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spk15: Good day and welcome to the Virtue Financial 2020 Fourth Quarter Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press stars and one. Please note that this event is being recorded. I would now like to turn the conference over to Deborah Bellivan, Head of Investor Relations. Please go ahead.
spk08: Thank you, Operator, and good morning, everyone. Thanks for joining us. Our fourth quarter and full year results were released this morning and are available on our website. On this morning's call, we'll have Mr. Douglas Cesar, our CEO, Mr. Joe Maluso, our co-president and chief operating officer, and Sean Galvin, our chief financial officer. They'll begin with some prepared remarks, and then we'll take your questions. After just a few reminders, today's call may include forward-looking statements which represent Virtue's current belief regarding future events and therefore subject to risks, assumptions, and uncertainties which may be outside the company's control. Please note that our actual results and financial condition may differ materially from what's indicated in these forward-looking statements. It's important to note that any forward-looking statements made on this call are based on information presently available to the company, and we do not undertake to update or revise any forward-looking statements as new information becomes available. We refer you to the disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report in Form 10-K and other public files. During today's call, we'll refer to both GAAP and non-GAAP results. In addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. Non-GAAP measures should be considered as a supplement to and not as superior to financial measures prepared in accordance with GAAP. We direct listeners to consult the investor portion of our website, where you'll find supplemental information referred to on this call, as well as reconciliations of non-GAAP measures to the equivalent GAAP in terms of in earnings materials with an explanation of why we deem this information to be meaningful, as well as how management uses these measures. And with that, I'd like to turn the call over to Doug.
spk04: Thank you, Debbie. Good morning, everyone, and thanks for joining us to review our fourth quarter and full year results. I'll begin today's discussion by touching upon the highlights of our performance, as well as some commentary on the recent market activity, and then Joe and Sean will provide more color on our detailed results and outlook. We'll keep our comments brief so we have plenty of time for Q&A. The fourth quarter cast an extraordinary year for Virtu. We successfully navigated the volatile markets created by the global pandemic, delivering record results for our shareholders, remaining ready to service our global client base, and taking care of our approximately 1,000 employees. I'm incredibly proud of our entire team that continues to step up and deliver amidst unprecedented market conditions. For the full year, we achieved record revenues and profitability. Our full year normalized adjusted earnings per share totaled $5.76, and our adjusted net trading income came in at $2.3 billion, or $9 million per day. I'm particularly proud that we maintained our discipline around cost, even in a year where we paused some merger-related cost reduction efforts and we were able to achieve an impressive 73 percent adjusted EBITDA margin. We used our substantial cash flow this year to reduce our long-term debt by $289 million and initiated a share repurchase program. I am pleased to announce that the $100 million share repurchase program that our Board approved last quarter has been increased to $170 million, of which we have already executed $50 million. This is in line with our comments last quarter that we were going to direct excess cash flow to return capital to shareholders in the form of buybacks. Going forward, we expect to continue this trend, balancing debt reduction, share buybacks, and reinvestment in our business. We successfully executed against the opportunities presented in the fourth quarter as we outperformed the prior quarter as well as the overall market environment, realizing $456 million in adjusted net trading income were $7.1 million per day and $1.18 in normalized adjusted EPS. For the fourth quarter and full year, both our market making and execution services segments delivered solid performance. Starting with market making, our customer wholesale and non-customer businesses performed exceedingly well in Q4 and in 2020. Our continuous enhancements to our trading strategies, technology, and asset class expansion delivered substantial returns by improving our yield on the opportunities presented this quarter, which included better than average volumes and levels of volatility that remained persistently elevated relative to prior years. On the customer side, in 2020, we executed over 1.27 billion orders for our wholesale customers which included providing approximately $1.3 billion in price improvement to retail investors. We provide wholesale market-making services to retail investors across over 200 platforms, ranging from retail and private client businesses of banks and global financial institutions to online retail firms, which provide immediate execution at or better than the national best bid or offer in over 8,000 listed securities in the United States. In addition, our non-customer market making business delivered stellar results in 2020. We saw a strong performance in a number of categories in the fourth quarter, in particular around our new options desk and the ETF block business, more on that later, as well as our European and APAC equities businesses. 