Q3 2021 Virtu Financial Inc Earnings Call
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[music].
Yeah.
Good morning, and welcome to the Virtu financial 2021 third quarter results Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Andrew Smith head of Investor Relations. Please go ahead.
Thank you Anthony and good morning, everyone. Thanks for joining us.
Third quarter results were released this morning and are available on our website. This morning's call. We have Mr. Douglas <unk>, our Chief Executive Officer, and Mr. Joseph <unk>, Our co President and co 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 <unk> 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 conditions 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 upon 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 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 EBITA margin non-GAAP measures should be considered as supplemental to and not as superior to financial measures prepared in accordance with GAAP direct listeners to consult the investor portion of it.
Our website, where you will find supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP terms 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 with.
This morning, we reported our third quarter results, which reflected an 11% increase in adjusted EPS in a market environment that was slightly softer than the second quarter.
Quarter, ending September 30, we generated 70% of adjusted EPS of $5 5 million per day of adjusted net trading income, bringing our results for the first three quarters of 2021 to $3 30 per share and an average adjusted net trading income of $7 6 million per day.
Our performance in the quarter, such as that highlights the success of our organic business growth plan. The goal of which is to increase our overall baseline performance in two ways first by expanding our addressable market by approaching new opportunities such as options market, making trip now entered to capital markets and second Brian.
Seeing the competitiveness and profitability in our existing offerings.
Hard work of integrating virtues best in class technology with the businesses, we have acquired evidenced by Virtu Algo technology legacy KCG Quant style strategies, and our customer facing ETF block desk.
I'll point out some important highlights for this quarter.
Our growth initiatives generated over $350000 of AC predict which represented 6% of our assay in the third quarter. Since 2018, we have grown these initiatives by 61% CAGR and in many cases leverage our existing technology and infrastructure to build these businesses from scratch.
In particular, I would highlight that our options market, making business continues to expand while we do not expect this business to simply grow in a straight line, we continue to evolve our capabilities connectivity and expand the amount of samples and venues we trade.
In the latest quarter. This business saw strong results despite options volumes being down 15% from recent peak in early 2021, we continue to make select key hires to expanded geographic footprint of this business and accelerate our growth.
I also want to provide an update on crypto currency.
We have formed a dedicated team of traders in technology and platform and plan to add additional resources in the near term with.
With a large distributor of Etfs globally, we now trade approximately 20 products across the U S. Canada and Europe. We are now connected to the principal spot venues to source liquidity and as meaningfully increase the number of venues in markets. We can access.
Given our historical expertise in marketing making across.
Diverse range of products and our scaled ETF pricing combined with our global connectivity with institutions and retail clients.
We believe virtue is uniquely positioned to provide liquidity to our customers a crypto products. Our ETF block desk continues to make meaningful progress and we are now a top five liquidity provider as measured by the win rate and total notional volume dealt in USD Etfs.
I also want to note the progress we have made in our commitment to return capital to our shareholders. Our board of directors had previously authorized $470 million and share repurchases.
Through the end of October we have repurchased 13 4 million shares at an average price of $26 95 for a total of $361 million.
Consistent with our previously announced targets for share repurchases.
In the third quarter alone, we've repurchased five 4 million shares at an average price of $25 71.
For a total approximately of $139 million.
As we look at on a next 12 to 24 months, we want to reiterate our commitment to returning capital to shareholders and are announcing that FERC <unk> Board of directors has approved an additional repurchase authorization of $750 million over the next two years we.
We believe this level is consistent with our expectations for cash flows generated by the business and would target this time horizon to complete the buybacks.
As we stated previously we remain committed to returning capital to investors and have prioritized share repurchases for the foreseeable future.
We aim to be in the market consistently buying back shares as we work to accomplish our capital management goals our.
Our baseline performance through the cycle is enhanced by incremental A&P from our organic business growth plan and the effects of returning capital to our shareholders through share buybacks.
We believe that over the long term this combination will be a powerful driver of growth.
The steady growth the steady growth of these initiatives as well as the continued less volatile performance of our execution services segment.
Coupled with the culmination of a multiyear integrations of KCG and ITG electronics to provide clear detail around where were hurt your results should be given various levels of A&P in a given time period. We believe our performance this quarter is consistent with that guidance and value creation for shareholders.
I'd like to take a few minutes to provide an update on the recent industry discussions around market structure payment for order flow and wholesale market, making.
I provided a detailed update on our last public earnings call and there has been no shortage of activity since then and now.
As I have said many times.
