Q4 2022 Virtu Financial Inc Earnings Call
Okay.
Speaker 1: Ladies and gentlemen, welcome to the WorldView Financial 2022 fourth quarter results call. My name is Glenn and I'll be the moderator for today's call. If you would like to ask a question during the presentation, you may do so by pressing star 1 on a telephone keypad.
Speaker 2: I will now hand over to your host, Andrew Smith, Head of investor relationship. Andrew, please go ahead.
Speaker 3: Thank you, Glenn, and good morning, everyone. Thank you for joining us. Our fourth quarter results were released this morning and are available on our website.
Speaker 4: On this morning's call, we have Mr. Douglas Sifu, our Chief Executive Officer, Mr. Joseph Maluso, our Co-President and Co-Chief Operating Officer, and Ms. Cindy Lee, our Deputy Chief Financial Officer. We will begin with prepared remarks and then take your questions.
Speaker 5: First, a few reminders. Today's call may include forward-looking statements which represent Virtues' current belief regarding future events and are therefore subject to risks, assumptions, and uncertainties which may be outside the company's control.
Speaker 6: Please note that our actual results and financial conditions may differ materially from what is indicated in these forward-looking statements.
Speaker 7: 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.
Speaker 8: We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report, Form 10-K , and other public filings. During today's call, in addition to GAAP measures , we may refer to certain non- GAAP measures , including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margin.
Speaker 9: These non-GAAP measures should be considered as supplemental to and not as superior to financial measures as reported in accordance with GAAP.
Speaker 10: We direct listeners to consult the investor portion of our website where you'll find additional supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings materials with an exhibition of why this information, why management deems this information to be meaningful as well as how managed.
Speaker 11: as well as how we use these measures. With that, I'd like to turn the call up to Doug.
Speaker 12: Thank you, Andrew, and good morning, everyone. Thank you for joining us today. In my remarks today, I will focus on Virtu's fourth quarter and full year 2022 financial and business performance.
Speaker 13: 2022 milestones and the progress we've made toward our strategic initiatives and goals.
Speaker 14: Following my remarks, Joe and Cindy will provide additional details on our performance.
Speaker 15: Turning to our full year and fourth quarter results, which are summarized on slide two, we generated $5.8 million of adjusted net trading net income per day in 2022, including $4.4 million per day in the fourth quarter.
Speaker 16: Total adjusted EPS was $3 per share for the full year, including 37 cents in the fourth quarter. Our market making segment, which earned an average of $4.2 million per day and adjusted their trading income for 2022, comprises our customer wholesale business where we received flow from $250,000 to $2.2 million per day.
Speaker 17: plus retail platforms as well as our non-customer or proprietary market making business.
Speaker 18: In the fourth quarter, our customer market making business witnessed decreased opportunity as the overall spread opportunity and retail participation ebbed and the quality of the flow we received from our retail customers was significantly less desirable.
Speaker 19: As we have noted before, parts of our market-making business can be more variable than our other businesses and as a consequence should be viewed over the long term in conjunction with the significant cash flow it generates. We remain extremely bullish on the long-term value of our customer business.
Speaker 20: which has proven to be durable and profitable over the past 20 plus years.
Speaker 21: Our non-customer business, which provides liquidity across asset classes globally, experienced a strong quarter as well as a strong overall year, as our ongoing investments and our growth initiatives, particularly around options market making, continue to perform well. While the integration of our businesses and increased internalization means that efforts to improve...
Speaker 22: For our customer market making business, although the opportunity was down in the fourth quarter, we performed in line or even better than our own internal metrics projected.
Speaker 23: We have historical capture rate metrics and these didn't deteriorate, but we continue to focus on ways to improve and capture more of every opportunity in every environment.
Speaker 24: And while market share alone is often not a helpful gauge of performance, it's worth noting that our market share in the wholesale business remains within historic ranges.
Speaker 25: A couple of significant bright spots in our thriving non-customer business include energy and natural gas, specifically as well as our continued growth in options globally.
Speaker 26: To give you some additional perspective, our non-customer market making business was flat year over year from 21 to 22 and up 11% from the third to the fourth quarter of 2022.
Speaker 27: Turning to our execution services segment, our adjusted net trading income was $1.4 million per day in the fourth quarter, essentially flat from the third quarter.
Speaker 28: For the full year, VES delivered $1.6 million per day, or 28% of our total ante.
Speaker 29: In general, VES results include revenue that is more recurring in nature compared to the inherently more variable market-making businesses.
Speaker 30: Given the contraction of the buy side's execution wallet and declining institutional engagement, particularly in Europe , we believe our execution services segment performed in line with the opportunity this quarter and the full year. We are bullish as well about VES's progress and the opportunities ahead.
