Q2 2021 Virtu Financial Inc Earnings Call
Good day and welcome to the virtual financial 2021 second quarter results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero. After today's presentation, there will be an opportunity to ask questions to ask a.
Western Press Star, then 1 and I touched on.
To withdraw your question Press Star then 2.
Please note. This event is being recorded I would now like to turn the conference over to Andrew Smith. Please go ahead.
Thanks, Tom and good morning, everyone. Thank you for joining us today.
Our second quarter results were released this morning and are available on our website on this morning's call. We have Mr. Douglas seafood, our Chief Executive Officer and Mr. Joseph Miller, So our co President and co Chief operating Officer and Mr. Sean Galvin, our Chief Financial Officer. They will begin with prepared remarks, and then take your questions first a few reminders today's call may include forward looking.
Statements, which represent Virtus 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 in these forward looking statements. It is important to note that any forward looking statements made on this call are based on information presently available to the company and we do not undertake to update or revise any forward looking statements as new information becomes available.
We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report on form 10-K, and 10-Q and other public filings.
During today's call. In addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income adjusted net income adjusted EBITDA and adjusted EBITDA margin.
Non-GAAP measures should be considered as supplemental to and not 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 referred to on this call as well as a reconciliation of non-GAAP measures to.
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.
Good morning, and thank you Andrew This morning, we reported our second quarter results, which reflect a resilient and balanced business model as well as the continued success of our organic growth initiatives.
For the quarter ended June 30th we generated 63 cents of adjusted EPS on 5.4 million per day of adjusted net trading income, bringing our results for the first half of 2021 to $2.67 per share and an average adjusted net trading income of $88.$6.3 million per day.
Last quarter, we announced the $300 million increase to our share repurchase program, which brought our total authorization to $470 million we.
We have repurchased 3.4 million shares shares for approximately $100 million during the second quarter and over $30 million worth since the end of the second quarter, bringing the total amount repurchased under the current authorization to approximately $230 million.
As we stated previously we remain committed to returning capital to investors and have prioritized share purchases for the foreseeable future.
We aim to be in the market consistently buying back shares as we work to accomplish our capital management goals.
Accordingly in the second quarter are more greenfield growth initiatives continued to shine in both relative and absolute terms compared to historical results on page 6 you'll see you can see how these initiatives contributed meaningfully to our performance generating $500000 per day of adjusted net trading income and <unk>.
Presenting 9% of our anti <unk> for the quarter.
These initiatives are truly organic in that our anti from these revenue sources was nascent only a few years ago and we've achieved it achieved these results by leveraging our scaled infrastructure and distribution channel supplemented with a handful of individual hires.
While these results are impressive we are especially excited about the continued growth potential of these truly organic opportunities and.
And options market, making for example, our daily adjusted net trading income grew quarter over quarter. Despite the 13% decline in options market volume, we continue to view options market, making as a key long term engine of growth that complements and enhances our existing market, making business, creating new revenue synergies.
Across asset classes and regions.
Other key initiatives include our ETF block desk in our deployment of legacy KCG Quant style strategies.
They are long term growth trend in the quarter.
Market volumes in U S. Etfs declined about 13% in the quarter, while our ETF block volume was down less than 1% illustrating the strength of our unique offering in various market conditions.
Our expansion into crypto currency market, making also continues to progress with our anti from crypto market, making doubling in Q2 versus Q1.
To date, our focus has been on market, making in bitcoin and ethereum in various forums, including spot instruments on a couple of the major venues as well as Etfs in futures as a leading market maker in Etfs around the globe crypto ETF fit naturally into our scaled market market, making operations leveraging our growing ETF block desk.
We are also on the early stages of developing our ability to stream crypto currencies over our direct to dealer streaming liquidity platform via FX.
Through this platform, we will provide liquidity to crypto currencies to select brokers and institutions around the globe. The key takeaway here is that the growth of liquid tradable crypto related products is yet another way that the total addressable market is growing for virtu scale liquidity provisioning and execution services.
Taken together our growth initiatives are making tremendous progress and we and help raise our baseline performance through the cycle.
As Joe will detail on a few moments we believe that this positive growth trajectory combined with our stock buyback program provides a compelling long term story for our investors. We look forward to updating you in the future about the progress we're making on each of these opportunities and our contribution to our growth.
Additionally, the steady growth of these initiatives as well as the continued less volatile performance of our execution services segment has let us to provide public guidance around where virtues results should be given various levels of anti any given quarter. We believe our performance. This quarter is consistent with that guidance.
After several quarters of elevated market activity realized volatility fell nearly 30% in the second quarter dropping to 9% below the 2000 average 2000 excuse me 19 average and as you know 2019 was at historically low point for volatility.
Further U S equity volumes were down 28% overall and retail equity volumes in United States were down even more compared to Q1.
Despite the steep drop in volatility with highlights to sustained levels of retail engagement and general market volumes compare to historical levels.
It is important to note that despite the changing operating conditions versus last quarter, our market, making business realized $232 million and adjusted net trading income were $3.7 million per day. This quarters performance is similar to the third quarter of 2020, where we generated $4 million of anti per day, albeit realized volatility was 34.
Sent lower this quarter than in Q3.2020.
Our execution services business also performed in line with the market opportunity this quarter, realizing $110 million and adjusted net trading income. We are now 2.2 full years past the acquisition of ITG and looking at the bottom of page 3 you can see the steady progression of this business.
This continued growth reduces the quarter to quarter variability to our operations, while still giving investors significant upside exposure from our global market, making operations.
Before I turn it over to Joe I'd like to take a few minutes to talk about the recent industry discussion around market structure payment for order flow and wholesale market, making.