We welcome the dialogue and we are eager to have facts and data driven discussions with regulators customers and other constituents as we do on a regular basis since I last spoke to you. It is clearer than ever that our market, especially where retail order flow is concern remains fair transparent and resilient study.
After studying an empirical analysis after empirical announced analysis continues to show that the U S equity market are more accessible than ever at U S. Retail investor experience has never been better and is decidedly better than any market in the world as such we and many other market participants remained.
<unk> that calls for reform are based on false narrative and factually unsupportable conclusions and innuendo.
Today, we have a robust regulatory framework that has been developed and maintained by the SEC FINRA and others, which was designed to foster competition has always been transparent facts and data driven mostly free of the politics of the day and.
In an effort to further enhance transparency, we recently petitioned the sempra specific regulatory reforms to enhance the measurement and objected disclosure of the enormous benefits that U S retail investors receive today.
We believe reform centered on enhancing transparency and enhancing competition will deliver tangible market led benefits to retail investors.
Despite the noise innuendo and political environment, we are confident that the.
<unk> data and a desire to continue to put retail investors one will win the day when they look at the data regulators politicians and critics will see that the massive benefits of today's competitive ecosystem, which regulation of transparency have created for retail investors.
Now I would like to turn the call over to Joe Maluso, Jeff Thanks, Doug as Sean and I will have some brief comments and then we will take your questions.
After several quarters of elevated market activity realized volatility dropped to $11, one which is the lowest we have seen in several years and 10% below the 2019 average and as you know 2019 was a historically low point for volatility.
The U S equity volumes were down 8% overall and retail equity 605 volumes in the United States were down six 6%. Despite the market conditions that were softer than the second quarter and meaningfully below the market activity of 2020, and first quarter of this year, our market making business.
For realizing $249 million and adjusted net trading income or $3 9 million per day, or 5% better than the second quarter.
Our execution services business also performed better than the market opportunity this quarter, realizing $106 million and adjusted net trading income of $1 six 6 million per day.
Is 5% less acute.
<unk> is a global business and market volumes were down a larger percent quarter over quarter in most regions. For example in the U S was down 8%, Canada was down 21% in Europe, 6% with only APAC seeing a slight 3% increase in volumes.
Continued continues to contribute to our global scale and reduced quarter to quarter variability to our firm wide results.
I will review some thoughts on purchase 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.
Last quarter, we reviewed a slide which showed virtues ability to generate earnings at various levels of adjusted net trading income coupled with our share repurchase capabilities. Our results year to date in this quarter are consistent with prior indications and demonstrates the earnings growth potential of our base level of earnings.
Power combined with our growth initiatives and return of cash to shareholders.
The inception of our share repurchase program less than a year ago, we have repurchased approximately 7% of the company on a gross basis.
Counting this effect over a number of gear should meaningfully elevate purchased base earnings power regardless of the environment.
With our current overall debt levels now well within our long term sustainable nominal amount of our quarterly dividend of $25 24 is more than secure.
And we have no immediate plans for any major acquisitions, our ability to devote most of this substantial cash flow to repurchases will continue.
The announced $750 million incremental repurchase authorization will target a two year period and is a recognition that over sufficiently long period of time Virtu will generate significant cash flows however, episodic.
Finally, our growth initiatives, while themselves volatile quarter to quarter are real and accrue to our bottom line with significant runway to grow is worth noting that while many of the initiatives included in our growth slide began only a few years ago. They will not grow in a straight line as volumes and volatility structuring.
In the most recent quarter, we witnessed continued strength in some areas such as option crypto and Virtu capital markets experienced a slight slowdown in August like block ETF we.
We remain bullish on these initiatives and the potential for them to contribute meaningfully towards growing our baseline performance in any environment. These organic initiatives together with the substantial cash flow and appropriate levels of debt going forward, evidenced <unk> ability to thrive in any environment, while producing significant returns to shareholders and now.
Like to shop to conclude.
Thank you Chuck in the third quarter as presented on slide three of our supplemental materials are adjusted net trading income, which represents our trading gains net of direct trading expenses totaled $354 million of our product line $5 million per day, 2% lower than the third quarter of 2020 and shippers.
Is it higher than the second quarter of 2021.
Market, making adjusted net trading income was $249 million or $3 9 million per day, 3% lower than the year ago quarter, 5% higher than the second quarter of 2021.
<unk> services adjusted net trading income was $106 million or $1 $65 million per day, which is a 1% increase year over year and 5% decrease in second quarter.
Our adjusted EPS was <unk> 70 for the third quarter, 11% higher than the second quarter of 2021.