Speaker 31: We have built our global multi-asset execution business as part of the acquisitions of KCG and ITG, and we continue to onboard new clients to our highly scalable technology platform. We're excited about the growth opportunities the future holds for cross-selling across regions, products, and assets.
Speaker 32: as well as adding more subscription revenue to BES's platform.
In the very early days of 2023, we are seeing some modest enhanced opportunity in our customer market making business and our efforts to improve our capture rates are beginning to bear fruit.
Overall, we are pleased at how we performed against the opportunities the market has given us in 2022 and how we have deployed new businesses that are in the infancy or non-existent only a few years ago. May the dollar Chriss categorise the retail market to personal understanding of why
Our performance in the fourth quarter, full year 2022, and in the start of 2023 is the result of the ongoing investments we are making in people, technology, integration, deploying strategies to new products, and ongoing innovation to expand our abilities to address more opportunities, become more efficient, and capture incremental revenue.
from each existing opportunity. As always, we remain relentlessly focused on cost and realize the 59% adjusted EBITDA margin for the full year and a 46% adjusted EBITDA margin in the fourth quarter.
reviewing some of our growth initiatives and options. Our business had a record year in 2022 as we've expanded across venues as well as across asset classes and geographies.
We remain very pleased with our decision to focus our early efforts and options on the most liquid issues as we build our footings. In the US.
Market-wide options volumes were up 5.5% in 2022, while ANTI, from our growing options business, was up over 100% for the second consecutive year.
However, given the size of this growing global cross-asset opportunity, we consider ourselves in the early innings of a multi-year effort.
In block ETF, we continue to make progress and our adjusted net trading income in 2022 goes up despite lower opportunity overall.
Closely related to our ETF block desk is our growing investment to build our fixed income business.
In the same way that our growing options business complements our global equities market making activities, success in our fixed income business enhances our ETF block desk.
In addition to our growing investments and resource allocation, we continue to actively hire and develop talent to help us realize these and other opportunities. Crypto.
I previously talked about crypto as a growth initiative and notwithstanding the industry turmoil kicked off by the FTX bankruptcy and continuing today, we continue to view crypto as a long term growth opportunity.
In the aftermath of recent events, I'm proud to say that we managed the risk around the events of this quarter, as you would expect from Virtu.
Although we had an approximate eight-figure fiat and coin balances deployed across several venues, when the FTX news broke, we acted quickly and did not realize any material losses.
Finally, I know you will have some questions on the SEC's latest proposals. In short, the proposals did not include anything new as compared to the rhetoric which preceded and our position remains the same and is consistent with the broader industry as well as numerous academics and commentators.
Today's retail investor receives immediate, competitive, and commission-free executions on over 10,000 securities.
Main Street investors enjoy this level of service thanks to a myriad of offerings from hundreds of retail brokers who leverage an intensely competitive landscape of wholesale execution service providers like Virtu and many, many others.
It is more clear than ever that the SEC's proposal would directly hurt individual investors and reduce their engagement in our capital markets.
In addition to a less transparent and less fair landscape for the average retail investor, on top of increased cost and worse execution quality, the SEC's proposals would also harm liquidity and increase costs for institutional investors and issuers.
Further and importantly, the haphazard rulemaking, lack of any real engagement with stakeholders, and abbreviated comment period has resulted in a proposal that is internally inconsistent, theoretical analysis that ignores empirical evidence, and an experimental approach that disregards
the likely cost to everyday investors. It is extremely unlikely to withstand any degree of scrutiny in the upcoming process, which could take several years.
Sadly, as we have noted before, we believe the proposal is a politically motivated solution in search of a problem.
Lastly, as I have mentioned several times, these proposed rules, while they would be terrible for the average retail investor, would not necessarily be terrible for scaled wholesalers like Virtu. Remember, today's wholesalers like Virtu are service providers that compete for business.
by immediately filling all orders we accept and by providing price improvement as part of our commitment to our retail broker customers.
Under the FCC proposal to mandate auctions, we would be able to, and in fact we would be required to, to send flow we do not internalize to an exchange retail auction.
Today, we incur significant fees including payment for order flow, price improvement and exchange SEC and other transaction fees on orders we do not internalize.
These costs would be dramatically reduced under the proposal.
We also internalized tens of thousands of orders daily in small and mid-cap listed companies as part of the overall wholesale service we offer to our clients, which we could now simply route to exchanges as a substantial savings to ourselves, but this savings would come at the expense of retail investors.
So, the preliminary analysis of the trade-off suggests that the exchanges and wholesalers may stand to benefit under key aspects of this plan and at worst, we will be in a neutral position. I'm sure we will discuss these issues further in the Q&A to follow. For now, Joe will provide some additional details about the quarter. Joseph?