2020 also marked the first full year of operations for our expanded Virtue Execution Services, or VES business, following the merger with ITG. I am pleased to report that the fourth quarter saw record results for our VES segment with $135 million in adjusted net trading income. We saw strong growth across all regions, delivering a 29% increase in adjusted net trading income versus Q3. This business, led by Steve Cavoli, really hit its stride in the fourth quarter. As we expected when we acquired ITG, marrying Virtu's technological capabilities with ITG's strong suite of workflow, analytics, and brokerage service products has led to increased client engagement across the board. In addition, VEF provides a stabilizing force, reducing overall quarter-to-quarter variability in our results. As we grow this business and prioritize cross-selling to existing clients, it's important to note that today over one-third of our clients utilize multiple products or are engaged in multiple regions, which drives more value for these clients and a relatively steadier revenue base for us. The impressive results of our VES business aren't immediately apparent in a year where our market making results are so substantial. But the VES business is a steady revenue stream that balances our naturally more volatile market making business. With 2020 in the rear view, 2021 is off to an impressive start. Based on preliminary results, our core-to-date 2021 performance remains robust and comparable to the record daily average we achieved in 2020. Finally, touching on the markets in the beginning of the year, total U.S. equity volume in January averaged 15.7 billion shares. Notional volume was 621 billion per day. We continue to be there for our clients and provided $134 million in price improvement in January alone. Naturally, we don't expect this level of activity to persist throughout the entire year, but we are encouraged so far by the start of the year. Now I will turn the call over to Joe, who will review some of our growth initiatives and progress versus our strategic plan. Joe?
spk02: All right. Thanks, Doug. I'll review some of our growth initiatives as well as a recap of our strategic overview that we presented with the third quarter results back in November. If you look at slide seven in the supplemental materials, you'll see that in 2020, we realized $166 million, or 7% of adjusted net trading income for these initiatives. While results in these businesses will be volatile, it's important to note that these businesses did not exist a few years ago. We made substantial progress this year in options, and we will be continuing to expand our symbol and venue coverage in the scope of our business in 2021, having spent 2020 building out our core options infrastructure. Our ETF block business has also been a success story. We have expanded our customer-facing presence, resulting in meaningful growth in net revenues, as well as providing us additional opportunities to grow into corporate bonds as a market maker. an effort already underway and one that we expect to contribute to revenues in 2021. Importantly, our Virtue Capital Market business is an example of how we leverage the capabilities of our VES business to offer execution services to a new segment of the market and grow revenues. In late 2019, we identified an opportunity to execute at-the-market offerings by hiring a small group experienced in this area. Together with the execution and routing capabilities of VES, this business bore fruit for us in 2020, and we expect it to continue to do so in 2021. Discussing further our strategic plan that we outlined in detail in the quarter, I wanted to point out slide 12 in the supplemental materials. We outlined the specific operating expense plan as well as a grid that noted the potential levels of free cash Virtu would be able to devote to sharing purchases at various levels of performance. This plan was meant to convey several things. First, to be specific about cost guidance as we head into 2021 when we expect to conclude the integrations of the large acquisitions we have undertaken. to make clear that after the substantial deleveraging in 2020, our current overall debt levels represent a permanent capital structure regardless of the overall environment. And third, to be specific about a plan that, through various market environments, should result in our ability to generate substantial free cash flow devoted to returning to shareholders. Consistent with this plan and assessing where we are as we approach the midpoint of the first quarter, we are able to increase our share buyback plan by an additional $70 million. Now I will turn the call over to our CFO, Sean Galvin, who will provide further detail on our results.
spk16: Thank you, Joe. In the fourth quarter, adjusted net trading income, which represents our trading gains and direct trading expenses, totaled $456 million, or $7.1 million per day, which is 75% higher than the year-ago quarter. Market-making adjusted net higher than the year-ago order. Execution services adjusted net trading income was $135 million, or $2.1 million per day, a 26% increase year-over-year. The full year adjusted net trading income totaled $2.27 billion, or $9 million per day, 131% higher than 2019. Market-making adjusted net trading income $1.18 billion or $7 million per day, 192% higher than the prior year. Execution services adjusted net trading income was $489 million or $1.9 million per day, a 31% increase over 2019. with our prior guidance. Adjusted EBITDA came in at $344 million for Q4, 200% higher than the prior year quarter, and $1.65 billion for the full year, 282% higher than 2019. We delivered an adjusted EBITDA margin of 75.4% for the fourth quarter by continuing to successfully leverage our efficient cost structure. As Doug mentioned, we have been diligent in paying down our debt, making $388 million in prepayments since the ITG acquisition in 2019 and have reduced our debt to $1.67 billion. Finance interest expense has decreased by $24 million to $68 million for 2020 compared to $92 million for 2019. We remain committed to our 24-cent quarterly dividends. Our just announced $70 million increase to our existing $100 million share buyback authorization fully demonstrates our continued commitment to return capital to shareholders. I will now turn the call back over to the operator for Q&A.