Third quarter, our overall compensation expense was $84 6 million.
Which is basically flat from Q2.
Our cash and overall compensation ratios were 20% and 23, 7% of adjusted net trading income respectively, which is also consistent with the second quarter.
As I've previously previously set of about our compensation ratio consistent with past practice, we accrued year end incentive compensation to a range of percentages earlier in the year.
Okay.
And later on.
Our specific compensation targets.
Yes.
We will update guidance for 2022 expenses early in 2022 overall.
Overall, we have our cost results going forward consistent with the specific cost guidance and actual performance for 2021.
Adjusted EBITDA was $210 8 million.
Thus for Q3 up from $196 8 million in Q2 with cash of two.
$147 million per year.
EBITDA margin was 59, 5% for the third quarter.
<unk>, which is an approximately two <unk>.
Increased from the second quarter and continues to be reflected.
Our cash cost structure and disciplined expense management.
Our capitalization remains adequate.
Long term debt was $1 6 billion at quarter end.
Hi.
$20 million for the third quarter, which is flat from both the second quarter as well as prior year third quarter.
We remain committed to our 24 set of quarterly dividend consistent with.
Over 25 quarters in every environment since our IPO and our.
Approximately 130 <unk> demonstrates our continued commitment.
To return capital to our shareholders.
With that I will turn the question over to Dr.
Operator for the Q&A.
Hi.
We will now begin the question and answer session.
So ask a question you May press Star then one telephone keypad.
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To withdraw your question. Please first started too please.
Please limit yourself to one question and one related follow up question at this time, we will pause momentarily to assemble our roster.
Our first question comes from Rich Repetto with Piper Sandler.
You May go ahead.
Hey, good morning, Doug Good morning, Joe and John.
Congrats on the good quarter and thanks for your candid remarks on equity markets.
So.
Okay.
Strong quarter, we're trying to understand what.
One of your peers had very dismal results.
Yes.
Blamed it on the lower volatility you yourself recognize.
Volumes were down and volatility metrics were slightly down quarter to quarter. So im just trying to see where the outperformance came from if you could just highlight any of the areas with us.
Geographically our asset class so whether it is in reach.
Mark can make just trying to understand how you guys outperformed.
In the market making segment.
Yes, Thank you rich and I. Appreciate the question I think what <unk> seen in this quarter and we've been attempting to disc.
Describe it quarter by quarter as the strength of our scaled global franchise.
Obviously, I know the competitor, you're referring to which is a great company, but they are much more of a specialized market making firm in that.
98, whatever as a percent of the revenue comes from global ETF market, which is a great business, but thats a small part of what we do globally and the philosophy behind virtue always was.
Let's try to be the best fit and best offer in every marketplace, possibly can electronically around the world in every asset class that's been our goal and so through the year as we built this scale franchise and certainly like in ETF block market, making in the U S.
It was a little bit down this quarter, but it gets it gets lost delayed and the avalanche of up between our market, making businesses like our ETF business is now internalizing off of our single object market, making business and our options group doesn't have to worry about hedging their delta risk because you can hand, it off to our single object.
Market, making business and we're able to leverage everything that we do globally.
To really.
Improve our market base and capabilities.
<unk> had a nice quarter honestly, we don't break fix tinnitus independently and individually because we look at this all with a single franchise at a single firm and so a lot of the investments we've made over the years in technology internalization continued to pay off and I think this quarter is just emblematic of what we've been talking about.
For the last 567 quarters.
We're going to continue to.
Put our heads down working on the blocking and tackling integrate the firm manage our expenses and even though like 605 volumes were down like 5%.
6%.
This quarter, we did better in the retail market, making this quarter than we did last quarter, because we worked hard in the strategies performed better.
Okay. That's helpful. Doug.
And my related follow up would be.
Yes.
Outline the crypto and option opportunities they both look like great opportunities for <unk>.
Electronic market maker like yourselves.
But just trying to see where you see the bigger opportunity with crypto did the.
ETF approval of futures.
ETF.
Yeah.
So that jumps out at you bid or where do you see more.
For opportunities I guess crypto versus auctions.
I think thats, a great question and sitting here today I would say options to me is a very large compelling very well known opportunity. We can all look at what the total addressable market.
You all know what the volumes are everything is published by the OCC internationally, you look look at the Nikai envelope. The nifty 50, obviously, there's some big index options in Europe right. So all of that kind of plays right into the Virtu strength, which I just outlined in terms of being a scaled global electronic market, making firm as I've reiterated a number of times in these calls we are.