Thank you. Doug touched on options and ETF block in particular as drivers of our growth initiatives. I'll review some of the growth information we provide as well as review where we stack up versus the grid of expected outcomes to refer to.
and finally discuss expenses and capital overall. On growth, growth initiatives constitute a 602,000 per day on average in the fourth quarter and 665,000 per day overall in 2022.
These numbers were 11 and 14 percent of our global ante respectively.
Ante from Options grew dramatically as well, doubling its contribution.
While we maintained our presence in the crypto markets in the fourth quarter, we did, like many others, significantly reduce our activity. We remain bullish on crypto as a growth area in the future and we remain excited about EDS, our joint venture, and view many of the challenges facing the crypto space and the crypto space.
as validation of EDX's best-in-class custody clearing and settlement model.
On expenses, we ended the year with cash operating expenses that were flat year over year at $609 million. We consider this a significant accomplishment given the most inflationary environment in decades and the marketplace for talent, especially early in the year, becoming text.
Our cash compensation ratio is at 21.5% for 2022, right in the range of where we would expect it to be in a year such as this.
Other expenses remain relatively constant.
The outlook on expenses is more of the same. You can expect our compensation ratios to fluctuate within the ranges you see on slide eight in the supplemental materials and a continuation of the trend for other major expense categories.
You will note a marked increase in operations and administrative expense in the fourth quarter. This is due a foreign exchange valuation swing related to our foreign subsidiaries that increased this expense by $9 million this quarter.
For the full year however, the FX translation was an overall benefit to Vertu of 9 million. We generally don't call these amounts out because they tend to be small, but given the strength of the dollar versus the euro in pound sterling this year it was a significant benefit overall.
Additionally, we estimate the amount of revenue that was reduced, but revenue we earn in pounds and euro and translated it to dollars was approximately 10 million. So these amounts largely offset and so did not significantly impact earnings.
In terms of expense guidance for 2023, we would expect our cash operating expenses to remain relatively flat to up 1 to 2%.
On capital and debt, we manage our capital as efficiently as our expenses, and you can see our trading capital remain relatively constant throughout the year. We maintained our public 96N annual dividend, which we have paid steadily now for seven years. And you can see on slide six that its payout has remained steady despite the volatile results and partnerships as it continues in 2015, though we were planted with plenty ofmusic that lasts nine days. So, we cannot wait to get these recommendations, and we expect this to be an investment plan
Over the long term in addition we repurchased 45 million in our own stock in the fourth quarter For the full year we repurchased 460 million dollars in stock representing 16.2 million shares
Our period and share count is now 171.8 million shares and we have repurchased net almost 13% of our company in the two years since beginning our share repurchase program.
We remain committed to both our public dividend payout as well as our shared buyback program consistent with the ranges we have provided in the past.
We were very pleased that we financed our long-term debt in January before interest rates really took off.
As of year end, we have 1.8 billion in maturity turned out to 2029, and all but 275 million is subject to a rate cap. So our total debt at a blended rate of 4.95% pre-tax interest represents a favorable outcome to us.
And with that, I'll turn it over to Cindy to review the financial details before opening the call to your question.
Thank you, Joe. Good morning, everyone. On slide three of our supplemental materials, we provided a summary of our quarterly performance. For the fourth quarter, 2022, our adjusted net trading income, which represents our trading gain, net of direct trading expenses.
Totals $274 million or $4.4 million per day, which is a 43% decrease year over year. We are making adjusted net trading income with $185 million or $2.9 million per day.
execution services adjusted net trading income with $89 million or $1.4 million per day. Our fourth quarter 2022 normalized adjusted EPS with 37 cents and our full year 2022 normalized adjusted EPS with $3.
Adjusted Ithaca was $125 million for the fourth quarter, 2022, and $859 million for the full year, which was a decrease of 62% and 34% compared to prior year respectively. Our full year adjusted Ithaca margin was 59%.
which is down from 68% in 2021.
On slide 8, we provided a summary of our operating expense results.
For the fourth quarter of 2022, we recorded $185 million of adjusted operating expenses, which was a 6% decrease year over year. The full year 2022 operating expenses were $675 million, which was $2 million lower compared to 2021. For scheduled
We continue to maintain an efficient cost structure and discipline expense management.
which has helped us to control our operating expenses during the inflationary environment.
Financing interest expense was $25 million for the fourth quarter of 2022, compared to $20 million in the prior year fourth quarter. With the benefits of the interest rate swap contracts we entered in prior years, we were able to keep a blended interest rate around 4.95%.
for the long-term debt in aggregate. Our capitalization remains adequate. We've repurchased 2.1 million shares or $45 million in Q4 2022 and 16.2 million shares or $460 million in full year 2022.
