Q2 2019 Earnings Call
Ladies and gentlemen, this is your operator todays conference is scheduled to begin momentarily.
All that time your line will again be placed on MS. Cool. Thank you for your patience.
At this time I would like to welcome everyone to the first two financial 2019 second quarter earnings.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
She would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key we asked you restrict your questions to one question and one related follow up.
In the absence of time to pull out everyone. I have a question I would now like to turn the call over to Mr., Andrew Smith head of Investor Relations. Please go ahead.
Good morning, everyone. As you know our second quarter results were released this morning, and our retail environment.
Today's call May include forward looking statements, which represent virtue Hercules regarding future events and are therefore subject to risks assumptions and uncertainties.
Maybe outside the company's control.
Our actual results.
Additionally may differ materially from one thing to get them all of them.
Note that any forward looking statements made on this call are based on information presently though [laughter].
And we do not undertake to update or revise any forward looking statement.
To review the description of risk factors contained in our annual report on Form 10-K , and other public filings.
In addition to GAAP results may refer to certain non-GAAP measures, including adjusted net trading income and net income.
The EBITDA and the Duffy.
That measure should be considered as supplemental to and not as you do.
Financial measures prepared in accordance with GAAP.
You'll find a reconciliation of these.
These non-GAAP measures to the equivalent GAAP terms.
Explanation.
Formation of.
<unk>.
Why did you get the information to be meaningful as well as how management uses these measures.
When used on this call adjusted net trading income refers to our trading income net of all interest and dividend income and expenses and all brokerage and clearing exchange rebates <unk>.
Digging in answering your questions they are.
You are chief Executive Officer, and Mr., Joseph Molluso, our Chief Financial Officer, They will be our prepared remarks, and then take your questions I'd now like to turn the call over to Doug. Thank you Andrew Good morning, and thank you for joining todays call as we reported earlier, we generated 16 cents of adjusted earnings per share on $238.9 billion of adjusted net trading income in the second quarter.
During the quarter, our market, making business and our customer market, making business in particular, what impacted adversely by the market conditions, including retail participation, which was down 20% in Reagan and that's names and over 35%.
TCV from the first quarter, representing one of the lowest levels a retail participation in the last several years.
Despite these market conditions or market, making business performed well compared to the diminished opportunity set and then our own internal metrics given the market condition.
In addition, as I will go into in more detail later or our execution services business has already demonstrated the upside from the integration of the AG business out of that outperformed the market conditions during the quarter.
Before I share additional comments about the second quarter and the third quarter to date I will first provide an update on our T.D.C.G. integration and touch on some of our key organic growth initiatives.
I'm very pleased with the progress we have made integrating I T. G and we have seen clients responded very positively to convert to technology or continued commitment to customer service and the transparency, we deliver as part of our claims solution.
Virtual execution services offering is a great example of how we were able to marry technology and people.
Both are necessary neither sufficient on their own that is to say, we're able to grow it scale, while maintaining a high level of claims service, which wasn't the hallmark of ICICI, because we had first the right kind of technology, which I've discussed with all of you over the years on these calls is a unitary global multi asset multi asset class technology stack as well as the right people more fluid technologies and software engineers, if you will but also great client service professionals.
Taken together, we feel like we built and are committed to continue building a unique a truly integrated global model.
Strategically it sustainably positions us to benefit from the significant secular changes the industry of course currently going through and it's compelling and its combination of technology trade expertise and unique liquidity.
We are excited about the prospect of leveraging virtues technological and diversified asset class capabilities across our new suite of global products, a growing client base to drive our organic growth initiatives.
I would also like to provide an update on our revenue Dissynergies estimates related to the I.P.T. merger, we value every client and earning and maintaining their trust in the utmost importance to our business.
Thanks in part to the depth of the eye TG relationships and to extend the client engagement by hundreds of dedicated employees.
We are happy to report that we are trending below our initial estimate of $10 million from ICICI client.
In fact, we've seen meaningful interest in our suite of products. For example, since the announcement of the transaction with TG, we've added over 50 new clients.
For our suite of broker neutral products or idling client base continues to grow since the IPO TJ merger was announced in late 2018 I'm pleased to report that since the transaction closed on March 1st we have added over $1 billion of annual revenue from new subscribers and from existing clients increasing their subscription more than offsetting the minutes amid a de minimis amount of departures.
In short our value proposition of marrying technology transparency and service is resonating with key decision makers on the buy side and sell side globally.
I'm excited to report that we are well ahead of our schedule not achieving our expense synergy target.
Our progress with the ITC integration and our overall strong expense discipline has enabled us to increase our overall expense synergy target by 25%.
Since closing the RPG transaction five months ago, we have been actively working to achieve sustainable fixed cost synergies across the combined firm, including data center consolidation.
System consolidation and the client migration to Virtu technology. We have also made great progress combining our sales forces and have begun internal cross training program to educate our global sales force on our combined quite offerings as they begin to jointly engage the client.
While achieving synergies through efficiency and automation is one of the keys to our success. We're also committed to having the right people in the right places at her too we're actively hiring and have added over 40 people around the globe since the transaction closed and we will continue to hire as needed.
Well expense management is a clear driver of our expeditious approach to integration integration also enabled us to execute on our organic growth initiatives to capture a significant revenue synergies, which I referred to in flight five and six of the supplemental materials.