As I said in the first quarter earnings call, we had virtu welcome the robust dialogue around the regulatory framework that governs our capital market. However.
We and others are concerned that the calls for reform are based on false narratives and factually supportable conclusion. These.
These misconceptions obscure the fact that we are participants in the most robust <unk>.
Transparent and fair marketplace in the world from.
For retail investors they were experiencing in the United States has never been better and by comparison is markedly worse in Canada, the United Kingdom and Europe developments.
Developments in market structure advances in technology and the introduction of intense competition have resulted in vastly expanded product offerings.
Low or no cost trading and importantly superior execution quality.
In summary, the benefits of today's market structure to retail investors are quantifiable and the supporting factual evidence is striking.
In the current high profile debate about U S equity market structure, many folks, including regulators politicians and critics.
Looking at the available data to draw conclusion, however, the data being used to assess execution quality for retail investors comes from rule 605, which most degree has significant shortcomings and provides an incomplete view of execution quality.
Current rule $605 significantly underestimate the benefit that regulation competition transparency and the current market structure have created for retail investors.
We recently published a report, which we furnished to the SEC that addresses many of 605 shortcomings and proposes updates to enhance the rule. The biggest hole enrolled 605 is that it measures price improvement by comparing an orders execution price to the prevailing N V b.
With regard.
So the number of shares being executed. This means for example that when we fill a retail order for 9000 shares of our stock execution quality is measured based on the mbo price level no matter, how many or how few shares are available at the <unk> price.
When we still have an order for more size and is available at the <unk> that provides the retail investor with size improvement and it happens a lot in fact in 2020, 45% of the shares we feel were on orders that outsize the entire NBS that's 45%.
If rule 605 was updated to measure this benefit as many folks have requested inc, including numerous retail brokers on exchanges like Nasdaq regulators.
Regulators and brokers would see that in 2020 virtual provided over $3 billion in price and size improvement to retail investors. That's 3 times the amount report reported on rule 605 today.
Defies logic to.
To conclude that this price and size improvement retail investors receive today would exist if as some critics suggest retail orders were all set to exchanges.
Thankfully in part due to the request from Virtu and many other brokers on exchanges. The SEC is now reviewing rule 605.
In addition to having a complete view of all available data, which means actual trades not theoretical model, having an accurate understanding of our current market structure is imperative to conducting a thorough review into proposing changes that help not hurt retail investors.
To this end, we have had multiple meetings with regulators and politicians to help correct various myths and misconceptions that clouds the existing debate.
In a report that I just mentioned, which is included in the appendix of today's investor presentation.
And then our in our discussions with the staff and commissioners at the SEC as well as folks on Capitol Hill, we use data to address their concerns and we will be releasing a follow up paper to provide even further important detail.
At Virtu, we serve as a trusted counterparty to nearly every retail broker and wealth manager in the United States, but also to all of the top broker dealers and hundreds of institutional buy side firms, including the top 10 asset managers in the United States. We are confident that in the end the data and that data and reason will win the day and regs.
<unk> politicians and critics will continue to see the massive benefit of the ecosystem, which regulation competition and transparency have created for retail investors.
With that Joe will now provide more details on our quarter and our growth initiatives Joseph alright. Thanks.
I will review some thoughts on virtues ability to generate growth.
Through both organic initiatives and through the excess cash flow we generate.
And how this all translates into revenue and earnings growth rates over time.
If you look on slide 5 on our supplemental materials, we tried to scale.
Trough growth rate for Virtu looks like.
On slide.
We are reducing adhere.
Understanding that our results will be volatile on a quarter to quarter basis on this slide.
The historical pro forma median anti for Virtu.
So thats, assuming virtu KCG and ITG were 1 company from the time Virtu and pump.
You can see debt. This is the 5.5 million free cash.
Using the current operating expense projections this translates into $2.69 centers and using the current capital structure.
131 guidance.
This is a historical median performance over a 6 year period that excludes any of the growth initiatives that I've talked about.
So next we look at the parameters around the growth initiatives. Yes. These amounts may be themselves follow.
Near term set of organic initiatives to generate between $5 million per day to 1.5.
Net apply from marginal cost failures to these amounts and arrive at the 18% revenue and 26% growth rate on.
On this slide and that is assuming no share repurchase.
So we understand this growth is difficult to determine on a straight line basis.
I wanted to point out is real underlying growth and purchase core business.
Layering on top of this growth is our ability to generate significant cash flow.
To generate significant amounts of free cash flow on any environment, including an environment like this 1.
And this quarter, it's worth noting that even in this more subdued environment, our business generated 63, EPS almost 58% EBITDA margin and we were able to buyback approximately $100.
<unk> worth of our shares with our current overall debt levels now at a long term sustainable notional amount.
Our quarterly dividend of <unk> 24, thats more than secure and no immediate plans for any major acquisitions, our ability to devote the substantial cash return to repurchases will continue.
We used this cash flow national in relation to our current market capitalization and allows us over time any sand from time period through cycle to acquire through open market repurchases a meaningful percentage of our call.
Importantly, if you look at the chart at the bottom of page on slide 5.
<unk> annual massive free cash flow expected to be generated by virtu at various hypothetical and humira.
Corresponding percentages represent based on shares outstanding the amount we can repurchase in any 1 year. It's important to note that these are annual amounts. So even if you factor in a full year at the lower end of the chart at any given time period should be able to reverse this.
Again from now okay.
For example in the first half of this year, we have average 8.6 million per day.
We have repurchased $195 million of our shares year to date, representing approximately 4 percentage of total shares outstanding.
Consistent with the guidance we provided.
Finally, our organic growth initiatives, while again themselves volatile quarter to quarter are real and accrued robot on line.