spk15: We will now begin the question and answer session. To ask a question, you may press the star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. And our first question today will come from Rich Rapetto with Piper Sandler.
spk14: Please go ahead. Good morning, Doug and Joe and Sean. First, congrats on the super quarter here. I guess the first question, Doug, is, You know, the question all the investors are asking, you know, if you look at the last two, four Q and three Q, and you look at the market metrics, the volatility and volumes, and this is all on slide five, that, you know, they look very similar. But when you look at the results and, you know, the NTIs are up 25%, quarter over quarter, and I get execution services and Steve did a great job. but they showed significant improvement. And, you know, your earnings, the leverage, you know, was up, your earnings were up 45% quarter to quarter. So how do you explain to investors, you know, the differences and, you know, and the outperformance? What really worked, I guess, in 4Q versus 3Q?
spk04: Yeah, yeah, thanks, Rich. It's a good question. I mean, clearly the environment continued to be attractive in the fourth quarter. You're right, you know, the third quarter compared to the fourth quarter. There are, you know, some differences. If you look at the interactive brokerage retail engagement, for example, in Q4 as compared to 3Q, which is the only public metric available with respect to how retail is engaging the marketplace, you'll see an increase. And you can also measure, you know, TRF volumes relative to to exchange volumes. And so, certainly, you see some positive trends there. You know, as well, you know, we continue to improve and get qualitatively better. I mean, it's hard, obviously, to measure and separate out sometimes the alpha from the beta, if you will. And we try to do that with some of the growth initiatives and whatnot. But within the existing, you know, quote, unquote, legacy businesses, there have been As I said in my prepared remarks, we continue to invest in technology and in strategies and whatnot. This is an organic business that you have to always be investing in and getting better. So I just think the firm qualitatively has improved. I was really, really happy with the performance of the execution services segment in this quarter. I mean, there's been a lot written about, you know, the combination with ITG. Was it going to work? Will clients react to, you know, an HFT firm, you know, merging with an institutional business? And the marketplace has resoundingly said yes. And the unique nature of this firm where we can marry a market maker that has both technology but also access to significant a significant central risk book, right, and make that available in a fully disclosed, efficient manner to our institutional clients is unique. And clients understand the story, and more importantly, they see it in their performance. So we now have hundreds of institutional investors that are utilizing Virtu both as an agency broker, but also as a place rich to source meaningful liquidity that might not otherwise be as robust and as available that they could find in other places. And so that story and that performance really is resonating with the, you know, with our clients.
spk14: Got it. Thank you. I got one follow-up. There's been a lot of attention and speculation, you know, on payment for ODPO from the media and from, you know, et cetera, from lawmakers. But if you had, and you sort of got into this a bit in the prepared remarks, but if you had to explain payment for order flow to, say, someone who's not as familiar with it, you know, what points would you stress and really want them, I guess, to understand? And do you think there's any potential changes to payment for order flow, you know, coming?