Simply put we are enhancing client experience by upgrading technology, and private improving quite interfaces and support interactions and expanded product and service offerings by delivering global multi asset class experiences to our clients, including integrating ibcs dynamic and globally distributed set of products with each other.
To deliver more products to more clients in a more scalable and performance Matt to drive growth in our recurring and re occurring revenue.
Great example.
We are delivering enhancement to two of our marquee broker neutral and multi asset class desktop products Triton Dms Mtpa portal.
By improving integration with each other and embedding them into client workflows created greater efficiency and product distribution.
As part of this enhancement.
We will be launching a new next generation of Triton Triton Valeo Triton Valor, we had to get the d. in there. So now that will begin deploying shortly the new technology drunk driving trillion dollar provides improved scalability for our global distribution of an integration with new Dms and TCH features and multi asset class functionality that will further set us apart from other buy side offering in the market.
We're also excited to tell you about a pending launch of already or unique version of outsourced trading, which we are calling execution concierge service that leverages burqas existing multi broker technology Park, then offer a complete global multi asset class outsource trading solutions powered by virtue and led by the head of our Commission management business, Jack Covina, a veteran EISG employee.
Bert to execution concierge services services or easier.
It's a scalable extension of our multi broker platform and products combined with our <unk> high touch trading service and global quite coverage.
Virtu is the only provider with a global multi asset class platform of yeah, Matt analytics network Algos in CFA product and solution, giving us a valuable unique advantage of being able to meet all of our clients trading and operational needs in house.
This concludes virtues global multi broker and multi asset class solutions that deliver transparency and quantifiable benefit throughout the trade lifecycle.
Our flexible offerings scales with our client needs and they will be able to choose the level of multi asset class outsourcing that fit their needs full service hybrid we're flexible on demand arrangement.
As part of these initiatives, we are enhancing client access to virtually cut than liquidity solution that offer price inside improvements with reduced market impact and global equities globally, Ts FX metals and fixed income.
We believe we will be able to increase recurring revenue with these enhancements to our global multi asset class products that expanded liquidity solutions for clients.
And create opportunities to fulfill more client orders in house taken together these growth initiatives and other other compelling actionable opportunities comprised the bulk of the $25 million to $50 million of revenue synergies, we have identified and quantified to date and we already taking steps to realize these opportunities.
We remain focused on successfully integrating its very strategic transaction and realizing these growth initiatives. We look forward to keeping you updated with our progress.
Looking at our top line results, our market, making business saw reduced opportunities this quarter driven by broad declines in market volumes and volatility, even so our customer and non customer market, making businesses performed in line with our metrics and expectations again the decreased opportunity set.
Well not unprecedented the market volume in this quarter presented one of the lowest market, making opportunities in many years and four as worth the closest resemble the second and third quarter of 2017, albeit with significantly less retail engagement.
Looking more closely at this quarter's environment, we see that U.S. consolidated volumes were down 8% versus the prior quarter and realized volatility averaged 11.4 or five down 17% from the prior quarter as I mentioned earlier retail engagement was also lower in the U.S. with retail <unk> equity share volume was down 20% and LTC equity volumes down over 35%.
The survival was similar for global equity with Pan European volumes down, 5% and realized volatility of the euro stocks 50 down 3% compared to prior quarters and Asian volumes on the CSC were down 8% and realized volatility on the new car declined 32% compared to the prior quarter.
Our business continues to evolve and we have not seen any ammunition in market share that affects profitability. In fact, we have earned additional share recently from some of our larger market making clients.
Well the poor market conditions continued in the first several weeks of July the opportunity has markedly improved overall given the recent market volatility.
Beginning around the last few days of July we've seen the most favorable environment since the beginning of the year and our business has responded accordingly.
We continue to look for opportunities to deploy our sketch to scale.
Technology into products in markets around the globe.
Recently, we were approved by the front of stock exchange Acadian stock exchange as a market maker, a registry trader, allowing us to expand our Canadian market, making activity and create opportunities for us to interact with unique order flow and expand relationships with the issuer community.
In the U.S., we have launched market, making in single name options by leveraging our existing fixed cost infrastructure to build out our options capabilities.
Also on the market, making front, we have begun we've become increasingly active in corporate bonds and increase the global coverage of our ATM blocked out.
Regarding our execution services business, which includes our end to end suite of buy side and sell side product and solution.
Im pleased to report a solid quarter, the first full quarter since the DG acquisition.
Execution services net revenues were 105 million, which is overall consistent with the first quarter and despite the lower market activity in the quarter. This business was resilient and perform well demonstrating the stickiness and stable nature of the business key drivers of our performance execution services work growth in multi asset class analytics subscribers as I mentioned previously.
On the U.S. Ats lock volumes increased by over 14% in the second quarter compared to the first quarter, while our main competitors volumes were generally flat.
Posit alert or block conditional trading platform, so as volume increases by 24% of the U.S. and 15% in Europe compared to the prior quarter when volumes decline market wide demonstrating the impact of the technology improvements we have made to the alert service it's quote.
As I mentioned earlier, we were excited about how much we are expanding and strengthening the core of our client business by adding multi asset class capabilities with Triton valor and our GCA portal, especially in conjunction with the pending launch of our global outsource trading desk offering.