Significant runway.
These organic initiatives together with the substantial cash flow and appropriate levels of debt going forward enhance our evidence a virtuous ability to thrive in any environment, while producing significant returns this year.
John Thank.
Thank you Joe.
Second quarter as presented on slide 3 of our supplemental materials are adjusted net trading income, which represents our trading gains net of direct trading expenses totalled $342 million or $5.4 million per day.
49% lower than Q2, 2020, and 55% below the first quarter.
Market, making adjusted net trading income was $232 million or $3.7 million per day.
58% lower than a year ago quarter, and 61% below the first quarter.
Execution services adjusted net trading income was $110 million or $1.7 million per day, which is a 6% decrease year over year.
Our adjusted EPS was <unk> 63, SaaS for the second quarter.
The second quarter, our overall compensation expense was $84 million or 20% less than Q1.
Our cash and overall compensation ratios were 21% and 25% adjusted net trading income spectrum.
As I previously said about our compensation ratio consistent with past practice, we accrue year on incentive compensation to our range percentages earlier in the year.
Ending upon how the remainder of the year unfolds. This may result in adjustments to our compensation ratio in later quarters. This year as we refine our specific compensation targets.
Overall, we believe that our full year cost results consistent with the specific cost guidance. We previously provided for 2021.
Adjusted EBITDA was $197 million for Q2, 59% lower than the prior year quarter on 65% below the first quarter.
Our adjusted EBITDA margin was 57, 6% from second quarter, which is down 20 points from the first quarter, but continues to be reflective of our efficient cost structure and disciplined expense management.
As Joe mentioned, our capitalization remains adequate our long term debt was $1.6 billion at quarter end, reflecting a $35 million repayment in the second quarter.
Finance interest expense of $20 million from second quarter of 2021 compared to $22 million for the prior year second quarter.
With this decrease primarily due to the repayment of $289 million from long term debt in 2020.
We remain committed to our 24 quarterly dividend, which is which we have consistently paid over 24 quarters in every environment since our IPO and approximately $100 million share repurchase in the second quarter demonstrates our continued commitment to return capital to our 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 asking a question Press Star then 1 on a touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question Press Star then 2.
And the first question comes from Rich Repetto with Piper Sandler. Please go ahead.
Good morning, Doug Good morning, Joe.
And team.
I guess the first question is a follow up on the on the size improvement.
Doug I've got a chance to go.
I'll go through the deck and HUD.
See the deck again on.
On it I guess the question is about.
The reception that you're getting with regulators.
Ted you brought it to them and they are reviewing.
Rule 605 reports, but are you getting any.
What do you see indications that this is actually thinking they're absorbing in getting this and that they may meet factor into what.
Whatever.
Valuation of the market structure that they come up with.
In the next coming months.
Yeah, Good morning, rich and thanks for the question.
It has been very very impactful.
Response from I'll talk about regularly on a second from the industry was Wow I mean, we recognize that 605 was outdated and that there was need for reform and frankly, the primary driving force behind <unk>.
Our report was there was this narrative myth out there that somehow odd.
Odd lots are skewing the data and a lot of the critics are saying, it's just about odd lots on robinhood blah blah blah well that was.
Fleet Bunk, we know it was complete bunk and we debunked it.
It just showed the data in that when you actually include odd lots and assume their quotes.
Then it actually improves the 6% or 5 statistics that we kind of flip the script. If you will on the critics there and so we're all about myth busting here on providing facts and data and so when we brought this to the regulators I think they were frankly.
And in a positive way I don't think they recognize the value and it's not just virtu, it's the entire wholesaling ecosystem, it's citadel Susquehanna the other 6 or 7 competitors that provide.
This price and size improve myths meaningful when you segment order flow it permits the wholesaler to the great benefit of the retail investor to have meaningful size and price improvement I said it on my script them on let me reiterate at 45% of the shares that we fill the orders that we get exceed.
The liquidity that is at the top of the book on National Securities Exchange is 45%, 54% of the notional size. So there we are providing real liquidity to small and mid cap issuers is exactly what the.
The regulators and the critics.
I want and this is what helps capital formation, Inc.
<unk> focus at the SEC and the last 10 years in terms of how do you get liquidity to small and mid cap names well there. It is folks that's what we do right and so if the wholesalers weren't there you would have enormous widening of bid offer exchanges in the capital markets would suffer so the evidence is compelling and at the end of the day.
The FCC has always always been driven by facts and data.
That's what that's what they are therefore, right analyze the facts and data that are out to them and then proposed rules and regulations that enhanced the marketplace. So every 1 of the proposals I've heard thus far are batted around in the Twittersphere. If you will would have the opposite effect. So we're going to continue to be forceful advocate for what we think is right we're going to be.
Continue to be very very transparent and positive in how we.
Our present this information and we're going to continue to be responsive to requests for data and as I said in my prepared remarks, where we're going on we're updating our are reported to include some supplemental questions. We've got to address the narrative somehow that execution quality in Canada and Europe is better.
Because of.
Because they've banned or they've limited piece off the actually the opposite is exactly the case that there is lack of competition out there.
The opposite is exactly the case price improvement has increased 750% since 2.
2013, so the facts and data don't lie.
And when regulators look at that and this is a country of laws and rules right and so.
On the administrative procedures act is very very clear if youre going to start changing rules and regulations you better have the fact that data support from this isn't about politics is about impacting marketplaces, and we take our responsibilities very very seriously at the market rate again, we know that regulators will do the right thing and we're here to assist in that process.
Thanks, Doug.
That's very helpful.
Paul.
Good.
And.
Maybe if you could do it simple so I think most of us can understand it but.