Since the inception of our share repurchase program, we have bought back a total of 32.8 million shares, which is $910 million today.
We remain committed to our 24 cent per quarter dividend. The combination of our dividend policy and shared repurchase program demonstrate our continued commitment to return capital to our shareholders.
Now, I would like to turn the call over to the operator for Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, you can press star 4 by 1 on your iPhone keypad now.
When preparing to ask your question, please ensure your phone is muted locally.
My first question comes from Rich Riperto from Piper Standard.
Wish your life to open.
Good morning Doug, Joe and Cindy. First the question is on the retail floor. I know you
You performed in line with the opportunity and I guess just to understand the opportunity a little bit better if there's any one or two things that you could have changed about the Nature of the retail flow and you know your your peers also in the channel checks Reported much of the same, but if there's one or two things to change about the order flow
that would help, that would improve possibly. What might they be?
Yeah, thank you. It's a great question, Rich, and I appreciate it very much. I think as we've been very upfront about, and obviously a lot of these metrics are public in terms of the aggregate number of shares that we receive and then obviously our 605 metrics. So what we do here is we measure within that subsegment of our business.
basically the spread or the bid offer in all of the orders that we receive at the time that we receive them and you know think of that if you will at the opportunity the opportunity set and historically and it's it started to break down over the last couple quarters that Spread some or that opportunity correlated very
linearly with Volatility so you know the higher the volatility higher spread some was in the retail customer flow you received
For reasons that, you know, I would just be speculating, that correlation has broken down over the last quarter, quarter and a half, and it was particularly egregious, if you will, in the fourth quarter. And so the opportunity was vastly different than the volatility would otherwise, the opportunity within customer...
check out. We obviously have invested and continue to invest tens and tens of millions of dollars in technology to improve and to capture more flow and to increase our ability to monetize flow. But at the end of the day we are somewhat beholden particularly in that business to the orders that we're receiving. And so as we have said and obviously there's been quarters where
spread sum has widened significantly and we've had outsized quarters. So that business, which is a sub-segment obviously of our market making segment, by definition will be much more volatile. This is unfortunately a quarter where we see decreased opportunity and therefore we're disappointing if you will.
and we get that, but there have been other quarters where we've surprised to the upside. So what we have always said, and we will continue to say, is we love that business, we think it's a great business, we provide terrific service to 250 retail brokers over...
The long haul has been incredibly profitable. We night ran it for the last 20 years, and we continue to run it. So we love the business. It's just a business that can be a bit challenging in the context of a public company that needs to report quarter by quarter.
Okay, that's very helpful Doug, appreciate it. Thank you.
Thank you.
Thank you Rich.
We have our next question comes from Chris Allen from Citi. Chris your line is now open.
Good morning everyone. Just to kind of follow up on Rich's question, I know you can only speculate on the reasons, but maybe you could give us some speculations of the reason for the opportunities that diminishing is maybe increasing sophistication of retail investors or is it...
flow mix between the retail brokers. Also you mentioned an enhanced opportunity in customer marketing in January with efforts to improve the capture rate, sparing some fruit. Maybe you could give us some color just on what efforts those are.
Yes, sure. Look, I mean the easiest and most...
I think on point answer is that you know in the retail business the whole idea behind the retail business, which you know smarter guys than me Created 30 odd years ago was that you're going to have smaller orders Chris that are typically not correlated with the with the wider market so as a market maker
you can absorb those orders, excuse me, internalize them, price approve them, and give a retail investor as compared to an institutional investor that will have much larger desires and enhanced experience, better service, et cetera, you kind of get that. In the quarter.
And it might be the mix of, as you say, the mix of the business, maybe more institutional investors were sliding into quote unquote retail brokers, et cetera. In the quarter, you have more flow that tended to be more correlated with the larger marketplace and that makes it more of a challenge.
for a market maker. We don't have some magic elixir in terms of, you know, if a stock continues to go up during the day, as I've said many times, that is the ying and the yang of being a market maker. Under the current ecosystem construction, we don't have a choice. We need to take all the flow that comes our way.
small, medium, and large, regardless of what the stock is doing, and many times that results in negative selection and a negative P&L, you know, with regard to that stock for a day, a week, a month, whatever it is. And so that's probably the best answer I can give you. What I can tell you, since 2017, is that the stock is up.
when we first acquired the Knight customer business, we've seen quarters like this, when we've seen quarters where the opposite is true, where the flow is a lot softer, the spread sum is significantly larger, and we've had outsized quarters. So again, I repeat the mantra, which is, we look at this business over an incredibly long period of time.
and we continue to be very bullish about it. In terms of, you know, enhancements and investments we've made to increase our monetization of the flow, it's what we've talked about historically. Obviously, we've done a lot of the replatforming and migrating all of this flow to the legacy virtual infrastructure, which is...
lower latent and more performance, but in as well, we've enhanced significantly the internalization opportunities for that flow, right? So internalizing it against both our own non-customer market making flow, but also making it available to our institutional investors.
who are very, very keen to get access to it. So all of those things, we've made significant progress, and frankly, it has borne considerable fruit in this quarter and prior quarters, but again, we are somewhat beholden to the outside world and the opportunities presented.