Now I will turn the call over to Joseph Molluso to review the financial results Joe. Thank you, Doug our results for the second quarter, including GAAP revenues of 378.5 million.
GAAP net loss of $55.5 million and a diluted loss per share of 27 cents.
Adjusted net trading income was 238.9 million.
As a reminder, virtue closed the acquisition of IP GE on March Onest 2019, just five months ago.
Second quarter reflects the first full quarter of consolidated results which include RPG.
To compare results across the quarter on a more apples to apples basis. We have included the adjusted net trading income where the execution services segment. Overall as devices. You were included for the entire year you can see that despite the disruption caused by the merger closing and the adverse market conditions. The execution services business was resilient in the face of these events and was down 4.5% quarter over quarter, while the market volumes were down 8%.
As Doug mentioned, our overall revenue declines period, adjusted Fright, TG was largely driven by the reduced opportunity for the market, making segment the customer market, making segment in particular reflected any diminished opportunity this quarter from reduced volumes and bid ask spreads driven by significant reduction in realized volatility together with decreased retail participation.
Turning to expenses, our operating expense performance and outlook continues to be strong and we are lowering expense guidance and raising expense synergy targets for the IC GE acquisition.
Fourth quarter operating expenses were 165 million comparing this to full year 2018 adjusted for the pro rata share of RPG expenses, we have already realized 59 million of gross synergies versus the original target of 133 million.
As reported on our last call we were on track to realize over 85% of the original target on a run rate basis by the end of 2019.
As Doug mentioned briefly we are now expecting to achieve over 100% of the original target by year end.
We are reducing our full year guidance for adjusted operating expenses.
585 million to 615 million, implying full year 2019 realized gross synergies of 146 million based on the midpoint of that guidance.
We're also introducing expense guidance for 2020, 620 to 650 million for the full year, which results in overall gross synergies of 167 million.
A 25% increase over the amount and they have at the time of the transaction.
Turning back to our second quarter results. We earned adjusted EPS of 16 cents for this quarter and adjusted EBITDA of $89.2 million net interest expense for the quarter was $34.7 million and debt to EBITDA posted a 3.2 times going into the quarter.
At the adjusted net income excluded $20 million and amortization of intangibles.
12 million stock based compensation and $65.2 million of a write off.
Future Reg and leasehold improvements related to the abandonment of the X X K CG offices in New York City.
The effective tax rate used for adjusted.
This quarter was 24%.
Diluted shares increased 0.78% over Q1, 2019, mostly due to normal vesting of employee share grants.
On our balance sheet as of June Thirtyth, we had approximately $1.6 billion of trading capital, including $450 million in cash and cash equivalents.
Since closing on our DG in March we paid down 50 million of debt.
As you know we track the cumulative dividend payout in our business over a long period of time.
In the supplemental materials on slide 11, you can see our cumulative payout has been 83%.
Since our IPO is 90% including share buybacks.
As we have stated many times ours is a cyclical business and we view the current payout and adequate and sustainable over the long term.
Now I would like to turn the call over to the operator for QNX.
At this time, if anybody would like to ask a question. Please press star one on your telephone keypad again that would be star one on your telephone keypad at gun, we offset so you reserve your question to one and one related follow up.
Your first question comes from Richard Repetto from Sandler O'neill. Your line is open.
Yes, good morning, Doug Good morning, Jo Ann.
My question would be on the market, making segment and.
Obviously results.
Were difficult this quarter and I was wondering.
To give some increase transparency into it.
Night, and it's all days would reported dollar volumes because we are having a tough time I think trying to triangulate between volatility as well as the retail opportunity.
But if we Didnt know just the dollar volume do you think that any increase metrics or that could be a possibility to give us some more insight into the market making segment.
Inter quarter.
Yes, it's a very fair point, then obviously I mentioned in our in my remarks that we obviously track.
Internally.
With a fair amount of detail obviously in a lot of different metrics, because we're making markets all around the world rates both in the <unk>.
Retail segment, but also in the non customer can market, making segment and so we have somewhere between 35 to 40 different internal measures, obviously, it would be difficult to do that.
And.
I will consider doing something navy on the retail side, because I don't think that there's enough publicly available information that allows you guys fairly to kind of slice and dice. Our business. If we just gave you a gross notional all of our market, making would be extraordinary large month now.
And it wouldn't be necessarily instructive right, because obviously in us treasuries.
It will be market, making a huge notional amount than me.
Just the notion of the transactions there are significantly larger so let us reflect and consider.
How we do that the only public metric right now, which I pointed out in my remarks, and I know you're aware of his way interactive brokers puts out in terms of retail participation and I view it make that point in the comments that that those.
Volumes were down 20% in Reagan domestic names and down 35% in PC names and as you well know we have a leading odisi.
Cash desk here and so it definitely impacts the profitability of that debt and as well.
You know not getting.
20% less of Reg NMS or with lower volatility is has a.
A significant negative impact on the retail wholesale customer market, making business that we inherited from.
Okay, TG, if not even necessarily a linear impact because this spread now when volumes come down it can have.
A pretty dramatic impact on profitability in the business still made money it was very profitable, but obviously a significant that disappointment from prior quarter.
Yes, the dollar Barton requests would only be for the.
Retail side of it so that.
Be helpful. I guess, Mike semi related follow up would be.
When you look at the execution services.
Compared to the first quarter.