A lot has been said about payment for order flow not being accepted in Canada and Europe.
Could you explain.
Why that is in simple terms brief terms so.
A lot of us can follow along with debt.
That's been used as a big comparison, I guess, yes, no and I understand the appeal on the headline of saying well if you know.
Payment for order flow is banned in Canada for example on Canada.
And I would be very careful about how I described it because I don't want to disparage anybody's motivations, but there is no price improvement in Canada, and the retail brokers, which in large measure are the large financial institutions.
Because of the market structure in Canada, which provides for price broker time right. So if you are a broker on your posting as a market maker in order.
We're able to have priority over their over other market participants. So if you are a retail broker that has the order the order gets sent to a national Securities exchange and so the dealers can selectively internalized.
Because of the price broker time preference and firms like Virtu Citadel and others are effectively excluded even if we have the ability to match or even improve that price and so you have selective internalization.
In Canada, So talk about conflicts right. There on this concern that payment for order flow creates a conflict between the broker how about a marketplace, where the retail broker is the market maker.
People's hair would be on fire here in the United States, if they saw that level of conflict.
And then as well in Canada, there is a.
Taker maker venues, so if you're a retail broker and you choose not to internalize on order you can route that order to a taker maker venue and you have a firm like Virtu citadel et cetera that they're making.
Price is right, we're paying to make and then the retail broker effectively routed to an exchange and gets what's known as a rebate provided by virtue well that's just payment of order flow by another name.
Again, I have no problem with that right I think that's part of what makes it makes markets function, but let's not let's not mischaracterize.
Our marketplace, so youre mischaracterizing on marketplace through material omission by suggesting somehow that payment for order flow has been banned and can assure it has but if you look at the entire ecosystem. The experience is just materially worse. So.
So yes from a very proud American I'm very proud of everything that we've accomplished here at Virtu and I'm very proud of the ecosystem because it is just much better I'm happy to go through your I don't want to belabor. It they're effectively the bid offer is just widened out so rather than having a direct rebate the retail investor gets a worst experience so really at the.
End of the day rich when regulators ultimately look at the facts and understand how marketplaces work in the United States and other places I think categorically I have no concern that the level of competition in transparency or its just markedly better and the experience is markedly better than any other jurisdiction. So.
The facts and data don't lie we will continue to be front footed about that and we're very very.
Very confident that at the end of the day.
On <unk> and sensibility will prevail.
Got it thank you very much.
Thank you rich.
The next question comes from Ken Worthington with Jpmorgan. Please go ahead.
Hi, good morning.
When thinking about new initiatives. It seems to me like Virtu is well positioned to further expand into the 6.6 or 605 versions of market, making for both equity options in crypto and both seem like big businesses and potentially big opportunities. So I guess is it logical to extend your current presence.
And options in crypto to the equivalent of the 605 business and is this where you ultimately expect to take these asset classes for Virtu and then if so what are the challenges you see and expanding your market, making there and then what is the reasonable timeframe to build out these businesses to scale.
In those asset classes, yes, Greg Great question, Ken. Thank you and good morning to you. So let me address options firstly on categorically that's the plan.
I mean, we have all of the infrastructure in place that's a nice way of saying we have the relationships with the Robin Hood the fidelity Schwab.
The trades in all of the other aggregators of retail options flow in this country.
<unk> said many times on these calls and in my conversations with investors that we began our path towards being an options market maker by taking on the most challenging of challenges, which is to be a market maker in index products on an analytics changes in the United States right that is what I would call the <unk>.
Fight and you've got to bring a big machete. So that knife fight if you want to be successful while we have seen success, we built the infrastructure, where we have a very.
Robust low latency infrastructure that we were able to leverage off of we built the technology in order to become a firm that could quote in options and to be competitive in options.
So we have all of the 2 tools to compete and we've got significant resources to do that now we have the relationships on the other side and candidly.
All of our Counterparties, which trust us and which have gotten great service and experience from us in cash equities I've asked us to be a competitor. They want more competition. I mean, there are 2 firms today that are very significant players theyre great firms, we're not suggesting we're going to overtake them tomorrow, we're not it.
It would be wonderful to be number 3 at some point that would be that would be success in the first instance in terms of when that will launch.
We will launch that in sometime in 2022, probably in the first half Ken and we hope to see meaningful runway I'm excited about this is just.
A similar feeling too I had.
Back in 2008 and 2009, when we were starting Virtu, we had nothing.
As Vinnie myself and another partner a bunch of capital and some great ideas and we grew virtu really from nothing to something that I think is very meaningful. So it's the same kind of feeling we have and options. We have a wonderful team, which is both an internal team and we've supplemented with some wonderful people from the outside so we're excited there is a ton of runway there and you can.
Make your own estimates on the total addressable market with respect to crypto.
No.
It's a similar story and obviously, we want to make sure that the regulation sort of catches up to the marketplace. We've taken great strides in Canada, and Europe, where there have been Etfs that's been launched.
Chairman was on TV. This morning talking about regulation of crypto exchanges and how thats. So important I couldnt agree more with him.
We think that's incredibly sensible and so again, it's we have.
All of the Coucher months, if you will to manage the counterparty risk to be a meaningful participant in crypto it spot future.
An ETF, it's kind of right in our wheelhouse and so thats the beauty and the scale of the model that we've created but we've always said we wanted to be ubiquitous market maker that could be at the bid and the offer as much as possible for as long as possible during the day and Thats.
The Virtu DNA, we've supplemented that with customer market, making through the acquisition of Knight. So we've expanded our reach in these 2 initiatives are in dish of that expansion.
Okay, Great and then just following up on that as you expand into the.