A key strategic decision to get into this business a couple a couple of years ago, and it's been a bit of a slog, obviously reorienting our technology, our infrastructure everything from the <unk> to the to the trading infrastructure to the middle and back office to make sure that we could be the competitive options market maker. We have done a lot of the work there is more work to do and we're in the <unk>.
Early innings. So we think it's exciting because we can be a non customer a market maker theres, obviously, a significant customer segment here in the United States and theirs.
International options and then there's a whole category of non equity options and <unk>.
You will be you know very well, we are a market maker of commodity products and FX products and whatnot. So the delta hedge there is well known and understood by us So asset class if you will.
We've been monitoring it very closely but again, we've made a strategic decision that it fits nicely into what we do as a firm clearly with the SEC improving.
At least the futures based Etfs that has widened.
The number of participants in the marketplace and kind of plays right into the core strengths of what Virtu is all about which is to say we are a market maker that is quite capable of interconnecting asset classes, whether they are expressed as a spot future an ETF and that's exactly what is happening with crypto products. So you've seen a Chinese CDN.
In Europe, and now you see the United States for Etfs have been launched clearly advancing fee saw fit to approve.
Etfs, the corpus of which were spot spot crypto coins, you would see an explosion.
ATM volume and I'd take the NFL, obviously going to be good for Virtu, because we're an authorized participant with all the issuers that have filed.
We have we're very well known as a lead market maker on the New York stock exchange. So all of the things that we do exceptionally well with play right into our hands.
Our friends at the CBOE decided to buy Harris.
Which we thought was really interesting because it really what that means Richard that people have concluded that this asset class is going to be institutionalized and institutional traders want access to it so alright CBOE.
CBOE I hope and we're part of that we were a part owner of Ara. So we're excited about that as an opportunity to further institutionalize crypto.
Crypto products as an asset class.
Got it great job guys. Thanks. Thank.
Thank you rich.
Our next question comes from Chris Allen with Compass Point, you May go ahead.
Hey, good morning, guys.
Yeah.
Nice quarter.
I had a follow up on Rich's question.
The outperformance in market, making maybe digging in a little bit on the competitive environment in.
Wholesale market, making.
Looking at Bloomberg reports provide seamless workflow data retail shares that skewed it looks like you guys are picking up share.
And coincidentally as soon as those two.
Sure Ken So it made comments around concentration risks.
If you can just provide some commentary.
This looks like when there's been some.
Some changes.
Maybe in response to the regulatory pressures any commentary there would be appreciated.
Yes, it's a good question and I think the.
Sure, obviously made some comments, which I thought were frankly off target in terms of the competitive nature of the environment has always been a very very competitive marketplace.
Somehow.
The notion that it was dominated by one firm send it out I mean, obviously they have significant market share, but we've been punching in fighting in trying.
Trying to get market share from them and other competitors have been doing the same thing for years, it's not an easy business to <unk>.
It needs to be scale.
<unk> effectively guaranteed execution.
To hundreds of clients in 8000 individual names so it's a very very difficult.
Marketplace to be frankly, three years ago, we had effectively zero market share with robinhood, which is one of the largest participant we made a concerted effort Chris too.
Adapt our algo is to make sure that we can handle their flow and honestly voluminous to put it mildly.
No.
I think we're now like somewhere in the neighborhood of 37% to 38% of the remarkable is this is all public information from the 65 and six our SEC report.
A number of other firms have.
Now that they are entering the wholesale business Jane Street Hudson remedies are great firms and we welcome. The competition. We think it's a good thing it keeps us sharp and it demonstrates that the myth that somehow this is a concentrated.
Marketplace, where there's possible barriers to entry is just that it's a minute right. So this is a very competitive market in the winter. The winter is ultimately our retail investors.
Because what has happened in service of ordering of routing.
And excuse me non marketable and marketable.
Orders.
And we internalize some of them the other ones we.
Obtain price improved liquidity and pass it on and we absorb all of the cost all of the exchange at Ats costs as part of that and that is really what this wholesaling.
Ecosystem is all about the retail brokers have made a conscious decision that it makes business sense for them to outsource this business could they save on expenses and also their customers in a much better execution. So I know this is not the question to answer but I can't help myself I have to answer and so when you Peel back the onion and actually.
Look and understand how the ecosystem works.
It is it is impossible for me to conclude that some of them looked at this and say we need to throw this entire ecosystem that first of all there is no statutory basis for that so we're really talking about nothing but at the end of the day is the fact that the data are just so overwhelming and competitive.
Is it shocks, we haven't come out of a conversation with someone at most of whom were really uninformed about how this all works.