Definitely you outperform mark market volumes I think it was a 4% decline or something like that but when you look at I guess the year average.
In 2018 for what.
Nice execution services did along with TG.
On a net trading basis I'm coming up with when you combine the two somewhere around 120.
Million and I guess, you just trying to sort of.
Reconcile that difference if you think thats just a change in volumes as well because I heard all the comments about you know the synergies and the less revenue attrition that you're you're seeing.
Yes, I, absolutely volume related because like you remember the first quarter of 2018 and explosion of volumes and just trying to get me the exact numbers here, which we felt pretty much from the same source that you do so like Q1 yet.
7.6 million share at 8.5 in the fourth quarter and I came to the average that in my head, but and we did 6.9 million shares billion excuse me. So it's obviously a significant drop off in volume I mean, I am really really very pleased with performance of the execution services segment in the second quarter. There is a lot written about oh virtually in a market maker in IP not having the market, making business are going to lose all this.
Definitely clients that have.
Reduced or turn it off but in the large large measure I would say globally. They are in the very distinct minority and in fact, we've seen.
Which I'm excited about significant pickup from large global asset managers and pension pension plans, whose names you would know very well that are really excited about the one the continuation of the great client service.
That and the deep relationships that the folks here at ITD have had over the last 30 years I can't complement them enough on their interaction with clients and really understanding hi, Andy any marry that with candidly the performance and the transparency of the virtue as a suite and I think thats just a game changing proposition. We're very excited about it I don't think there's anybody else out there in the marketplace that has something like that and layer on top of that.
The unique liquidity that we have from our internal crossing with our with our central risk book or retail orders.
It's a really dynamic offering that is really resonating with the buy side. So.
I tried to be enthusiastic my remarks, and being more enthusiastic we got a really good proposition here and if you layer on top of that kind of what's going on in the marketplace in the cyclical.
What a secular rather changes we're seeing in the institutional agency business I just think we're too.
Really well positioned to take care of.
A lot of client needs in a post missed the two unbundling best execution really matters world and so that's why I'm very very excited about that business, we announced a couple of initiatives, we're putting forth outsourced trading we have the full package year raise either we can offer to the buy side sell side okay.
Continue to press that initiative.
Got it and I just look volumes were down first half.
Versus.
2018, so anyway. Thank you very helpful.
Thank you rich.
Our next question comes from Alex Blostein from Goldman Sachs. Your line is open.
Hey, good morning, Thanks, guys.
So it should maybe building on the same line of questions. This is not the first time, we've seen pretty significant swings to the downside in the market, making business from you guys.
Clearly environment has been favorable but I guess looking at the global equities business. In particular, you know it seems like the business is underperforming the berries.
Benchmark and metrics that we all tend to track so I guess, Doug how I understand your comments around that these moves are all kind of environmental related and you don't see that as a market share issue for virtu.
How do you assess the opposition to help us better kind of getting confidence in your competitive position, especially in your non retail related market, making business.
Sure sure I would point out I'm not going to be a smart guy we've outperformed below the metric sometimes in quarters as well.
So I think.
It really comes down to understanding what the baseline and I said, what I repeat the comments I made in a rich which is we bought it we run a very complicated global business in a lot of different asset classes and a lot of geography.
It is and I know this is a challenge for you.
For you guys and we have not done a particularly great job in trying to educate you with the it's a difficult thing to do because we have assets. Obviously, it's all the market share and volume metrics from every market from Thailand into Canada to Brazil to the U.S. on another customer side.
What I can tell you is we track that religiously we track it daily weekly and monthly and we have not seen any significant diminishing in market share profitability that is not consistent.
With the market volumes and the opportunities that have some markets gotten more competitive shore, we maintain our competitive edge yes.
In retail and in particular at the marketplace, which is very easy for us to track because we get this bespoke batch of orders.
From a retail clients and so how do we.
How do we assess that we obviously know what that should look like and what our profitability should be on that it's very difficult asset me, giving you that data, which we can't do.
For you guys to really getting inside and I understand I appreciate that so.
Richest suggestion is a good one because I think we could in a in a sanitized manner.
Describe what the.
You know what the notional amount we're seeing on the retail side, we'll certainly consider that were opened Alex always the suggestions to allow you into it but like.
Business in the quarter had a really nice quarter. It had a really nice first half of the year is up significantly.
Overall from last year, so I'm very excited about the growth of that business is a great business that has less than a dozen people in it scales magnificently. So.
Folks that.
That were prognosticating that somehow we're getting out of the effects business couldn't have been more wrong. So I continue to be excited about it.
And.
ETF business for example is often where.
Taking a recap blocked at the Asia into Europe , because I think there is a real need for it. It's a great example of marrying the DNA of night with the technology over to.
For the first time, we're seeing institutional orders in Asia and in Europe , and so we're going to take on some of the bigger competitors there as well. So we continue to see some of the benefits Joe Yes.
And Alex just to put a finer point on the macro environment right because.
Yes, Doug making points.
Good points about how we can kind of help on on a on a modeling basis, but just.
To put a finer point in the macro environment like the last time, we were in this kind of sustained low volatility environment.
It was in the second and third quarter of 2017.
This quarter realize well get below six right. So we went to slide slide nine the average is a little higher because of some some better days in may.
But if you just compare it to last time, we had that kind of environment beginning in 2017.