spk04: Yeah, no, it's a great question. Obviously, it's, you know, front of mind. And we've tried very much to be front footed in talking to clients and regulators and lawmakers about this over the years, and indeed more recently. I think the issue is really there's a misunderstanding with regard to what the term payment for workflow means. And people use it synonymously with wholesale market making. And frankly, that's a mistake, which leads to confusion and misinformation. Wholesaling, by its nature, is a business which we and a bunch of other firms are engaged in, where we are providing immediate execution on over 8,000 Reg NMS listed securities, as well as meaningful price and size improvement to every marketable order that comes in. So retail flow comes in, and by its nature, it's a little more balanced. And because of our ability to offer price improvement that is better than the national best fit and best offer, retail investors are benefited from us providing that service to the tune, from a Virtu perspective, of about $1.3 billion. And we estimate, as an industry, in 2020, that Virtu, Citadel, Susquehanna, Two Sigma, and the other firms, UBS, that provide this wholesaling service, provided $3.6 billion of price improvements. nothing to do with payment for info, but literal price improvement off of the national best bidder best offer. So if you are a retail investor, you're able today to pay no commission, send an order of up to 9,999 shares, right, and receive either the NBBO or in many instances better than the NBBO on that entire order. There are a lot of institutional clients that are maybe listening that I've talked to that would happily take that deal, right? They're sending similarly sized orders in similar names and they're paying us a commission and they'd be thrilled if we get the touch right so retail investing just take a step back at the ecosystem and what we and our competitors have developed in partnership with the over 200 odd trading platforms etc it's an unbelievable ecosystem that we all should be very proud of and regulators and policy makers and folks that study the market that look at that, say, and really look at the data, right, and avoid the histrionics, if you will, look at that and say, well, that's a great system, right? Like, really, who is not benefiting from that system? And we're putting, you know, risk capital up to, you know, provide that service. And we get paid through, you know, internalizing, if you will, and realizing the bid-offer spread as best we can. Some days, You know, we don't make any money in that business, right, because flow can be sharp and unidirectional and whatnot. And on balance, we do. But we've been at that business for over 20 years and invested billions of dollars in technology to make that work. Now, some retail brokers, you know, charge the wholesale market makers a fee, and that's called payment for order flow, right, for executing the order flow. As I've said before, you know, there's about a dozen or so firms that do that of the 200 retail brokers involved. platforms, et cetera, that we connect to. And as a general matter, we're agnostic, Rich, as to whether or not a broker charges that or not. We look at that as really the same as any other fee, right, or charge that we're going to have from connecting to any other kind of exchange, financial intermediary, bank broker. You know, we're connected to hundreds of venues and banks and brokers around the world, and a lot of times we're paying for order flow, right? In this instance, it's with a handful of retail brokers. The important statistic is that we paid, that we provided, excuse me, over three and a half times, three and a half times price improvement, if you will, to PFOP, right? So, the vast preponderance of what we're doing as a service in the industry is providing price improvement. And then, finally, all of the retail brokers that require payment for water flow do it at a standardized rate. And so, really, the competition between us and our competitive wholesalers is 100 percent based on what level of execution quality or price improvement can we provide back to their end users, right? So, in terms of the ecosystem and who's ultimately benefiting, it really is the retail investor.
spk14: Male Speaker 1 Got it. Thanks for the explanation, Doug, and congrats on the great quarter.
spk04: Doug Smith Thank you very much.
spk15: The next question will come from Dan Shannon with Jefferies. Please go ahead.
spk13: Thanks. Good morning. So I wanted to tease out a bit more of the strength of the fourth quarter and what we've seen to start the year. Obviously, Realize Vol, as we look at that slide, didn't change much, but retail participation is up. And then you have the trading of kind of single or low price stocks and SPACs that are becoming a much larger part of the market. So could you talk to some of these other factors and maybe isolate some of the more specific things that are really incrementally different in this market?
spk04: Yeah, yeah, great question, Rich, for asking me. You know, as I mentioned and you just alluded to, obviously, when you have U.S. equity volumes that are, you know, $12 billion, I think yesterday was close to $15 billion, right? That's just an enormous flow that's coming through our system. And it's not just in U.S. equities, and you'll see it in Canada and in Asia, right, where there's just enormous engagement in the marketplace. And so all of that kind of, you know, it's not just from our retail partners that we're experiencing all of this incremental flow and incremental engagement. I think it's really part and parcel of certainly the United States, you know, the Fed policy around zero rates and the, you know, stimulus in the economy. And you see that globally where folks are really engaged. And when you have zero interest rates, the equities market becomes, is, you know, candidly a great environment for a market maker to be participating in. And so it's not just, you know, the legacy night wholesaling business that's experiencing this. The legacy Virtu and the old get-go businesses, which candidly have nothing to do with retail order flow, you know, are off to fantastic starts in 2021 as well. And all of that leads to the results you see. Again, I'll emphasize it. I just answered it, I mentioned the answer to Rich's question, but our execution services business is off to a better start of 2021 than, significantly better than what it did in the fourth quarter. And the fourth quarter I thought was fantastic, was up 29% from the third quarter. So it's not just one thing, but we are certainly clicking on all cylinders here. And, you know, I'm very, very optimistic that that's going to continue for the remainder of 2021.
