this year in terms of their interest and having exchanges and that state has made it very clear and in fact, youll see and their legislative.
And this year that they will as a state.
It is their intention to ban any type of transaction tax. In addition, they have a constitutional amendment against income taxes for those that are curious so that doesn't make any sense on a federal level. Obviously you have the same.
Type of folks that have been railing against Wall Street, you know at least from the dozen years of so I've been doing this and every year you have the same proposals on a transaction tax certainly given the recent events and the marketplace and given the backdrop of the pandemic, there's been and increased hue and cry on that but again, it's from the same types of <unk>.
Folks that I would loosely describe on the left of the political spectrum.
And those folks that are either somewhere in the middle right that look at data and understand what the impacts of of transaction tax our empirical evidence all around the world, Sweden did this and I think it was <unk> 94 to net derivatives market. They shut the lights out on Friday transaction tax came in on Monday, and guess, what the derivatives market and moved to London right and.
And goodbye Swedish derivatives market and a transaction tax generated essentially zero revenue. So people that look at data are smart enough to realize that that is the case the market makers and the big banks arent going to pay the transaction taxes, just going to get pushed back to the pension years into the 401 K folks and all of that's going to do is just clobber. The U S financial system, which is nobody's into.
This is a great place for raising capital.
Or are there adjustments that need to be made to the market reforms of course people can look at that but ultimately slowing down the market and taxing it and forcing.
Those of us to fleet other jurisdictions and moving liquidity outside of the United States to Europe or to some other.
Jurisdiction is really and nobody's best interest.
Thanks, a lot guys.
Okay.
And our next question will come from Kimberly Cheng with Evercore ISI. Please go ahead.
Hi, Thanks, just wanted get your perspective on how the.
Industry multi structured close of the quarter Q4.
On the volatility I know there were reports of like some market participants.
And some glitches.
First of all.
And then following followed.
I know Youre trading capital was up a bit during the quarter can you just remind us what you think the right level of capital is to operate.
Given the heightened levels of volatility.
Yes, great Great question, Yes, Sir.
Certainly and I mentioned this before and answer to another question.
I would say going back to 2015 and the events of August 2004 at the industry got together and give the New York stock Exchange Blackrock NASDAQ of lot of really good market participants got together and improved the infrastructure and limit up limit down volatility across all of those kinds of things. So I think there was a good improvement there on the exchanges invested a lot of money and their <unk>.
<unk> has been great and their technology is fantastic and I'll throw CBO CBOE and to that as well and want to leave those guys out right so that debt.
Net part of the ecosystem works well, we had virtu have had to make the same investments right as retail volumes have increased and we've increased our market share as new participants of comment.
Had to.
Investing in our systems to make sure that we can we can stand.
Stand up every day and perform our service are we 100% perfect net have we had you know.
Glitches here, there and everywhere of course every market participant has them periodically we make good on them. We have of standard operating procedure and how we recover and none of them have had any material impact on what we do and our clients understand that right and that's why they want to have a multitude of service providers. So that if we're having an issue and they can adjust flow to somebody else.
And vice versa. It happens unfortunately happens periodically and the marketplace in terms of capital I'm going to ask either Joe or Sean to answer that question, Joe you want to jump on it yeah sure you know.
Capital that we show here on the materials is is that a high point, that's not surprising given the time of year.
And given the performance and the fourth quarter and the answer to your question is that were and are better positioned from a capital standpoint, and from a liquidity standpoint to meet our daily obligations that we ever have been that this is more than enough capital and we need to run the firm with an appropriate buffer.
And we've got access to holding company unsecured borrowings.
And more unsecured borrowings to meet margin calls that at our broker dealer than we ever have before.
You've got extremely high levels of capital of our broker dealer. We spent early part of 2020.
Consolidating the broker dealer, so I think where we are.
We're very well capitalized and we have access to more than adequate liquidity. So we're in very good shape.
Thank you and just one more.
Quick question.
And then separately.
Did you guys disclose.
605, multi channel and how is that trending in the current quarter.
No we didn't put it in I mean.
And I've said this many times before I think there is and undo.
Fascination and I'll say that with our six of five market share, yes, I look at it but it will go up it will go down.
It probably went up in January and my guess is it'll go up a little bit and February went down a little bit of December we're always going to be and that kind of sweet spot hovering around like 30 ish percent I'm very very comfortable there we have different.
Yes, we have different shares with different brokers just some of that is just history. Some of that is performance some of that is.
And our just our preference of their preference of that kind of thing so.