If you look at where retail just except me the public statistics available Gage retail participation then versus now just ODC Bulletin board.
I shares.
Volumes were half of what they were back then.
And I can say our share volume number is 25%.
Right. So so I think this is a an instance, where you have these kind of macro volatility statistics going the wrong way and that kind of dovetail it with extraordinarily low retail participation.
Great point April was one of the worst month, we've seen here a long time and I think it's exactly the point, Joe based which makes which is realized volatility is a measure of bid offer spread narrow significantly.
Retail investors are on the sidelines.
Otcs volumes, which were a big otcs participant get get cut in half and you're going to have.
A challenging month April was one of the worst month, we've had here in the last four or five years and a lot of it has to do with those with those outside metric. So I know, there's a long way to answer your question and I believe me I wish I could invite came here and show you. The 40 pages. The statistics I go through every hour in every day and every month.
And we're going to do better out try to educate you guys more on on what those metrics show us.
Okay. Thanks.
And I guess as a follow up I guess, given the coming out of the really.
Tough tough quarter.
Any any specificity specificity around what threeq it looks like I know you guys aren't giving it to you.
Onto the month to month, but again just given.
You know it will be helpful to understand how the businesses are responding to a slightly better environment here.
Yeah, no. It's a great question I mean July started off it looked a lot like may and June so better than April , but kind of consistent with what the.
But the second quarter look like and then I don't remember exactly what day with.
You know the one the day the president tweeted.
And maybe that was the 28 or 29 or something like that of July you saw a big uptick in volume and volatility and not surprising and Thats continued for.
I guess today's ALKS eight so we've had five or six trading days in August so you've seen a huge burst of activity from a volume perspective, I think we did 9 billion shares just in us equities market and the VIX went above 20, I don't I don't know exactly what realized volatility wasn't we capture that opportunity. So you know you had a dramatic I think the word we use in the press release wasn't material increase seems to be a lawyer. So that means a lot like many double digits.
Of of results. So the machines are broken and working exceptionally well.
They're meeting metric and when the opportunity set increases significantly like it has in the last five or six trading days, we see an associated increase in revenue capture on the marketing side I know that frustrates people that there is volatility in our earnings and it frustrates us obviously, we'd like to be a lot more consistent we encourage the president to Keith We think Thats a good thing for our business.
But at the end of the day I'm very very happy with the way that our business has responded in all segments not just the retail.
It's not just retail we've seen it in Asia, we've seen a big increase in Japanese.
Futures trading for example, in Cfd trading and FX globally and in effect in China in particular and in Turkey, and other locations, where there is significant possible hot pockets of volatility that's the virtual model capture where it resides.
Got it all right. Thanks, guys.
Thank you. Your next question will come from Ken Worthington from JP Morgan Your line is open.
Hi, good morning, and thanks for taking my questions I guess first.
On the multi asset class global outsource.
Trading solutions that you talked about.
Can you talk about who the target customer is for the service and any guess on maybe how many I TG clients.
Fit this profile and then maybe lastly, when might you start to onboard clients to this new service.
Yes, Great question. Thanks, then I think look the from my perspective, the way I look at it the the target clients is frankly anybody on the buy side that wants to.
Minimize their existing spend and still have great service and great execution, I really think it's an approach to new clients and existing clients. The benefit of the transaction is that we've got this unbelievable great TG Global sales force and we have a.
The all night now her to Salesforce, which is lending very nicely and so we've got.
Hundreds of folks globally that can sell this offering so a target customer would be.
Small to mid size.
Buy side institution.
That doesn't want to either wants to outsource entirely or use us to supplement some of the resources that they have but the key thing is that virtu provides a complete holistic solution.
So we can give you virtual box you got NMS solution on your desktop you've got algo Sweet you've got algo wheel, you've got TCPA, You've got commission management. So that we can we'll pay research for you right. We've got complete six connectivity the old IP gene that business, which is a fabulous business right. So you come to her too and we can give you a single source completely outsize solution. So as your portfolio managers and focused on what they should be focusing on which is alpha generation and let bert to handle what we're really good at which is taking the alpha ideas from the smart portfolio managers and in a completely broker neutral manner.
Yes that executed in global equities and other asset classes.
Right. So why you don't need to build that capability and havent internally, we can either do it with the folks you had were frankly.
Provide that that turnkey solution Jack Philina, the gentleman I mentioned.
Has been at it for over 20 years.
I understand everything about a broker neutral business has all the relationships with not only the brokers, but the research community. So we really think it's a compelling offering and in a world that screams for efficiency and scale.
We think we can do that we think we can grow with these clients and that becomes a longstanding her to clients.
Great. Thank you.
And I apologize this is unrelated but.
You mentioned that the FX business is performing well I think you said it was up year over year.
It looks like to stick segment, the way you're reporting it was down.
A bit so maybe first how do we see the success, you're having in FX and.
If FX is doing well.
What what really parts of the business I think FX is the biggest part of that sick bucket, maybe that's wrong.
But what parts really struggled a lot this quarter.
Yes, yes. That's good question no. We combined obviously FICC, we kind of do it with the banks do it now right both FX and commodities that would include energy and metals product.
And then it well it.
Fixed income products as well so I think.
You know FX as I said is headed as a nice year there are.