I'll answer the question in <unk>.
And the competitive environment is stable.
The answer there.
I'm sorry.
And the competitive environment.
I mean, how has that evolved.
Paul maybe over the last couple of quarters.
Looking at the U S equity business, given sort of flattish volatility and lower volumes, how did revenue capture fair in that business and I know you don't provide specific numbers, but directionally was it.
Up down or flat like that would help me a lot. Thank you.
Yeah sure.
We've gotten away from looking at like.
Like some sickness I would call in our market.
It becomes more of a product or what we do.
I'm not trying to avoid depression.
But we do look at the firm.
As a mosaic of market, making and the scale of opportunity to continue to grow and we pointed out like some new areas reporters were longer in Nashville gives you.
Oh totally statistics, we put them all out there so I can volumes were down and.
And nobody has an volatilities bin.
Then and now so in terms of.
Ah how they performed Ken what we do is we looked at it like internal metrics as to what the opportunities and and then measure our performance against those metrics and on that basis, but you. Obviously all maternal <unk> you don't have access to and all that kind of stuff, but on those metrics both.
That segment has performed well and can.
<unk> in particular week.
We've seen good growth in metals segment clearly in in natural gas as well during the quarter. Because you you saw the spike in natural gas as we come into the September October period, and finally, we have some volatility and natural gas I will say.
Crude has.
And a.
Slower area for us in the last.
Couple three four quarters, and that's largely because of the dislocation in the crude market.
I can't even remember what crude went negative within the last.
She returned and that really that really impacted ETF market as well right. So you saw a lot of folks and a lot of volumes and crude.
<unk>.
By that.
Grange market event, so things like that that are out of our control. If you just look at like you know.
Crude volumes since that event that obviously.
We're pleased with the segments and if you look at it and a quarter to quarter is over.
Please talk even if you look at it versus 2019 and 2020.
2020, if you look at the.
Volumes on the spot venues.
They weren't really awful.
Versus 2019, even though you're in 2020, and they're kind of flat year over.
A year.
And in some of the other areas.
And an energy as well until recently.
You really muted environments and I think over the long term if you look to your versus 2019.
Versus where we are today we are.
Pleased with Windows business owners, they're still very good solid businesses.
Okay.
Recapture.
Up down sideways.
Sideways.
If it was up this quarter, which helps our results obviously rich and asked that question earlier, and I guess that kind of vaguely answered, but again, we don't publish equity capture because it can be a little bit of serendipity, sometimes particularly in the retail business. When you have in a moment of these medium stocks that kind of blow out and there's extreme volley.
<unk> have been offers widened but as an overall.
Firm, including customer and non customer in terms of certainly U S equity Richardson.
The number that we're looking at right now we saw an increase in and capture over the over the quarter and I would I would.
Characterize it more as kind of a growth of same store sales I'm trying to recall if there were moments of volatility I am sure. They work during the quarter, but nothing really sticks half. So that's just really blocking tackling getting better at an increase in same store sales.
As the follow up just love to get a little bit more in depth into crypto rollout can you talk about the evolution of the business maybe through the quarter and.
I see the prepared remarks were you broaden the resources and crypto.
But are you market, making at this point in spot tokens or futures.
If so what what tokens are you doing whereas the focus here to force still been on the crypto ETS.
Yeah. Good question so to be more specific we are connected in training on the four major spot vanished with plants and four to five additional logic.
<unk>.
Finance.
And I think because neither one of them.
And we're going to add Almac scratching on a couple of others. So.
Obviously done our due diligence as where counterparty risk and whatnot because.
Right now.
It's not really the kind of a prime brokerage and centralised clearing all that kind of some sort of a little bit of a different class for us.
We are obviously.
Connected to the future squirrels, and we are a market maker in the you.
You might be cash and then all of the Champs up in Canada, and Europe as well, so I would I mean.
And I would choose Canada. It feels to me, it's a little bit like our commodities business in the sense, we've got spot gold and silver we got told as a future and we've got it clearly obviously cold etf's in and use scanning of Europe and in Asia. So we look at that has a similar style business and.
One of the things, we're looking to add would be.
Direct market, making to retail and institutional customers that want to stream of products.
Right now we're market, making a fire tokens or point that you should call them or.
Agree with describe them and it will be judicious about adding those were again, we're not going to go too far out on the skew in terms of.
50 odd venues because the risk management, but we think.
Being connected to those poor and then ultimately those 789 venues, we're going to be covering 80, 590% of the dreadful market in the universe. So that's kind of the business plan there I would say.