Got it. Just a quick one on the FX, the $9 million in the quarter offset by the $10 million in revenues. The $10 million revenues that spread over the years, does that occur this quarter?
No, that's so the way it's working Chris is you know that
The option admin 29 this quarter was was 9 million higher than it would have otherwise been if not for this FX rebound.
But that's because the pound and the sterling started the year at 135. It ended at 119 and then in the second and third quarter, I think it went all the way down to 110 or below. And then they came all the way back up. So for the full year,
For the full year, the FX ReVal was a $10 million benefit, which was offset by revenue. Okay, so it's a wash in terms of impact to earnings.
And each quarter obviously for it to be a benefit for the full year of 10 coming into the fourth quarter it was a benefit a lot higher than 10 because negative 9 brought it down to 10 this quarter. So for the full year it's a wash.
the quarterly ups and downs basically offset in revenue. So, you know on a full year basis, it's a wash.
Thanks, guys.
Thank you.
Thank you, Chris.
We have our next question comes from Alice.
Cram from UPS. Alex, your line is now open.
Yeah, hey, good morning. Thanks everyone. Yeah, I think Doug, you made a comment very briefly at the end of your prepared remarks about what you're seeing so far this year. I think I heard that, but maybe you can flesh it out a little bit. Sounds like on the institutional side and also if you look at the public volumes.
Things have started surprisingly slow, but obviously that never really speaks to your opportunity set so maybe you can
Talk a little bit about what you're seeing and how that compares obviously to the fourth quarter. Thanks
Yep, yep, yep, you never cease to miss the little kernel when I give a little update. So thank you Alex for noticing that and kudos to you. Yeah, obviously since we had a challenge quarter in the fourth quarter for customer market making I wanted to give
some color. And look, it's obviously, today's January , whatever, so it's obviously early in the quarter. But we have seen an improvement in the opportunity set within our customer work and making business.
it's not been dramatic, but it certainly is meaningfully better than what we saw in the fourth quarter which is terrific. As you say, the rest of the business in terms of you can then look at kind of what institutional and overall marketplace volumes are. I'm very happy with the way that we've started.
the year. I will say and obviously caution everybody, right? It's early in the quarter and that's really based on you know I guess 15 or so trading days, but I wanted to give some indication obviously that we we see some improvement in the customer market making business and as well we're seeing you know improvements in in our commodities and energies business and in Asian equities.
and excited about 2023 and the early indications are that we're going to see some improvements so far.
On the debt, I think the trailing EBITDA, debt to EBITDA is 2.1 times, but obviously if I annualize the fourth quarter, I think you're somewhere in the mid to high threes. Can you just remind us in terms of any sort of covenants? Again, hopefully things improve here, but
I know people are going to ask again if we stay in this environment, if there's any issues we should be aware of.
No, we have no, we are you know covenant in life.
to the max. We are... There is zero maintenance coming out in our long-term debt. And we got rid of the cash sweep as well, right? So when we have a when we have an outsized quarter, the next time we have an outsized quarter, we're going to you know, obviously dedicate all of it to compounding value by...
Thank you, Alex.
We have our next question comes from Dan Fanon from Jefferies. Dan, your line is now open.
Thanks. Good morning. I wanted to follow up on the comments about the core or I should say legacy market making business. If you could repeat the numbers of what you said, I think flat year over year. But that also includes some of these new initiatives. So I say capital.
wanted to think about what, you know, how that business has trended maybe over a longer period and, you know, I guess maybe thinking about it prospectively, what is, you know, how does that, you just gave some context around the start of the year for the customer American Making Business but also maybe talk about that business and how the prospects of that look from here.
Yeah, it's a great question. Obviously, you know, we get that question a lot, you know, given the fact that we only report a single segment. So I thought it was important in the context of this quarter, Dan, to give just a little more of a hint of, if you will, how that business did. So yeah, what I said in the script, whether it was flat or not,
from 21 to 22 and up 11% in the third to fourth quarter, which I thought was significant, right? Because we've been doing a lot of work during the year to improve. Look, that is, the beauty of that business, it is truly scaled and global, and it's multi-asset class.