Think of every geopolitical place where currencies are traded it's not just the you know the euro.
And the dollar and the yen, but we go pretty far out the skew count in terms of the payers that we trade, it's a very globally diverse.
FX business, where we can kind of be everywhere trying to capture those opportunities as well.
As you know we do stream directly to you know.
Whole bunch of people through our BFX offering.
And so that business did well I mean commodities again continue to struggle.
You know a lot of that has to do with.
A lack of volatility in activity, particularly in the natural gas segment.
Which is been a long term theme.
And so.
You know that that really kind of the mix of the business. There I know, we don't separately disclose anymore. Because we just thought it was too granular, but we're we continue to be very excited about our FX business.
Okay. Thank you very much.
Thank you.
Your next question will come from Alex Kramm from your boss Your line is open.
Hey, good morning, everyone.
Just the first of all thank you for the additional disclosure on work flow solution analytics that's helpful.
Do have a question on that one now.
First of all quarter over quarter, and actually ticked down. So just wondering if you can give us a little bit more help what kind of variability in that business. So we know how to model it better, but then related to that I think Doug you make this comment.
That you are you already generated $1 million of off I guess, new sales or annualized revenue in that business, though.
Obviously, it's only been a few months, but if you if I annualize that and look look look at it again did not its disclosure the growth rate is sub 2%. So wondering what kind of your goals for that business and how quickly you think you can ramp that you talked to some of those most solutions.
Yes.
Good question so in the workforce segment remember the Tri Dms.
Asset or business. If you will has two components to it there is obviously a fixed subscription model to it so we're getting paid by.
Brokers for connectivity and a lot of times from the Buyside customers they will pay a subscription fee.
For that technology service as well there is a transaction component. So the more the broker neutral brokers, if you will trade through the mass product.
We get paid more and so when volumes.
Decrease I know this very well because before we bought the D. We were we were paying a lot of money to ICICI for this for this service as well and so as volumes decrease obviously the transactional component.
Of the trade Dms business and the business and the algo wheel business for that matter declined as well so that is really just a.
A result of declining volumes quarter to quarter. The subscription part did very well in terms of analytics.
Yes, we provided this disclosure separately I mean, I look at the analytics business.
Alex and I'll answer your question when I look at the analytics business not as a separate business. The reason we disclose it because there was a lot of concerns that we would have this exits of analytics customers and actually the opposite has been true people are excited about one the portal.
The improvements we've made on the backend to the delivery of the analytics product and also the multi asset class nature now the analytics product with a virtue market data being fed into it.
And so we've seen a significant interest and uptake there.
I think the analytics it is a great business because it is part of the whole solution. There are a lot of clients that you can actually lead with analytics, particularly in Europe , where you've got missed the two invest extra requirement and so some of our biggest asset management and pension fund clients in Europe are actually first and foremost analytics customers and so thats why holistically its a very important product.
From a dollar incense perspective, it's never going to be a gigantic business right because it's just that.
Based on how that those products are priced and so.
The way I look at is it's a modest single digit kind of growth business. If it continues to grow somewhere between 3% to 567% a quarter I'd be very excited about it.
To me.
The notion that we closed the deal four or five months ago. There was all this uproar about vertu analytics, they're gonna have lead clients, leading fleeing and we actually increased was it really the story here. So I think we've kind of gotten past.
That narrative and were now on to the narrative, Hey work rate market structure and technology from maybe we can provide a better solution, let's see with these guys have and that's indeed, what we're now seeing in the marketplace.
Alright. Thank you for that and then secondly, maybe just coming back to some of the questions around disclosures and an opportunity in the marketplace.
Not sure if business. It doesn't feel are helpful. But if I look at your payment for order flow disclosures over the last three quarters.
I've been kind of the same kind of $24 million range per quarter. So to me that suggest that you actually.
Getting decent amount of order flow or the same kind of level of order flow. So I guess the question is is really then just the environment and the dollar volume that that rich asked about is actually been kind of consistent or or are you having to pay up to get an auto floor, because I think sometimes the customers understand if the opportunity set is lower your payment for order flow should be lower as well and there is some sort of sharing so I guess I guess, maybe just tell me why that metric is trending flat, while youre not trading revenues is clearly trending down.
Yeah, I'm not trying to be nicely, but it's actually a very good question.
And very very insightful, it's the one of the issues with that where that business is structured is that was a great business, We love and we've got 200, great long term relationship but payment for order flow.
It's really price improvement and that the lion's share of our customers in the vast vast majority of them don't take a rebate or really providing price improvement to the order or better than the national best bit of ethanol from the time that arrive and that doesn't happen on a daily weekly or in some cases, even monthly manner.
And so a client a price improvement and market share and whatnot is set by clients.
You know, sometimes monthly sometimes quarterly so you're sort of always a little bit looking in the rearview mirror if you will so as.
Opportunities decline.
Spreads narrow realized volatility goes down take a month like April which was kind of disastrous in that regard.
Even if you are getting the same amount of order flow or even go down somewhat because the retail participation and then the amount of price improvement that you are obligated to pay in order to keep consistent is kind of a fix number and as well the rebate is indeed, a fix number and so.
Your gross pie, if you will decreases and the amount of payments that you are making kind of stays consistent if that makes sense.
And so as a result your net.
Your next just going to be reduced right. So.