spk13: Great. And then just as a follow-up on options, you know, market making, and you talked about 2020 being kind of laying the groundwork in the infrastructure and now increasing symbols in the rollout this year. So it's a contributor in terms of net positive, in terms of the revenue in AMTI in 2020. So I guess, what number in terms of the market and what you're participating in today versus what you think you can be in terms of activity levels or just the broader securities that you can actually trade as you think about 2021? How should we think about that rollout?
spk04: Yeah, yeah, it's a great question. I mean, we are very, very early innings in that business, right? I mean, we frankly did not really even have a business in I'm very proud of the strides that we made in 2020. I've said numerous times on these calls, it required an entire infrastructure built, right? It's a very, very different DNA to be a market maker in options in cash equities, not from an understanding of the marketplace perspective, but just simply from the vast nature of the symbology and the quotes that you're going to have, right? It's a quote-level business as opposed to an oral-level business, right? So it's very, very different. So, you know, we're kind of building the car, if you will, as it's going down the road and at the same time making money in typical kind of Virtu fashion. So I'm very... impressed and happy with the results that we had thus far. We have barely scratched the surface. We are focusing, as you would imagine, in the high-value targets, obviously the index products, right, which trade significant volume. There are 1,000 or so individual names in the U.S. that have options. We are creating but a handful of those right now. So we are in the process of scaling that business. You know, to use a baseball analogy, which everyone likes to, you know, we're in the dugout. We have our cleats on. You know, maybe we're in the on-deck circle. We've swung a little bit, and we're just getting up to bat. So there's a lot of room here. There's, you know, a number of firms that are great, you know, entrenched incumbents. providers of liquidity. And so we don't have any aspirations to be number one anytime soon, but certainly we can be in the mix, and we're beginning to see positive results in a true kind of virtuian fashion. So it's a very profitable business, but it's one that we continue to invest in, and we're excited about the growth prospects for.
spk15: Thank you, Chris.
spk04: Yeah, thanks.
spk15: And our next question will come from Ken Worthington with J.P. Morgan. Please go ahead. Hi, good morning.
spk07: You highlighted a $2 base earnings run rate, and it wasn't that long ago when we were seeing sort of a dollar of earnings. So can you talk about what's giving you comfort that that $2 run rate is really the right number? And I'm sure it's a combination of new business, greater efficiency, and maybe some other things that have changed in terms of mix. But bring those together to help us get the confidence that the $2 number is the right number.
spk02: Yeah, Joe, why don't you try to answer that first, then I'll jump in. Yeah, sure, Ken. Look, you know, we put out that grid in the third quarter that showed, you know, here are the different levels of net trading income, you know, what we can earn in terms of EPS, and then what we can earn in terms of what we can do in terms of share buybacks. I think, you know, we have confidence in it, to answer your question, because when we look at the history of, you know, Virtue plus KCG plus ITG, We look at it across multiple environments. You go back to when Virtue went public in 2015, and then you look at the peaks and the troughs. And then you look at our operating expense guidance, which we feel pretty confident about and we've historically been very good at. I have a hard time coming up with a trough scenario that doesn't get us into too much trouble. through the long term, right? That's why we highlight the fact that we generate a lot of cash flow. We'll leverage appropriately. The excess cash that we're going to be generating, you know, from we've got $170 million authorized today, you know, in the future, again, we need our board to authorize it, but I would expect that if we generate excess cash, we're going to be, you know, returning it to the shareholders in one form or another. So that's the That is the reason why we have confidence, is that if you look at where the trough was, it was in the year 2019 where we acquired a major acquisition and that the volatility and volume levels were at multi-year lows. So I feel pretty confident that's trough, but I also feel pretty confident that we're going to meet our expense guidance. When you put all that stuff together, not even counting the growth, not even counting some of the stuff that we've got on the table in terms of growth, just looking at the firm as it is, I feel confident in that number.