605 business, how should we think about capital requirements or even other risks.
To further building out those businesses, yes, it's a great question I'll address the risk first I mean, obviously, when you're making markets in single names. There's idiosyncratic risks risks both from a dividend on a corporate action perspective with regard to those names right. There's clearly more risks no different.
Then the risk we took on when we bought night and we became a market maker on 8000 name is very different from what we did at legacy Virtu.
Options are a different breed right I can I don't speak the Greeks, particularly well we have people here that do and so clearly in terms of idiosyncratic and volatility curve risk.
There's more exposure and we will manage those in a Virtu, Inc. Kind of way, we have our global risk management framework and cover that will supplement it with subject matter experts and options, which you already have and we will continue to market, making the virtu style. This is not going to be a firm that is betting on volcker. That's just not what we do we don't bet on directions.
Market, we certainly don't debt on the direction of volatility we need to understand the vol curve and we've built models to price it but at the end of the day, that's not really what we're about we're not a hedge fund that makes bets on things. So managing risks there will be meaningful in terms of capital on actually ask Joe to address that because they'll do a much better job than I will.
There is nothing.
As a market that is suited to purchase power market.
<unk>.
And from cleared.
We would use.
Prime broker we have a.
Anything that we put out there in terms of the capital plan for share buybacks.
And different amounts of cash flow with different levels of anti contemplate.
Wired capital for.
Our expansion into and it doesn't matter, whether it's options ETF block 4.
Or even crypto I mean, Cryptos you asked on creeped up a little bit different in that.
We're managing different counterparties, but we are very conservative.
Initial year in terms of how we access counterparties.
And how we get.
And how we.
Manage that exposure the last thing I should I should have mentioned it.
Joe If you were finished which is with regard to options I mean, the thing Thats, obviously on I'll state. It again is that we have the delta hedging all of these products can right. So we're really really well positioned I mean, we're obviously a large market maker in U S equities, but also commodity products and then internationally, we're going to be launching an Asian options business in the fourth quarter. This year.
And we're already there. So that's just in terms of adding some subject matter experts, we have connectivity and we have the delta hedge.
So the growth in options just enables us to achieve more synergies within our equities business globally and within our commodity business. So we're excited about it going forward.
Okay, great. Thank you.
Thank you.
The next question comes from Dan Fannon with Jefferies. Please go ahead.
Thanks, and good morning, and I guess as a follow up is just on when you think about options market, making and you obviously saw strong quarter quarter on quarter over quarter growth. Despite industry volume is coming down.
As you look at the capabilities and what you've built out is there anything that you are lacking in just trying to think about the potential of this business and kind of the growth from here are there is there anything on your end.
From a capability technology functionality that is still needs to be built out or is it now just more.
The blocking and tackling of normal competition.
Yes, Dan it's a great question and good morning, I haven't look it really is blocking and tackling and like I said.
And answer to the last question it feels to me like it's 2009 and 1 on the younger man and we're at Virtu and we're starting to launch U S. Equities and then we launched FX and then we launch energy products.
It is a laborious time.
Time, taking if you will activity to grow a business. It's what we have done exceptionally well here and you grow in step functionality I remember when we launch Virtu. The first day, we traded we had spent a.
A year getting this thing ready and we made $24000. The first day and Vinnie said to me don't worry the next time it will.
Youll get excited when it's 100000, and then Youll get excited when its a million dollars and you know what he was right as he was right about a lot of different things. It's the same thing with options. We started 2 years ago, we were making a pittance.
And we're banging our head against the wall on all of a sudden you have a good day and you get connectivity and you add new venues and you'll learn about.
On the micro market structure of each venue. It is a very difficult thing to build a market making business. The good news is we've done it before we have all of the blocking pieces.
All of the credibility.
Credibility and all the capital that we need to do it. It's just a question of doing the hard work to build the business and we've done it before at Virtu and we will be successful on it because that's what we do.
So there's no impediment the only impediment is the frustration of time.
And.
Having the right personnel to do it we have all of those things and so it's just going to take.
Putting our heads down on doing the hard work, which we like doing here at Virtu.
Got it and then obviously the environment much different <unk> versus the previous several quarters could you maybe talk about the progression of a NCI throughout on a monthly basis day kind of throughout the quarter and I know you don't you've gone away from kind of the shorter term stuff, but maybe some context for how Q3 has started.
Yes, just from a from kind of a run rate perspective.
Yes, yes, that's fine obviously, we've gone away from monthly, but yes, I mean, the quarter was I don't recall each of the months I could probably look them up here I mean, it doesn't I have no recollection that there was a big uptake and then a downtake. It was kind of around the same feelings for the entire quarter. It felt like a little bit Dan like the market was just taken a deep breath between the election and all.
All of the events shall I say surrounding that new ministration.
Covid spending bill potential changes to tax policy opening reopening whats going to happen vaccine rollout all of this kind of stuff. It was clear that the marketplace was taking a deep breath volumes overall was down we're down excuse me volatility was markedly down.
Payment for order flow for equities for example was down 41% from Q2 to Q1, it's obviously a significant indicia about.
Retail engagement.
It was just a lot narrowing of spreads.
During the quarter.
You can see because of.
Realized volatility being down almost 40%. So look we were very very competitive during the quarter. We gained market share on our <unk> business. Our options business continues to grow so it's a constant.
<unk>.
Fight here, if you will to continue to maintain and grow our market share into.
Improve our growth initiatives and that's where we can introduce to continue to do so was I satisfied with the quarter no I'm never satisfied with the quarter.
If we had if we had made 68 cents I would've said, we should've made 72. So that's what you want out of a CEO I've never been satisfied with any quarter, we've ever had even when we've made $2..5 so I know, we can do better and we will continue to do better. The most important thing though is that the plan that we laid out.