It's actually a really really interesting way to look at it and it's something that actually we should probably focus more on so thank you for that question.
Alright, thank you.
Your next question will come from Chris Allen from Compass point Your line is open.
Morning, guys I wanted to ask about your comments around the LTC impact in market, making.
Covering key CG over the years it used to be important business for them, but then I really had dwindled.
Before you bought them.
So I'm just wondering like all I like where are you.
What's the impact to your how material is it to the business.
And how should we think about going forward.
Well, there's about 25, guys sitting 200 feet away from me I think it's pretty important and we've taken.
And they've done a great job and we've got you know very very significant market share.
And in a larger from obviously, Chris it's less impactful, but within the market, making segment and certainly within our customer market, making segment. It is still a significant part of what we do and don't think of this is just you know.
Some crazy paint can bully name you never heard of inter listed stocks that are not listed in the United States and so like you have Canadian cannabis stocks you have firms like Nestle that don't have a sponsor tier one or tier two HDR program. So this is.
Basic blocking and tackling market, making for non listed securities, which we do in a hybrid manner with human traders, but also using algorithmic.
Input.
Right. So it's a very important.
And a key part of what we do on the customer market, making side.
Well. It obviously is an important part of what our retail partners expect us to have as part of a solution.
Where we provide both LTC NMS capabilities. So it's very very important.
As well we are getting a large block of an LMS name. It will go to that desk as well. So those guys are very central to what we are and how we operate and so when that.
Volume is down 35% again, the impact is going to be pretty dramatic I mean that it's going to be more than linear right because you're going to have.
Declining spread then declining volumes is not a good situation. So thats why I separately highlighted it is still an important part of what we do certainly on the customer side. It's also just another.
Another benchmark for retail participation.
There's not a lot of moving so we I mean, it's important part of the business and it's also something that that helps directionally. We are looking at retail volumes.
Got it and.
I mean, what.
Well I think one of the top three benchmarks, we should be looking at going forward. I mean, you guys used to break down marketing machine, you Us Asia Pac and Europe , obviously now just global.
You can have the kind of change the playing field in terms of what metrics, we should be looking at over the last I'd say few quarters. So can you give us the top three that we should be focusing on to thinking about the business or is it because.
Clearly like all the metrics we looked at this quarter.
Were misleading relative to the results.
Well I mean again I I think I'd say realized volatility is probably is the most important.
And some.
Indication of retail participation, we use ODC volumes.
When we use the I.B.K. our volumes.
And then and then which were down 20.
There is an indication of exactly what's going to happen in that segment and then global volatility metrics.
I'd say is is after that and then global volume metrics and then volume volatility in it's like.
Hi, Capex and responsibility, but I'd say, Chris I mean, doug's point about how these things are not linear number one and number two when you've got if you look back over the past 234 years, you see quarters, where realized loss was lower and we did better.
But you see.
Retail participation levels, 25% higher.
What you see Bolton more volumes two X what they were here.
I get that it is it is highly imperfect.
But I think Directionally is there they are the right you're right metric.
Thanks, and just last one for me I mean wouldn't affect bucket can you guys. I mean, obviously you touched on FX, a little bit better, but then some others a little bit weaker I mean, what like can you size that bucket roughly in terms of what the contribution is often a different asset classes because FX. For example, you're seeing is better to Q, but every metric volatility is low on the core cash trading was low in the quarter futures trading was low in the quarter. So I'm just trying to.
Think about or frame. It so any anything that you guys can give us regardless terms the size of the different business when that business within that line would be helpful.
Thats a good look at what we before we merged with Knight and ITD be to separately have we kind of slice that down a little bit and so the relative shares there between FX.
Energy metals, which is our commodity segment, and then fixed income and options.
You kind of see the relative contributions they haven't changed all that much I should have commented one.
Ken Worthington asking the question before.
That that it also includes options, which includes like Arvixe family and single name and Big Index options and obviously in a quarter, where volatility is fairly muted you're going to see it.
Proportionate negative impact on that part of the business as well Chris.
And so that would would have been a negative.
Contribution if you will to the proportion of revenue in that in that particular.
Segment, so FICC.
Is broadly speaking everything that is not a global equity.
And so.
Relative the relative size is not.
Significantly different from one or two as a standalone companies report those buckets differently.
Thanks.
Yes.
Your next question comes from Dan Fannon from Jefferies. Your line is open.
Thanks. Good morning, So just wanted to talk about expenses and flexibility obviously reduced guidance this year.
If the revenue environment like we saw in Twoq you in July persists.
I guess can you talk about variability or flexibility you have.
In that guidance or any changes we can think about in terms of the baseline you're building for 2020 and the guidance, we gave as well in terms of what kind of revenue backdrop, you're assuming.
Yes, sure I mean look I think the reason why we give ranges as part of that flexibility is within that range.
So you need persistently low.
It consistently poor environment like this.
I would I would expect us to be at the low end of the range.
Can we put a range out there I want to I don't want to guide that we're going to be below the range, but but art.
A significant amount of our.
Of our expense base is compensation and a significant portion of compensation is variable.
Hi, so.
We have we have a great deal of latitude there obviously on the compensation line.
Yes, the communications data processing, I think thats pretty much set theres a plan.
Market data plans today any color.
Plant that we maintain that Doug mentioned, we're in the process of consolidating that.