So it's a little bit, the analogy I always use is a little bit of like a water balloon or a water bed. You sit on, I don't know if you remember the water beds, I don't know if you're old enough, I remember them from the 70s and the 80s, right? You sit on one side of it and it feels great and then all of a sudden, especially because I'm a heavier guy, there's a ball where water moves to the other side and you push that and it kind of goes back and...
with the natural gas and energy declines significantly, and then it comes back, which it has done more recently. And so overall, you know, obviously we look at that business on the individual asset classes and geographies, and we've fully integrated it with some of the...
intelligence and the quant expertise of the Knight business and we now internalize options into equities and commodities and you get how we work. Over the last, you know, we track it obviously from when we acquired Knight in 2017, from 2018 through 2022, we've seen significant overall improvement.
overall in that business. Have there been challenges in various sub-asset classes? Of course, have we introduced options and helped grow the business? Yes. The important thing is that capture rates overall in most of those segments have improved. We've maintained our market share and we continue to be.
very, very excited about the quote-unquote legacy businesses. It's not easy to continue to be relevant and highly profitable in those businesses. There is a, you know, a conga line of firms that used to be in these businesses that are no longer there, but it's really about disciplines.
of improving technology, of hiring wonderful people, and maintaining an expense base that makes a lot of sense because as Vinny Viola said, everything goes into the bid and offer. So if you manage your firm in a scaled, efficient way, you can continue to be.
profitable and successful even as bid offer spreads.
and then narrow and widen to narrow. And we've always said that we built this highly scaled firm to do incredibly well in times of feast, but when there's famines, we still do very well as well. So I'm very, very happy with the progress of that business. And I wanted to give a little more color just in the context of this quarter.
Understood. That's helpful. And I guess just thinking about the comments around expenses and knowing that comp can fluctuate, but the more fixed costs being flat, what does that say about your, I guess, your prospects or how you're thinking about the revenue environment for 2023? Do we think about it similarly to Y3?
kind of what it's been in more recent periods? Is that how we should think about that expense relationship with the revenue backdrop?
No, that's a good question. It doesn't imply that. It does not imply that. It implies that if we had a similar year, I would expect expenses to be flat.
I provide that guidance to just simplify things just because we are in multiple years now where we have kind of met or exceeded expense guidance. So I kind of feel like we can provide that number if the environment is markedly better.
you know, the cash compensation figure is the one that, you know, fluctuates a little bit. And there's enough history now you can see the cash compensation ratios for four years, you know, in a year where we're, you know, up in the 2020 and 2021 ranges.
I would expect comp ratios at those levels, and then this year the comp ratio, cash comp is 21.5%. So there's flexibility in the compensation ratio. A great portion of our compensation is discretionary. So that's just
a guidance based on the current environment, it does not assume that the environment is going to continue.
Thank you.
Thank you.
Thanks.
Thank you, Dan.
Our next question comes from Ken Worthington from JP Morgan.
10, your lines are open.
Hi, good morning. I wanted to flush out crypto and options a bit more. In terms of your build-out roadmap for those two asset classes, I want to make sure that you are following the same
Where are you in the build-out and at what point do you think you'll be fully built out?
And then at what point are you going to be in a position, if you're not already, to kind of win the same sort of 606 contracts you have with retail brokers in equities today?
Yeah, it's a great question. So we began this journey in options, I'll say two years ago, but really 18 months ago. It took a lot of building and the building continues, but we had to basically reconstitute the way we approach the market as I've described before.
quote-based market as opposed to an order-based market. And as you know, there is a plethora of options venues in the United States. I'm embarrassed to say I think there's 17 options exchanges, but I'm not sure. And every day, it seems to be adding one. So just having connectivity.
to each of those and understanding the market structure of each of those. Some are price-time, some are pro rata, as you know, has been a bit of a challenge. So to use the baseball analogy everybody seems to use on these calls, we're in the very early innings of that process. We have the infrastructure built. We have hired.
and moved some legacy Virtu people. So we have a very, very talented team both in the United States and around the world. But I think there's a lot of runway left. I think, you know, to throw out a number just kind of looking at where we are and the opportunity, I think we could increase that business, Ken, by somewhere like three to...
four to even five times what we did in 2022. I think, you know, really what we've done heretofore in 21 and 22 is, I'll just say just, although it's a significant opportunity, but just the index family. We are dabbling in single name options, and the beauty, if you will, of the options market is that you can...
And the answer is I'm not sure sitting here today. We know that it's on the horizon. I'm not going to rush it because we had a fantastic year in 2022 in options. I'm very happy. There's a lot of opportunities in Asia. We're now market making the Nikkei and the Nifty Fifty options family in India. And if you look at the volumes in India, for example, they're extraordinarily large. So there's a lot of opportunities.
with the opportunity and will prioritize the 605 business relative to other opportunities. We have not lacked for opportunity and work thus far. And so I continue to be very optimistic about our ability to be a meaningful participant in that marketplace. Thank you for that.