A year and a half ago, whatever it was where we said listen this is what we're going to debt we're going to grow this firm organically, we're going to continue to fight to maintain and to grow same store sales, we're going to manage our expenses. The way. We've always managed our expenses and we're going to be incredibly judicious about capital management, that's a nice way of saying if a penny every penny here that we don't need for Mark.
Making that's not nailed down we're going to return to our investors in the form of our 96% dividend and buying stock back and Thats My game plan for the foreseeable future.
Thanks for answering my questions. Thank you.
The next question comes from Alex Blaustein with Goldman Sachs. Please go ahead.
Hey, guys. Good morning, Thanks for thanks for the question so.
I mean look so the market, making business continues to be volatile as we know quarter to quarter, but I was hoping you could take maybe a little bit of a step back and Doug Joe Joe If you could talk about the confidence level around sort of the lower end of the range of MTI per day, so call. It about 6 Bucks per day in your in your slides as you look.
This year and next year on the year beyond that rate. So maybe help us frame how much in your budgeting plans on your growth initiatives is expected to come from things that are smaller today like options that might scale that could compensate for any of the volatility in some of the legacy businesses. So.
Just trying to get a better framework of how to think about the kind of day minimum revenue levels for the company.
Hey, Alex it's Joe the answer really.
Isn't any different than.
Over the past year.
When you look at look at slide 5.
Illustrative range of outcomes.
We are charged parchment sixth I think from the first time.
With this chart out.
Every time I've talked about it.
We emphasize this is Daniel.
Range.
Annual illustrative range.
At quarter to quarter could be.
Hello.
Let me look at first.
First half to date, we're at $8.6 right.
So.
And why are we confident kind of starting to try to Wi.
Wi Fi look historically stripping out all of the.
Initiatives stripping out.
The organic growth options work on everything else, we talked about this.
The 3 companies together.
Historically <unk>.
On average and we add on the growth initiatives is why on an annual basis I think we're very confident that youre, putting out this chart and say that's the low end.
But quarter to quarter.
Things are going to continue to be volatile.
When we take a step back on this quarter and looking kind of on the levels of volatility.
We are.
Where we're printing 63 quarter.
<unk>.
Sure.
Sure.
And buying back $100 million worth of stock.
4% on the company I think as Doug said.
Keep hammering on that.
Year to date.
All the numbers play out in terms of share repurchases in terms of where we should come in PFS.
We're spot on in terms of in terms of that guidance.
Pretty good about.
So I still feel pretty good about kind of simplifying story.
Okay, and I guess just around the new.
Initiatives again like options when you look out the next let's say year to 2 what percentage do you think of.
Bob and he could come from things that are much smaller today.
Well again.
Look at it.
Look at the new initiatives chart ratios in 2018. These 160000, a day and in a muted quarter there a half a million a day first quarter of 2021, they're almost $1 billion, we put that range.
5.2 million 5, but I think figure.
They'll continue to grow through the cycle.
Sure.
And you just look at it versus the median I think.
Hard to pinpoint on a straight line basis.
Hi, Alex.
Just look at it this quarter is 9%.
Recently.
Between 789% over the.
Over the past couple of quarters and past year unexpected.
I'll take a little bit.
As we continue to as we hopefully get closer to that 5 a day I think I would expect.
Alright, thanks very much.
The next question comes from Chris Allen with Compass point. Please go ahead.
Yes.
Good morning, guys maybe.
Maybe just a follow up on Alex's question on on.
The new initiatives.
On a year over year decline from <unk> 23 to 21 I'm, assuming most of that decline was driven by lower contribution from the quant strategies from KCG.
I mean can you just give us some color there.
So year over year growth.
What businesses within the news just feel better on a near term basis versus others right now yeah.
Yeah, I think I'll take that 1.
Yes, you hit it right on the head, Chris, which as you know there's going to be volatility within the gross initiatives because theres more on marketplace opportunity I mean, so for example, ETF block in the second quarter of last year.
Maybe I kind of wish that would happen again today, because we will be better positioned for it but you probably couldn't have a better environment for like fixed income ETF block market, making than you had on the second quarter of 2020, so its kind of hard to compare.
Q2, 2022, this period because realized volatility is down 65% so.
What we're doing there you know on.
Options block ETF is susceptible to the wins the wins of volatility right.
Alright, you're going to see that capital markets, which is more of a commission based business no, but the lion's share of what we're doing in the growth area will be impacted by volatility. So the way to look at it is look at it over the longer cycle as Joe indicated if you look at what the CAGR is and it's it's meaningful so there's.
There's nothing really to read into there other than they are parts of our market, making business. They will continue to grow organically as they have but there will be periods, where volatility ramps it up on ramps down and as Joe said it is consistent will be somewhat somewhere between 7 to 8.9% of our adjusted net.
Trading income in our expectation and hope is that that debt.
As a contributor to the overall firm P&L.
Debt they continue throughout the cycle to growth.
Chris we breakout.
Bucket the initiatives into existing markets growth versus market.
Go back to the earlier periods. If you look at 2018 on that slide.
Most of that was announced in 202019 most of that.
West from.
Existing markets right. So.
In a volatile business, where you have a quarter like the second quarter of 2020.
It is a great environment.
Growth from the existing markets.
Legacy cases.
Yes.
Business.
Going to perform better right. So you are starting from a much smaller base.
Options market, making.
Market and some of the other stuff.
And those are continuing to grow its from a small base.
Why.
Intuition is correct.
Got it.
And then I also wanted to ask about the execution services last quarter from call. It correctly, you talked about some of the.