And then on the on the overhead side.
You know again were very aggressive in paring that down.
Of course in a series of course in a sustained environment like this we would do more.
I don't like when our EBITDA margins this quarter.
I would expect in a in a sustained environment.
Like this.
We would want to get that back to kind of where we were historically low environment like in the high fortys or.
50%.
No.
Because I think I can do in terms of quantifying that.
Okay, and then as a follow up.
25 to 50 million of strategic growth opportunities identified is that 2020 figure that we should start to see that or you're seeing that.
Kind of annualize that for the back half of this year or just trying to get a time period for those numbers.
Yes, it's more 2020, Dan because we're rolling out Triton Valor as I said shortly.
That's going to be multi asset class, it's gonna have FX trading capabilities in it for the first time in DG.
Flash virtue history right. So we're going to see a significant uptick there, where our clients and abusing FX algos, including or to liquidity.
The April is now going live.
And we've got 30 ish or so clients I think conveyed on that so these things are starting to happen, but they're not going to really kick in until until 2020 is a number of other things we're working on as well.
Got it thank you.
Thank you.
Your next question comes from Michael Cyprys from Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question just following up a little bit on the fixed side, maybe just diving in more on credit just curious what trends you're seeing around credit how meaningful that is today. How are you thinking about the opportunity set within credit and then just maybe an update on some of the initiatives that you guys are thinking about or have in place as more credit trading goes electronic how you're thinking about capturing that and I know you have a partnership to get announced with market access perhaps you can update us on that as well. Thanks.
Yes. Thank you for the question.
Yes, I mean I've changed my view on this a little bit in the last 12 months a lot of that has to do is getting educated and candidly merging with Knight capital.
Both at Knight capital have this wonderful block trading GTS business that they run for a number of years.
A lot of the flow there is not surprisingly generally the sales staff, but a lot of it's generated from our retail.
Partner broker relationships ri agent cetera that want to.
Do a portfolio transition whatever it is and where their provide two sided liquidity not surprisingly a lot of that.
Interest is in the fixed income market and so therefore, we are a market maker in fixed income Etfs in a large way that let us to their natural conclusion, well as an underlying.
Instrument, that's a credit instrument or why can't we'd be a participant there some are alive on.
Market access and trade web and all the other electronic venues, where one can be a participant there and that has obviously now.
Peaked our interest that we're going to do that but why can't we do that in a meaningful way were good market makers, obviously, there's a little bit different in terms of what the risk profile looks like in the hedging profile and whatnot, but.
Im a big believer in market access and trade when firms like that that have done a great job in terms of Electronifying. This asset class. There is a lot of CUSIP, it's not going to be a million names that are going to get traded electronically, but certainly you know 500 to 1000 to 2000 will be.
And so we are building up internally our capabilities there we are significant.
In my view a significant player there now it's not so there's a lot of runway.
In that in that area, both here in the us and in Europe .
The things, we do we've decided to take that DNA that block trading capability married with regard to pricing capability in technology and bring that to Europe and Asia. So thats happening now as well. So we have a natural natural synergy there between our customer base, our ETF market capabilities and our our technology to be I think a significant participant in the credit market electronically.
Great. Thanks for that and just maybe as a follow up now with I T. Under your belt just curious how you see your competitive set evolving.
You know as you look out across the industry today across both of your businesses and I guess, just with both of these businesses here market, making and the customer centric business together, what sort of synergies or.
Competitive advantages do you think that gives you in the marketplace.
Now with both of them at this juncture.
Yes, very good question here just to be very clear I've never considered a competitor on the some of the large both bracket firms.
I look at.
Youre from Morgan Stanley and JP, Morgan and Goldman and all these other great firms that have been around for a long time Theyve got a very different value proposition in a very different orientation from from bird to in fact, we work very collaboratively with all those guys. We consider their customers and then where customer back on the prime side. So it's a very nice symbiotic partnership we have with the both bracket firms. There are obviously firms that are not bold bracket firms that are either try to.
Compete on execution only.
Or maybe have some small research, but again today really are not not significant global banks and so those are the firms that were competing with I think we've got a unique value proposition that they don't have we've got global scale.
We've got the resources to invest hundreds of millions of dollars in technology, because were doing our market, making side and most importantly to answer the second part of your question, we have something that none of those firms have which is our own bespoke natural liquidity, because we are a market maker all around the world and in particular in us equities, where we've got this.
You know 7600, Reg NMS names and a whole bunch otcs names that we are market, making in any moment in time and so there has been and we call that the cross or BQ and fuel nightly business a little bit. So we've kind of melded that altogether into this very significant offering we now have dozens of asset managers that are alive and they have access to this is purely an opt in business and it gives us a real competitive advantage against candidly any other competitor that doesn't have that and frankly, there aren't any that our retail competitors in the wholesale business don't really have this business. So we think virtu is extremely well positioned globally.
As the destination for an execution only technology, driven very transparent with unique liquidity kind of business thats completely vertically integrated with end to end service provider that is truly a global business.
Great. Thanks for taking my questions.
Thank you very much.
I have no further questions in queue I turn the call back over to the presenters for closing remarks.
Okay. Thank you all very much for taking the time and your interest in virtue and we look forward to speaking with you at the end of our third quarter. Thank you very much.
Thank you everyone. This will conclude today's conference call you may now disconnect.