spk04: For once, I will actually be pithier than Joe Maluso, and I'm not known for pith. We're confident. I'm confident because we're doing it. We're doing it. We had a fabulous fourth quarter. I see significant improvement internally. Obviously, the growth initiatives, Ken, are great. We've always been religious about expense management. And I think we are, we obviously have always had a religion around our balance sheet and returning capital. So, you know, all of the components are there. We started on this journey in 2017 to expand the footprint of what we thought could be a fully integrated global financial services firm that did a lot of things really well and some things we hadn't even started and we were going to start those. and build the firm organically and really be a differentiated, different kind of player in the marketplace. And, you know, you're beginning to see the fruits of that labor, I guess, is the right way to put it, against a backdrop that's very positive. So I feel, you know, really excited that we found incremental ways to scale using the infrastructure and the platform that we have. And it's always, always been the Virtu model that Vinny and I envisioned when we started on this journey about 13 years ago.
spk07: Perfect. And then maybe to follow up on Ricky's question, since payment for order flow, unfortunately, is a topic du jour, maybe one way to approach it, if payment for order flow were regulated out of existence tomorrow, not my base case, but it keeps coming up, What do you think would be the impact on your earnings and maybe participation in the wholesaling market? So maybe if we go through that scenario, it might give us our investors comfort that this may not be that big a deal for you, even if it went away.
spk04: Yeah, and candidly, I don't think there'd be any direct impact of Virtu, right? I mean, we would continue to be the wholesaler that we are. You know, presumably, you know, there'd be more of a shift to price improvement. And the vast preponderance of our clients, including some of the largest names that you know today, don't charge for a payment for water flow. So from a Virtu perspective... You know, there wouldn't be any change. I think the wholesaling business is a remarkable business. I didn't really understand it until we bought Knight, and now, obviously, now that I'm on the inside, it's just incredible what these guys at Knight had built over the prior 20 years before we got here. I think actually, though, but from a policy perspective, and this is why regulators and people that have studied it and looked at the data have including most recently the SEC and whatnot that have looked at it, understand that payment for water flow or the rebate, if you will, is important for innovation. I mean, you've seen incredible innovation in this industry in the last couple of years through zero commissions and what that has meant in terms of democratizing the marketplace. I think the focus really should be now in this next generation, now that you have all these incremental people accessing the market. I think that's a great thing. I'm a big believer in transparency and democratization of marketplaces. That's a virtue it's always been about. I think if we focus now on education and disclosure and things along those lines, that can make the marketplace even better. I think that's really the solution, not just – irrationally, you know, quote unquote, banning something because we think it's bad or it distorts the marketplace. You know, I've never seen a shred of data that validates that, you know, that assertion. I understand people have emotional reactions, you know, to the name and whatnot. It's, you know, it's no different than the firestorm of innuendo that was created in 2014 with the publication of the book Flash Voice. But when people really took the time working with us and other great market participants to peel back the onion, it was kind of a big nothing. Really, there was nothing there. There was a lot of smoke, there was zero fire, a guy sold a lot of books, and the marketplace didn't really change at all. Same thing here. I think when people look at what the marketplace has done and what has been created for retail investors in this country, where they can literally on a smartphone or a laptop or an iPad, whatever it is, push a button and buy 1,000 shares of Tesla, at or better than the national best bidder best offer, for zero? Why would you change that? No reason.
spk07: Thank you. And just a tiny follow-up. Does the payment for waterfall, if that disappeared, would that drive more volume to the lit markets? or do you really think price improvement just keeps it the status quo?
spk04: I think it would keep the status quo. It's not just the price improvement. Remember, it's a service. It's a service. Like, we're there as a guaranteed execution. Trust me, things go wrong, and when they go wrong, they end up, you know, on Virtu and the other wholesalers' balance sheet, right? We are providing a guaranteed execution to hundreds of market participants. And if we have an issue, an error, if we've mispriced something, you know, if there's an outage of Wi-Fi in New Jersey, you know, God forbid, things along those lines, we still make good on those prices, right? So we stand behind the service that we're offering to our own users. And some days that's painful. And when the market is unidirectional in a name and 80 percent of retail investors are buying or selling something, that is painful. But we're still there. We're still there. We're always in the marketplace, right? So People need to differentiate. It's not just – this is not the easiest business where we're just kind of clipping coupons. I wish that were the case. That's not the case. So it's both price improvement, right, which is meaningful, you know, $3.6 billion, right, that came out of the bid offer and back to investors. That's meaningful. And secondly, literally the billions of orders that not just this firm but all of our competitive firms serviced in 2020 – It's just remarkable, the ecosystem. And we stood up in a time of incredible pressure and pandemic and work from home, and not one of us went from our obligations to our own use. I'm very proud of what we all as an industry did in 2020. Awesome.