And does it look like, is there a possibility or a likelihood that 2023 can be the year that you're ready to kind of roll this out? Or is it much more likely that the options business getting to where you want it to be?
in terms of that wholesaling business is more of a 2024, 2025, you know, timeline.
Yeah, I mean, I would never say never. I'm not sure sitting here today where we're going to have our priorities. I will point out that in looking at the opportunity data in 2022, if you look at like the dramatic increase in options, it really wasn't the index family, not to denigrate the other business or single name.
but that's really where the opportunity is.
You go where the opportunity takes you and as I said, there's plenty of opportunity there. So it's something that's on the horizon. Is it within our plans in the next couple, couple three quarters? No, but I would never say definitively one way or the other which we know where we're going to head.
And then maybe lastly, is crypto further ahead or further behind the options business? It feels like crypto is a bit more simple. Yeah. Maybe that's not the case.
No, no, it's a great observation actually. I mean crypto, you know, I'm gonna say it's simple, right? Because obviously there's a lot of coins and there's a lot of venues and obviously there's a lot of fraud and criminality, right? So there's a lot of complications there that you don't see in a highly regulated environment like options. But yeah, it's obviously more order-based. It feels a lot more like the FX world we have.
You have SpotFX, you have forwards and futures, and then you have ETS, or at least in the United States, you don't have ETS thanks to the chair of the FCC, but in other jurisdictions you do. So that infrastructure we have set up, obviously, to state the obvious, the criminality at FTX.
the shutdown of that venue means that we're not making markets there and indeed we pull back from most if not all of the spot venues and so we continue to be a market maker in futures and in ETFs and I'll put a plug in for Jamil and the guys at EDX because we think that that is the great you know it will be a great solution
particularly to the Wild West unregulated marketplace, having execution quality that feels and acts like equities with best execution and then ultimately with disclosed custodial and, if you will, centralized clearing, that's really going to be the key to exploding.
or having investors have real confidence in digital assets. So I think EDX, Jamil and the team there really have the right solution and we're very proud and honored to be an investor in that platform.
Thank you very much.
Thank you, Ken.
Well, the next question comes from Michael Cypres from Morgan Stanley . Michael, your eyes now open.
Great, thanks. Good morning. Maybe just sticking with the options topic, if we look across the industry, volumes continue to remain very robust for options. Just curious your views on that. Why is that held up so well, particularly compared to cash equities? And how durable do you think that is? Do you see any prospects for volumes on the options side to compress meaning?
or day trading if you will from cash equities to options that's always been the case but you know there's been a lot of innovation by my friends at the CBOE excuse me there's been good education by brokers there's now daily contracts right as opposed to weekly explorations and that innovation I think has
driven some of the volume and you know you get more leverage and there's more opportunity if you will if you're a day trader a retail investor in options. So I you know again it's hard to prognosticate. It's more of a macroeconomic question as to where that goes right if the economy rebounds and we don't have record inflation and there continues to be job growth and people are optimistic etc. Then I think you'll see.
I got lucky if you will Michael in that we had targeted that as our first place to go as opposed to single name. And so I think that was up like 40-ish percent in 2022, the volumes there were while single names were actually down pretty dramatically. So I think investors that want to get exposure to broader indices and are making sure that
It's a complicated trading dynamic. Obviously, you have to have a volatility curve that makes sense. You have to have low latency. You have to understand the set-ups in Chicago and New York and all of that, and you have to have the ability to provide a delta hedge that makes sense and it is acute and priced well and whatnot. So that kind of plays... I'm not a golf player.
very well into the multi-object market making firm that we built at Virtu, and our investments in the options infrastructure and in our ability to be a participant in a quote environment as opposed to an order based environment have really, really bore fruit in 2022. So if you're sensing enthusiasm in my voice, you are very perceptive because I continue to be.
compare to a year ago and what hurdles do you face in expanding that to more tickers? How do you think about overcoming that and what are some of the actions you guys might be able to take?
Yeah, it's a great question. I mean, so the answer is dozens today. And so it's, you know, we clearly have the capability to do it. And to be blunt, there's a lot more risk in that side of the business as opposed to an index side. I mean, obviously, index options is volatility, you could screw up your curve, you could have an operational issue so you can lose money but
Corporate actions and things along those lines make it much more challenging to be a single object market maker in options, particularly if you're gonna be, it goes back to my much earlier comments on the service nature of the wholesaling business. As an options wholesaler, you don't get to pick and choose, so hats off to.
the incumbent, Citadel, Susquehanna, and a handful of others that have built the risk infrastructure to be a two-sided market maker in a thousand different single object names with a multitude of strikes, a lot of which won't trade a lot, but you don't have the ability to pick and choose, and so there's still a lot of risk in that business.