Growth in the recurring elements of the business had been taking market share from other players maybe you could give us an update on both of those angles.
And then maybe talk about where you are from customer penetration perspective.
Yeah sure Great question, So look I mean that is a.
I love that business right, we obviously.
We've grown it organically from an inorganic start because we combined the night and the ITG businesses together, we extracted a meaningful amount of synergies and lets be candid like we when you buy a customer business and you effectively say to every customer we're migrating everything you've been using for the last umpteen years.
Is terrific, but guess what we're migrating on to this new technology and this new platform called frontier, which is the virtu.
On system Trust us it'll be better you'll have a better experience.
So that's been a bit of a process.
I am very grateful and thankful to our customers who took the time to do the AB testing and they have seen that the virtu.
<unk> is highly performance and so as a result, we are winning.
Share and winning wallet or market share in Q2 was higher than it was this time last year, we are adding new asset classes.
2 our Triton Triton executed its first at fixed income trades and its FX trades during the quarter, we added new asset classes Cts and swaption 2 are on Q hub products. So we're doing things that we talked about when we bought ITG, we merged with ITG rather.
That we thought would be impactful to our customer base and will help us grow and that's what we're doing so we're focusing on leveraging our core technology to do more for our clients on addressing opportunities that we find in the marketplace.
And we will continue to grow in.
In terms of.
The capital markets business can be a little more.
Up and down ride a little more lumpy is probably the right way to describe it and similar to I guess, what you would see at a large investment bank and so capital markets has been a fantastic business for us the guys that run at our wonderful and have vastly exceeded even my own aggressive expectations as to performance.
And but it was down from Q2 to Q1 not by any fault of their own just because the market was less robust and so I continue to be excited about the trajectory of our execution services business led by Steve Kibali Who's done a great job great job on the last thing I'll say with regard to some of our subscription businesses.
We really land launch these big data offerings, I guess, you would call it our open intelligence in our open Python.
On.
Products.
Out of our analytics business, which which clients and customers really like a lot. So again a lot of really really good.
Tailwind in that business again is still going to be driven a lot by volumes on what the marketplace offers but excited about that business going forward.
Thanks, guys. Good luck on Q.
The next question comes from Sean Logan with Rosenblatt Securities. Please go ahead.
Hey, guys good morning.
I hate to continue to harp on on payment for order flow, but I do have 1 question maybe for you Doug.
It seems it seems there's some misperception of wholesalers dependence on on <unk>. So I was just wondering if you could explain in your own words.
What the impact of a ban putting aside but the chances of that happening would be on on virtu or.
Wholesalers in general yes.
Yes.
Thank you Sean it's actually a great question I should have actually my little diatribe before I should have actually mentioned this payment for order flow as an expense to virtu.
<unk> picked up on <unk> line.
In our GAAP financial statements so.
It's an expense to us it's not revenue to Virtu, obviously, we're paying it right every single retail broker wealth manager wherever you want to call on globally that sends US 605 eligible order flow does it based on the amount of price improvement, we are providing to that broker. Let me repeat that every single broker we get routes to us.
Based on price improvement not payment for order flow there is a small subset of.
Retail brokers and we all know who they are all public it's all transparent it all out there yet as a conflict, but yes, its fully disclose that as part of our.
Our arrangement with them ask us to pay them, a rebase and that's fine it's been going on for 30 years. This is not some new nefarious.
Market structure niche of the market that somehow some people.
Uncovered right. So the ecosystem works so if payment for order flow it will be where it can be banned which you will not be because that is nonsensical.
It has fostered.
Initiation in this country. So I cannot believe in a rational world that that would happen.
But putting that aside it would have no net effect virtually at all they made might ask why am I doing this and why am I. So strident about it because 1 my customers.
Like it and 2 I think it's just the right thing to do I think the ecosystem on very very proud of it so at the end of the day.
There are brokers, including a very big 1 in Boston that everybody knows that doesn't take payment for order flow for cash equities and that's fine and they route.
<unk>, 99% of their marketable orders to wholesalers why not because they are getting any payment affordable. They don't take a nickel operating cash equities. They route because we provide superior execution quality in a guaranteed execution.
And so they've effectively.
Outsource debt service.
To Virtu and 2 the 6 or 7 other wholesale so they deal with on these are really really smart really really successful people with access to every piece of technology and understanding of the market that they possibly could.
And what universe is that wrong and on what universe is that not good for the retail investor and again Thats why we will continue to be front footed on this positive and strident and very transparent because I know that the wholesaling.
System is has provided an enormous amount of value in it and has enabled an enormous amount of innovation right.
Alright people talk about lack of access to this and that and our quality and whatnot, we should all be very proud that in this marketplace.
Anybody that has an iPhone or some type of device can download an application from I don't care what broker it is and for no dollars Zero dollar Commission can buy not only just the share but $5 worth of some stock that they may have interest in that that's empowering that's democratization of a marketplace and so from an order right.
That's what competition and regulation has brought to this country, we should all be very very very proud of that.
Okay.
Great. Thanks, and then sort of along those same lines we've heard.
We've heard talks.
Article integration from the retail brokers and things like that so I just wanted to get your thoughts on that or just an update on what youre seeing on the M&A front in general.
Yes. So it's a great question look I mean, I think when people say and look I'm not trying to talk about any particular broker or anybody what anyone else that they're all my customers, we love them all okay I'm, the Switzerland here of customers at the end of at the end of the day.
People are concerned about conflicts so the notion that a retail broker would somehow startup of market making unit.
And try to internalize its own flow I mean, if there is concern about payment for order flow, where you have a third party multiple third parties on a fully transparent regulated way, providing a rebate can you imagine what the regulators down in Washington, and FINRA would say about a.