spk15: Thank you. And our next question will come from Alex Blistein with Goldman Sachs. Please go ahead.
spk03: Hey, good morning, guys. Sorry, same topic for maybe a couple more minutes. So, I mean, given your comments around just the significance and how robust the retail trading backdrop has been, I know it's difficult to separate the market-making activity, kind of what's legacy Virtu and kind of the legacy market maker versus what's retail-related, but I was hoping you can help us size sort of the percentage of market-making revenues that's more directly related to retail trading for you guys. And then just building on the last discussion, If we were to see an environment where retail brokers either decide to start more kind of internalization on their own or route to exchanges more because 50% of the volume is off exchange and some people would argue that that's a negative for price discovery, how would your model need to respond to that? Kind of how would you adapt to prevent revenue attrition?
spk04: Yeah, I think there's a couple of responses to that. First of all, the notion of of off-exchange trading growing is obviously factually correct in terms of share count. If you look at the notional size, right, of what's traded off-exchange, it's actually significantly lower than the share count. So I think it was like 41 percent, if you will, of trading notionally is off of an exchange. Remember, you can have low-price names that trade a billion shares in a day, and that distorts Again, there's a lot of mistaken information out there that would distort the TRF account. That's the first thing. The second thing is the TRF is not just wholesalers. It's a big bank doing an institutional block. It's a dark pool. So it's not just, quote unquote, retail 605 club. And just taking a step back, again, maybe it's my libertarian view of free markets, but people send orders to places where they think they get better execution and better service. So you know, from my perspective, if folks want to send orders to a bank or to a broker or to a wholesaler or whatnot, that's their prerogative, and we should be encouraging that. There's plenty of execution and volume that happens on an exchange, and there's no magic number and no study I've ever seen that demonstrate, okay, if it all of a sudden tips from 49.51 to 51.49, you know, the universe begins to spin in the other direction. That's just, you know, what I think that is, right? Mistaken information, let's put it that way. So from that perspective, I think, you know, I feel very good about where we're at and kind of, you know, how the ecosystem will sustain itself. The point I would like to make, though, is we don't separate our businesses and we're not going to separately disclose what's this and what's that. Because even internally, if you will, it's really an amalgamation, right? The legacy knife business and the quote-unquote retail business doesn't not also trade in dark pools and exchanges and all around the world and other marketplaces, right, Alex? So it's not as simple as saying, okay, X and Y is related to the flow we get from brokers. And indeed, the reason the strategies are successful is because we have this enormous kind of cornucopia of orders that we're getting from retail brokers, but we're also getting from other broker-dealers, right, in our link business, and we're also acquiring on an exchange or in a dark pool, and those all get kind of thrown into our central risk book. So it's not as simple as sort of separating it out. Really what we're seeing is the backdrop of increased volume and activity in the marketplace, right, together with the improvements we have made. It's not a coincidence that when Knight and Virtue combined, we've seen over the last couple of years through some great hard work and wonderful people here, we've seen improvements in our strategies and our performance. And so against that backdrop, we will continue to see measurable improvement internally. And a lot of times that does get kind of lost in the beta, if you will, of the marketplace. But overall, you know, we're not sitting here like reliant, if you will, on a single client or two. It's really the entire business wrapped together.
spk03: Okay. I got you. All right. Maybe shifting gears a little bit. Joe, one for you. I wanted to dig into a little bit on the stock-based comp dynamic. It's up materially year-over-year. Obviously, revenues are supporting that. But just curious how you guys are thinking about stock-based comp compensation going forward. What is the annual share creep from equity-based compensation? And when it comes to the buyback, is the goal to neutralize that equity-based comp share creep, or we could actually see a decline in the share count?