I wouldn't read frankly too much into it I know people like to kind of amalgamated and kind of draw conclusions.
Most of which I kind of scratch my head about to be candid with you. If we wanted to have.
10% more market share could we do that yes, it would probably not make a lot of economic sense I'm all about trying to find that right balance, it's a little bit of art and science as affirmed between market share and profitability and providing good price improvement and.
The service and the retail segment to our clients.
Thank you.
Thank you.
And our next question will come from Alex Kramm with UBS. Please go ahead.
Yeah, Hey, good morning, everyone just shifting gears.
And execution services business can you actually give us an update on how the conversations are going with new and.
And existing clients.
Leading on execution quality of usually talking about hey, we can be right and so.
Certain names.
And what is really the pushback that you may be getting.
And I think you said 41 of 50 top institutions like what is it that you're not providing on how do we get and how do you get new clients.
Because you're not providing capital like and like how can you have a bigger addressable market.
As you think about this business more holistically.
Yeah Yeah.
All of 41 out of 15, it was pretty good Alex but.
Are any of them.
Look I mean.
Taking a step back I think when we bought ITG you know there was a lot of <unk>.
No ways about Oh, the HFC firm and and a bunch of our competitors I'm sure sold against US because of that that's always a failing proposition if youre not selling something positively I don't think you really selling you just kind of making noise, but there were definitely ITG clients.
We're going to turn off and we want to see and there were clients that probably didn't even say that but we're just going to click the mouse less to your guidance and kind of see how this all goes we want to see how the performance goes we want to see if you're really going to invest in technology and so we did what we do at Virtu, we put our heads down and we work Steve couple of he has done an amazing job we have migrated.
<unk> share of U S and European ITG algo clients to the Virtu frontier.
Multi country single Algo stack no other firm and the World has what we have in terms of a single algo stack that literally is ubiquitous around the world and market it.
And in every marketplace and win.
Currently works right and we built the same thing and Canada and in Asia and now we're we have that product to go south of clients and so we've seen a pickup of people just trying the product and saying Wow. This is of great product, it's really performance and we're going to use it and on top of that as I mentioned in my remarks.
In the United States. We have this people are very fascinated with retail retail rents of how can I get access to that as an institutional investor. The answer is one 800 virtu right. So opt in.
To having your your orders interac fully disclosed with our market maker right and you'll see that you get significant sales, yes. When we bought ITG I had no idea of that people actually published their market share and that's how naive I was.
Now on Bloomberg and if you go to the Bloomberg.
Market share reports, you can see and a lot of names that people of interest in and just about every named virtual will be the number one broker why is that because we have a large business of wholesaling of non customer market, making institutions and that's attractive to people. So it's literally the blocking and tackling Alex of going to clients and we certainly are focusing.
On the top 50, right once and we don't have but more importantly, once that we have to say you know what.
We do this for you and the U S can we do it for you and Europe or would you give our EMS product to try it because youre already using our algo or will you use Commission management can you quote and <unk>.
As a whole multitude of things that we're trying to cross sell so we're really seeing that growth because of 29% increase in Q4 and Q1 as I said before is significantly ahead of where we were on Q4 and execution services very jacked up about that business.
Okay, great. Thanks, and then just a quick one you talked a lot about share buybacks, but in terms of capital allocation.
How do you feel about your debt levels I know.
On the ratios look pretty pretty good right now, but you've obviously been and a very very sweet environment.
So.
That can certainly turned the other way right so zone.
Would you think about deleveraging a little bit more so you'll have a little bit more firepower for the tougher times off of potential deals or whatever it may be or or or is this a good levels of assumed from here.
Yeah, No Alex and I think I said in the remarks, we consider this a permanent capital structure for the same reason why we're confident.
Around the base level of earnings of $2 of share at the same reason why we're confident this is a.
And.
Permanent capital structure, because when you look at and.
Historical troughs.
You've come out of 301, and we were comfortable.
They're right, where this is all about kind of looking at the business through the long term.
And there is nothing that we need to deal with the overall debt level too.
<unk>.
And to take it down.
And to kind of batten down the hatches for.
On a poor environment.
Our cost base and our capital structure.
And would would do very well and of poor environment.
Makes sense and well thank you.
Want to focus on on returning on returning capital to shareholders.
Alright, Thanks again.
And thank you.
And our next question will come from Ken Hill with Loop capital. Please go ahead.
Yes. Thanks, Good morning, just one more on the capital front I know you know on slide seven you guys have a lot of great organic growth initiatives, there and you're making a lot of progress any of those that you think could get a boost from an M&A.