Our retail broker starting on its own wholesaling unit Thats. The first thing. The second thing is it's actually it lacks a fundamental understanding of how wholesaling works. The reason the ecosystem works for Virtu Citadel Susquehanna 2 Sigma UBS and everybody else is because we have 200 relationships. If we were solely a market maker for you.
The name of ABC broker, we would not be in business today. It doesn't work that way you need a full cornucopia of these orders that balance against themselves. We have had many periods of time days weeks months. This will surprise people, where we are losing a meaningful amount of money from large retail brokers individuals right and we adjust.
Execution quality and sometimes it gets better sometimes it gets worse, but if we were solely trying to provide market, making services to a single retail broker. It would not work. So the notion that a retail broker which has no ability to do this today with somehow wave a magic wand and throw some fairy dust on a situation and become a hole.
Taylor with regard to its own order flow I mean candidly is almost.
Naive I guess is the right way to describe it I mean schwab sold its its market, making unity to UBS years ago E trade got out of the business that is what Susquehanna is today, so that that ship has sailed.
It's getting back into it.
Port anytime soon because in the intervening 10 year since those firms got out of the business, it's just gotten more competitive and execution quality. Thanks.
To the competition and the fine efforts of all of our retail broker partners has.
<unk> has improved 750% so the margins in this business have shrunk dramatically. So it just doesn't make sense to try to do it for an individual brokers so anyhow.
I've talked too long on that answer I think it's kind of counterfactual to suggest otherwise.
And I'm happy to answer any other questions you've got.
Thanks, Doug I appreciate the day.
Anthos.
Again, if you would like to ask a question press Star then 1 to join the queue. The.
The next question comes from Michael Cyprus with Morgan Stanley. Please go ahead.
Oh, Hey, thanks for taking the question just wanted to ask about buybacks in the sensitivity table that you guys show on page 8 I'm just looking at the scenario of $8 a day of daily trading net income, which is like 2 million of adjusted trading net income.
For the year, and then I kind of offset that with the expense guidance say at the high end of $645 million, which suggests that your cash generation is call. It about 1 billion 4 or about $1 billion. After tax yet the range you show for buybacks is about 300 to 400, so that's like a $30 to 40% payout ratio and then you think about the dividend on top that's another 10.
Percent. So all in it looks like what you are showing on the pages of 40%, 50% sort of capital return payout ratio on that $8. It would just seem that you have a lot more capacity to potentially return more than that particularly since the DMT stopped paying down debt.
I Wonder why that's not the case to pay out substantially more and maybe you could walk us through the different uses of your free cash flow sorry from the long question.
Interest you have taxes.
You have the dividend.
You have.
<unk>.
We do model in here, some excess cash flow sweep.
Because we have that in the terms of our of our debt.
So.
You've got to factor those things in as well so I'd say the nominal amount of debt is.
Appropriate going forward.
And obviously, if we had a outsized quarter, where we were called on the on the.
On the on the debt and repay a chunk of it.
We would obviously look for an opportunity to refinance them.
Kind of get that back to the nominal level.
We are at today right. So we're at the right capital structure today, So I guess to.
To the extent that you want to model in.
Kind of like a re upping of any kind of reduction.
Because it requires repayments and Youre right line.
Got it okay. Thanks, and then.
Apologies if I missed this earlier I hopped on late but just hoping you could talk a little bit about the monthly progression of the adjusted trading net income throughout the second quarter and maybe you could also touch upon them the mix and composition within the different strategies, how that's sort of evolved and then how you see the environment shaping up in July for the environment relative to those 3 months of the second quarter.
Yes sure.
Question I did Dan Fannon I think asked about this before obviously, we've gotten away from monthly results, but what I did say there was.
To my recollection, there wasn't a material.
Swing from April May June I mean, it was kind of a consistent month, I said earlier and I'll repeat which is that it felt like the wind kind of came out of them the market.
A little bit and people kind of took a deep breath volumes were down almost 30% and realized vol was down 30% to 40% on all of the metrics I know you have access to and Youre aware of so that kind of combined for the type of quarter that we had which again.
If this is the new normal in terms of volume of volatility we'll take it it's obviously.
It provided a reduced market, making opportunity, but we gained 6.5 market share options.
Did did better relative.
Our ETF block volumes were roughly flat relative to the to the marketplace being down. So we continue to March forward again, we're not.
Kind of gotten away from the monthly financial and I've gotten away from prognosticating about like the next quarter. So I'm not going to really comment on July other than to note that it looks like some of the volumes and volatility numbers Arena. We're coming back in July August has always been either kind of a feast or famine kind of month Michael <unk>.
<unk>.
When the S&P downgraded the United States in 2012, it was a it was a great month for a market maker and then other years everybody's on the Hampton. So it's hard to maybe they're on the hamptons already because they've been there for a long time, so it's kind of hard to.
To look forward beyond that again.
We were running this firm for the long term and trying to get away from kind of forget about quarter to quarter.
Fluctuations, but certainly a month to month, because I, just don't think that they're really meaningful and the longer story that we're trying to lay out here.
Great. Thanks, so much.
Thank you.
Yes.
This concludes our question and answer session.
Alex on the conference back over to Don seafood for any closing remarks, I just want to thank everybody for taking the time and I would be remiss if I did not note.
And comment as Chris Concannon, Billy Holdco about Richard Pedos running style rich we're proud of the fact that you're after exercising and we assure you that you are much faster than Joe and myself, we are not a running management team. So.
We would be in the shock, but anyhow, we look very much forward to it.
Engaging with our investors and talking to you all next quarter. Thank you.
Yes.
Okay.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.
[music].