We're doing a lot of walking Kathleen in terms of understanding the operations around borrowing in any pain, when the wallet and moving coins back and forth a little bit different and trying to do it securely and intelligently and the virtue kind of.
Why thickness as I've always said I don't want to have a map.
Situation right, where all of a sudden.
Or collateral disappear someplace, so I'm excited about it as an asset class, we don't have the burden of saying or signing whether or not there's any value to these things because the marketplace has spoken people are interested and we hadn't retail clients come to us and saying can you provide to stream.
And we're in discussions with institutional Counterparties that are anticipating that their client will walk this as an asset class so as to become more of a regularized I guess I would describe it and bring institutionalized asset class exciting for us in terms of what the total addressable market would be.
Your analysis would probably be better than mine in terms of there's no central repository, new things, but clearly.
A ton of volume and you can see that very very nicely into what we do with the global market nature.
Obviously, we're going to people, but in terms of like.
Activity in terms of trading strategies in terms of like operational.
So in terms of being a lead market maker and being an authorized.
Participate in an activity we have all of those things to the incremental spend for us to get into this is effectively dominion Mr. Zero. So that's what again.
Again, the beauty of our scale model is weak in Tibet and shifting get into these new opportunities with very very minimal cost, obviously, there's a focus cost and where reallocating people from other training areas. So we think in this instance, it's well worth the investment.
Great. Thank you.
Thank you.
Our next question comes from.
Salmon with Jeffries. He may go ahead.
Oh, Thanks, good morning, but I just wanted to follow up on the options market, making talked about increased symbol and venue coverage in the prepared remarks could you. Please.
Give us an update on kind of weird that neither I don't know if you want to use it.
The baseball analogy or just thinking about <unk>, what percentage of the market, you're actually interacting with and how we think about that kind of full coverage or what's the what's the goal of a time period for that kind of meeting what you think will be kind of against it.
Look at the Great question I understand people are very focused on it.
To use a baseball analogy would definitely out of the dugout.
Whether it's the first second in any or the third inning I don't know if I could go ahead is still pretty early innings.
It is a very different marketplace, a very different market structure from what we are used to.
We are now trading complex instruments were involved in auctions, which is like the.
A very important step to getting into what I would call customer market, making or that kind of course and so we're doing that we are very very active in the.
The index options, the United States, and we are now market, making an index options I am happy to report an agent, which is a significant expansion for us.
We have gone out of the firm to hire laterally, where we needed to be fired options plants and experience options traders that.
Have been fully vetted combine them with vertu technologists and people that understand market start trendify articulated early in my prepared remarks in an answer to a prior question. The fantastic thing about the firm is that when it comes to ending off the delta hanger understanding pricing around either underlying stock or an H at four.
<unk> product or an FX pair all of that DNA is already within the firm. So my friends that are options market, making effort to effectively have the best in the world, which is their own internal colleagues right. So that's really the poor strengthen and affirm in terms of the setup.
We're not connected to all the principal options venues and understanding there in the United States and understanding their DNA I will say, we're getting approached by option venues. All the time because people are excited to have this is a new participant and then last piece of the puzzle obviously from a business development standpoint.
When we want to get into direct.
What retail market, making we obviously have all of the relationships with all of the big and small players that have options. So all of the infrastructure and business development and people understanding Hoover to US and then we have credibility they're all there so it's really hard.
Hard work, which were very good at and doing the blocking and tackling getting better I am I am very very pleased with the progress. We have made very very pleased with the progress we've made in our.
Option and I continue to be very optimistic in terms of where it will be I think 2022 is going to be key year for us I've said publicly and I'll say again, we fully intended to.
In the six O five business early in 2022, whether or not.
By the first quarter of second word I'm not quite sure it depends upon how do we do.
But the beauty of that market structure and as you well know is that you can you can experiment in terms of retail options market, making by participating in the auctions and that's what we're doing right now so we're learning.
And we fully intend to be a meaningful participant in that marketplace for the foreseeable future.
Okay. Thank you and then someone just to clarify I think you've reiterated the.
David expense guidance for this year.
And then decided I know it's early for next year, but just remind us there's there's no more synergies coming out from from legacy transactions and we can just think about kind of a normal kind of inflation plus an ongoing spend is kind of a reasonable based framework to think about 2022.
Yeah.
Yes, there is always a little bit more synergies.
Continue to work on.
Most of that has been realized already.
Okay. Thank you.
Our next question comes from Alex Blow Stein with Goldman Sachs go ahead.
Hey, guys good morning.