Type of activity there and can you also remind us maybe what the criteria you guys look at it internally for transactions and how the market's kind of.
Appears to you right now thanks.
And I look at the good it's a fair question. Obviously, we did two large acquisitions I think the hurdle for an acquisition is really high at this firm.
100% convinced based on everything that I've seen and Theyre in my experience that we can grow and options business and a block ETF business organically. We're doing it we're doing it are there competitive firms out there that are in this business of course.
Do I want to pay on a lot of money to go buy one of them on and go through the frankly, the aggravation and years of trying to integrate them into virtu culturally and technologically not really don't when I know that I can do it organically with people that I know and I Trust and.
And we've got the stadium built so I don't need I don't need technology from anybody and I just need time, just need time and and that's what we're going to have and we have the benefit of having a vast business to support that and indeed these businesses are profitable on their own so the criteria for M&A is.
It has to be really accretive and to be really attractive and has to be something that's not going to give me and the rest of the management team of <unk>.
And headache and.
Based on everything I saw in 2020, and nothing even came close to that to that level, where kind of matured as a firm where we have this very large stadium and this very large opportunity set in front of us that we know we can build organically what do I need to overpay somebody.
For that privilege.
Alright, thank you.
Okay.
And our next question will come from Michael Cyprus with Morgan Stanley. Please go ahead.
Thanks for taking my question I was just hoping you could dig in a little bit on the thinking and options business on the revenue was down a little bit there and the quarter. Just hoping you can elaborate on some of the moving pieces from third quarter into the fourth quarter and any color you could share on that part of the business here and <unk> and <unk>.
Yes. It was really if you just look at the opportunity metrics I'm trying to find them and the supplemental materials, Joe pointed out to me, but if you look in particular.
At like volatility and the currency market out of down like 30% down like 50%. So it's really just.
If you understand kind of our businesses and the drivers of each of them.
You could really just all of the information is right there for you so.
It's zero.
Really just driven by on page five if you look at realized volatility in.
The FX market it was down 50%.
So it kind of says it all right there.
Okay, and then I guess, how would you sort of.
Disaggregate or provide any sort of color on the say top three contributors to that revenue line as we think about looking at which metrics will be driving and are you, suggesting that FX is the biggest component there what would be the top three how would you sort of rank them and how long.
And in the past we've.
We thought it was important and consolidate this is vic options and other.
It's kind of fluctuate Mike on that and Thats, why we consolidated and Sac, which a lot of companies and so that's that's.
Category and we look at it.
<unk> energy and includes foreign exchange it includes commodities.
And those things are going to kind of fluctuate over time and I.
And I Couldnt give you and want to use rates.
It includes all of those asset classes.
And we're going to report it is fixed.
Got it Okay and then just a quick follow up just on the back to the capital on the balance sheet. I recall, you guys were looking to free up I think it was about $100 million of capital with emerging and the broker dealers and this is maybe a year or so ago.
Just curious how that progressed and if there's anything incremental at this point that could be released.
No we've done on all of the capital release from from the mechanics of merging broker dealers. So we operate principally out of one broker dealer.
And we are.
Pretty efficient about capital.
The entity and.
As Doug said is kind of over $1 billion.
Of total capital now and it.
It's not our entire business, but it's a good portion of our business and as I said from the beginning of the year, we've enhanced our liquidity meaningfully right just by having the operations and one broker dealers and enhancement as I said, we've got holding company and lines, we've got lines at the broker dealer and as Doug mentioned.
And we've outsourced a good portion of the clearing.
For the business, where the requirements are less predictable and you kind of need to accommodate clients and.
And that could generate and unpredictable large large margin call and thats been outsourced as Doug said.
Three large financial institution so.
We are we feel like we've done a lot of optimization around that and realized a lot of the benefits, but the excess cash flow and the.
Answered your real answer to the question you're asking is.
Look at the grid and we gave you and the third quarter at.
And at various levels of adjusted net trading income and hold us to that in terms of how.
How much excess cash and should be generated because that's really the entire company. That's just not just of broker dealer that's.
Operating out of Europe operating out of out of.
Asia Pacific, our non broker dealer business and the U S and terms of.
And the effect and.
And FX and other.
Great. Thanks, so much.
Thank you.
And this will conclude our question and answer session I would like to turn the conference back over to Doug seafood for any closing remarks.
Thank you very much I just want to thank my senior management team here doing a great job and for all of our employees and we look forward to speaking with you guys at the end of the first quarter. Thank you everybody stay safe.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.