So we're gonna, this is an obvious answer, but we're focused on the most valuable opportunity and the most addressable opportunity first.
and that's what we've done. I don't mean to not give an answer, but it's hard for me to sit here today and say, okay, well, we're gonna be 98% complete with that and therefore we can shift our focus. We're gonna do everything at once the way we've always kind of built Virt2, but the opportunities there are so meaningful and so significant as they are.
overseas in the Asian markets I mentioned before, that we see, you know, there's a multiple, you know, three, four, five times the opportunity in the index family that there is in single name. So, while I think that's a business that we will get into and obviously our broker partners would like us to be in that business, right now, you know, we're focused on the blocking and tackling and thankfully.
it was highly profitable for us in 2022. Great, thanks for taking my question. Thank you very much.
for us in 2022. Great, thanks for taking my question. Thank you very much. Thank you Michael.
We have a follow-up question from Rich Rupetl from Piper Sandler. Rich, your line is now open.
Thank you. With all this talk on options, I have to get back and ask a question about – so with the FCC proposal, I took a hard look at the options market structure.
And one of the things that sort of popped out was it's different like these Citadel and the Susquehanna that you mentioned that are big in options. Also besides getting flow, they also are market makers on the exchanges and then this whole thing about directed autoplow.
So I guess the question is, do you think that that is important to progress in options to be a primary market maker, a designated market maker, whatever each exchange calls it? What is the model that Citadel and Susquehanna has and how easy or hard could it be?
if you went that route, could you get those same sort of designations if you decide to go that route? Yeah, that's a great question. Obviously, we've studied it and we know we have a lot of friends at the CBOE. We do a lot of business with them and other exchanges where being, as you say, a designated market maker is important. We're all sellers.
in the options world, you know, will always be the main responders to auctions. Others are invited in. And certainly, if – no, not if – when we become part of that marketplace, you know, we will need to acquire BINs, if you will, and become a designated market maker. I have –
every degree of confidence that we will be able to do that. We've got a pretty good brand name, we've been really good business partners with global exchanges for now for 15 years and we've always lived up to our obligations. So I don't have a concern that we will be able to do the business development part of this business and we already have done that.
and these exchanges and other counterparties want a participant and want a firm like Virtu to be an active participant in it. That being said, you know, you don't wave a magic wand and become a meaningful market maker. Citadel and Susquehanna are amazingly...
competitive, excellent firms that have been doing this for 20 to 30 years. I'm not arrogant enough to suggest that we're going to come in there like, you know, guns blazing and take away the market share. We're not going to, right? We're going to be a complement to those firms. We're going to hopefully add value to the ecosystem as we are today.
in the Invix family, and I think that there is room for competition as there is in cash equity wholesaling. I mean, one of the complete falsehoods that the chair of the SEC has propagated is that somehow that this is a duopoly between Virtu and Citadel. It's just factually inaccurate. There's a great firm called Jane Street that started.
in the wholesale cash equities market two years ago and now has 13%, 14% of the market order of the marketplace. So Gensler is just again, exaggerated, I'll be nice and not said lied, but exaggerated that part of the marketplace. And so these markets are extremely competitive.
picking up saying, you know what, we're going to make this right for you and we're going to make sure that your client's orders were priced and executed at a price that made sense.
That's the big lie about our business. He describes it as rents in the industry. These aren't rents. We're providing a service.
a very meaningful service, in fact a bundle of services, and being compensated for that service.
through our own efforts with a portion of the bid offer spread.
And he either doesn't understand that or doesn't want to understand that. And that's what the data and the narrative will prove. So ultimately, that's not going to change. And that's why it's so important that firms like Virtus, Citadel, Susquehanna continue to provide that service in cash equities and as...
I've indicated we intend to do that in options as well. But if I could leave you with one thought, that's the most important distinction I think that the Chair of the SEC has either intentionally or otherwise omitted in all of his political narrative around this marketplace.
Thank you for the water bed analogy earlier. I get it and it left a vivid image in my mind.
Thanks. Yeah, Rich, I probably shouldn't comment that this is a public call, but we can talk about that later.
Thanks.
Thank you.
Thank you Richard. As a reminder ladies and gentlemen, if you would like to ask a question it is.
Please press star, fold by one, and type on keypad now.
Okay, it looks like we have no other questions in the queue, operator, so I appreciate everybody joining us.
for the fourth quarter call and we will be back sometime in April I would imagine with our first quarter results and I look forward to engaging with everybody then. Thank you very much, have a great day.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.