Could follow up I guess on page on slide five around some of the new initiatives I was hoping you guys could break down how much various initiatives certainly kind of contribute to this organic growth numbers you put on slide you know either for the quarter a year to date that there'll be helpful. And then is it kind of secondary part to that I haven't heard you guys talked so much about.
Credit and I think that you know obviously, that's one of the market continues to get more of a chronically traded what is sort of the aspirations and the ideas you might happen in credit and I did get in a partnership with market access at some point of time that that could maybe propel some of those initiatives. So curious to get an update there's all thanks.
Thank you I'll, let me handle the credit for it and then I'll turn the organic initiatives of the job.
A much better job than I do in terms of credit your rank and put it in my prepared remarks promise should have in hindsight, which because it is we have so many things going on it's like you have to prioritize opportunities.
We think it's an important opportunity.
To to be electronic <unk>, we are connected in training.
Training corporates anonymously on market access we're being on board for training and credit which is a first for virtue. We've done our first portfolio transient credit, which words I'd never thought I would say publicly.
I didn't think there should be an asset class that would be preferable.
Respirable by virtue, but it it it is and certainly not having an ETS data.
That is a significant market major a fixed income etf's has really helped us. So I continued to see more more automation, we're quoting as insignificant upside the counterparty want to deal with us.
But it's a very nascent business for us and so it has immaterial impact on our performance to date again strategically.
We think it's really really important are blocked desk has real credibility were ranked in the top five in the United States in terms of just hit rates and volumes that we're executing so we have become a trusted counterparts. So we have dedicated folks.
Alex that are now in our I guess I would call it our credit market, making group they are attached to the ETS task and so we are ready willing and prepared to be a liquidity provider.
We've hired a business development people too.
Go out too.
Managers and.
Pension funds and folks that need liquidity and credit so it's going to be a growing area. That's Joe you want to handle.
On slide five we kept it at this level of detail because it is really a mix of things between.
New businesses. If you look at the 2018 bar a lot of these businesses underneath that 160000, a day <unk> obviously.
<unk> crypto are zero.
And it was about a block etfs, but it's been.
Really overhauled and you're adding to clients.
Spoke about me also spoke about options.
And crypto anyway. So so Alex I think we're going to continue to present to present it this way.
I think the opportunities are there we could add things to this as we as we need.
Okay. Thank you.
The market's business.
Something to highlight that.
This just started.
Last year and performance has already double 20.
We hired a team and they have done extraordinarily well.
We are very excited about that business, we expanded the team were hiring someone else.
Market. So look I think we're gonna keep it at this level.
Part of the reason is because it's going to fluctuate quarter to quarter.
The decline in.
And realized volatility.
Hi.
Some of the some of the the real progress we've made here so we're going to keep it at this level.
We're not even talking about your execution services.
That business has been.
Transformed and I think outperformance this quarter as well, we'll talk a lot about market making.
But when we look at it internally.
Meaningful expansion in the margin of that business is required ITG.
It really outstanding so we don't want the focus to be only on these businesses. This is a good way for us to highlight some incremental revenue network that was really next to nothing just a few years.
Gotcha, Thanks very much.
Our next question comes from Michael Cypress with Morgan Stanley You May go ahead.
Hey, good morning, and thanks for the taking the question I just wanted to circle back on crypto. So it sounds like you are starting to make markets and the underlying crypto coins physical just curious your perspective on what you think it's gonna take could be successful crypto market, making how different can you see that from other asset classes. What do you have to do differently. There and you could also talk a little bit about.
Which coins are you, making markets and today and maybe talk to learn about your process around determining which claims to add.
Yeah. That's a great question. Thank you Michael.
In a general manner as I said before it feels like.
Any other one of our commodities market, making business will take hold we try cold as a spot instrument triangle future, obviously, Chicago and in other places around the world and obviously it has been a proliferation of gold.
Just about every jurisdiction, where we are market maker. So if you just equate crypto clients effectively to some digital measure of welfare value like gold, it's no different than the strategy that we are running a crypto right now are analogous to what we do for our called Martin make strength. So that's.
10000 foot why it's going to work and why it makes sense for us debated as I mentioned before however is an operational different in the sense that like.
For our go Mark mentioned, we would kind of Morgan Stanley or J P Morgan or somebody like that.
Can you be our fault manager, we need someone actually did manage the Gulf for US can you be our prime broker and futures and spot because we need someone to give.
Give us leverage to handle.
Settlements and and Etf's, obviously, we'd be around settlement personally because we're software in the us, but otherwise produced AVN our partner in Europe.
And in Asia, and crypto today as I said those institutions that J P. Morgan Morgan Stanley's are largely not providing.
Service is a prime broker a just settlement agent and an act providing leveraging capital. So we're doing it largely on a round. There are new types of institutions that are attempting to provide some level of like.
That will manager wallet and help you move coin fashion report and there's some leverage but it's a different asset class in a sense that if a new asset class and institutions have not yet and breaks it.
As part of a traditional financial services offerings. So it's a little more work and certainly from a risk management respect that we have to be rather than having counterparty risk J P. Morgan Morgan Stanley Rick Goldman we have counterparty risk to coinbase or two in Ah Phoenix and things like that so we have to monitor it more closely those are obviously large institutions.
We feel very comfortable around the risk so.
It's a nicely as a segment that we could market making.
But obviously operationally there are some nuances, but we're really good at understanding what's event with virtue has been really good about it and.
And extrapolate to say as I mentioned earlier, there obviously retail brokers today that are providing crypto access to their clients robinhood as one and there are others that are that are doing it those firms need liquidity as well and so think of that as like our customer market, making business right, where we act as a wholesaler. So it's no different than Avi.
Flee all of those firms noblesse very well. Thank you we provide good service we've been a trusted counterparty so.
We are in the process of launching.
Just call it be correct, unlike virtually providing extreme as well they are the counterparty would be robin hood or wherever the retail brokers and obviously, we know them very very well the last thing I would say is obviously we've got a.
Fitness training, we've got analytics products as well so add this asset class becomes more institutional line is going to be a need for institutions as well to have.
If you will have access to the market and then they're going to have their own best execution obligations. So they're going to need someone to provide analytics. So everything we do all the products and services, we provide either as a market make sure a as an institutional.
Execution services counterparty, we intend to add tripped up each of US product. It's a bird too playbook. This is like page one of the virtue playbook got something.
We can market, maintaining and we can provide services as an execution services counterpart.
Great and just as a related follow up if I could I recall in the past you are a little more hesitant about getting into physical market, making for crypto and I think that you had thought about that parents as more of your entry point into crypto as separate entities. So I guess, what's changed from regulatory our market structure environment that comfortable to enter the marketplace what her.
<unk> did you overcome and if you could just maybe share some updated thoughts on errors in the opportunity there.
Yeah. It's a great question are very very fair question, I mean, I guess I got it.
Scared away by now costs, which I referred to earlier and hacking and all those things and but add.
We've got to know firms like point banks, and obviously, a Gemini and Galaxy <unk> a couple of Obsequent basis, now and very large public company and as Robin Hood has got into it. It's been very it's become clear to me that like number. One. This is an asset class that's here to stay because so much value associated with it I don't have to make that qualitative judgments, but more on.
Number two there are very credible scaled institutions and a lot of money behind them I don't know what basis market cap is but it seems extraordinarily high honestly.
Right significant EBITDA and all this kind of thing so looking at them at the counterparty with transparency, it's less about regulation is more about understanding the counterparts in a transparent behind them. The other thing that the ball is that there are a number of these.
Wallet.
Infrastructure I call them crypto infrastructure companies that have come up I'm not going to name names because I don't want this demand pancakes for who are using but there are a lot of really good companies out there that are getting into the marketplace and understand what I will name is is Gemini and we do really good work with them and they are regulated by the.
New York Department of financial services that kind of thing. So we feel very comfortable micro with them is kind of trusted counterparties.
Kind of clearing service and all that kind of stuff that we take advantage of so it's not quite obviously as I mentioned before not quite.
Cole if you will in terms of the infrastructure that has been built up but you've seeing basic steps towards it and that's really why we've kind of changed our tune and why we're excited about it and why we think we can kind of be in the middle of it.
Great. Thanks.
Okay. If you have a question. Please press Star then one our next question comes from Kris Allen was Compass point you May go ahead.
Okay.
Okay that sounds great.
My thoughts or maybe a quick Paul just unplug, though uhm, maybe give you some color just until the how much capital you deployed and it's up to me right now and how that compares to maybe that must be deployed in commodities for example.
Great question Joseph.
Chris.
Obviously, we don't we don't breakout segment capital.
But it's not an amount that would be considered material overall.
Two land I think is following up on the answer to.
The last question, despite there being no kind of central clearing or even settlement mechanism.
CLS and FX markets mature in terms of some of these services that Doug was referring to.
The companies have matured in terms of the size and their access to the capital market themselves.
And our ability it's not just the amount of capital that we look at very closely.