spk02: Yeah, I'll start there, and then between me and Sean, I think we can handle the stock-based comp question. On the buyback, look, we've executed half of the original authorization, so we've already I bought back $50 million worth at about $24 a share. And, you know, we look, we are going to look to be in the market on a continuous basis. And we've got, you know, an additional authorization for $70 million just based on how things are going so far to be consistent with what we told you we were going to do. And I think it's important that we be in the market on a continuous basis. and look at it over the long term, which is kind of what we've always done. So I think that's part one. So I would look to actually have the share count go down. In terms of the RSU grants and our stock-based comp itself, you should see that on a continuous basis going forward. like I think the third quarter more or less. The fourth quarter we had a true-up because we changed a feature in one of our plans to just make it consistent. So we had a little bit of a catch-up there from prior quarters. We didn't bother breaking it out as a separate item because it's added back already. But we just added a retirement feature that caused a little bit of a catch-up. John, is there anything else there?
spk16: No, I think the other thing I would point out is our comp is up. that vests immediately. And as we've had great success in our business in 2020, our overall comp from an equity standpoint and from a cash standpoint is up year over year versus 2019. So that is certainly one of the components why 2020 exceeds 2019. Great. Thanks, Amita. Thanks, Amita.
spk15: And our next question will come from Chris Allen with CompassPoint. Please go ahead.
spk12: Hey, morning, guys. Great quarter, and I appreciate the granularity on the expense and buyback outcomes for next year. I did want to follow up just on Doug's response around focus on education disclosure. I'm just wondering what the regulatory focus has been since the recent issues in GameStop and other stocks. Are they looking at capital levels just at the broker-dealers, or are they also focused on capital levels at the market makers? Do you think potential solutions are just suitability requirements around options and margin lending? Just any thoughts around that would be helpful.
spk04: Yeah, sure. Good question, Chris. Obviously, we're in constant contact with regulators because that's what we do. We are proactive in terms of talking to FINRA and the SEC because, you know, we want to be good actors and transparent. You know, from our perspective, you know, we've got a billion dollars or more or so in our broker-dealer. This type of situation doesn't really impact us because as a market maker, we can control our positions, right? So at the end of the day, we're ending flat or maybe we'll be notionally long or short, various names, but, you know, it certainly, you know, we can control our own positions as a market maker. So it's a much different scenario. In our institutional business, where obviously clients are sending us orders, we have a hybrid approach there. We don't self-clear all of that business. We have three very large partners that we work with here in the United States where we've effectively outsourced as a correspondent clearer, a bunch of our clearing of that business. Because there, obviously, we could get large blocks of orders. Institutional clients weren't really trading those names and size, so it had, you know, no real impact of any sort on our capital during this time period. The reason I mention education and suitability, because I think those are appropriate topics, right? And it's got a lot written about, you know, this influx of new investors, traders, whatever you want to call them, And there obviously are concerns some of these products on the options side can be a little more complicated than just buying, you know, 100 shares of X, Y, and Z, that kind of thing. So I think that's certainly within the purview of regulators to ascertain whether or not, you know, there's been appropriate education. And indeed, all of our clients that provide these services are saying the exact same thing. So I think, you know, there's unanimity of interest and concern around it. I think You know, a lot of the clients we have have wonderful tools on their website. I've gone and looked at a bunch of them. I've actually learned some things by, you know, playing around on various websites and things like that. So I think there's a lot of great information out there. I think as an industry we can always get better, and I certainly think that will be a focus of regulators.
spk12: Thanks. Just to get to that horse on the regulatory political front, but the pushbacks we get on the stock and payment for order flow, One of the outcomes specifically is just the potential for a big broker to start up an internalizer and just maybe some of the challenges that would come with that. We think that's probably an outcome regulators do not want, but they call on that. Then they get updated thoughts on the FTT, which is obviously in the headlines now. Thanks.
spk04: Yeah, sure. It's a great question. Here's what I would say, and I kind of answered it. In response to a prior question, there's a huge misunderstanding out there that somehow if we had a flow from one broker, XYZ, that somehow magically we'd make a lot of money. It's actually not the case. The reason the knife business that we inherited at Virtu, the wholesaling business, is so successful is because of this giant business. you know, client base that we have, both here, Canada, Europe, and even some Asian clients that send us this front-door retail. So if you're a single retail broker and you think you can internalize your own flow, my instinct, gut, and from my experience of seeing how we react and respond is that you will make a huge investment and you will be sorely disappointed. The reason this business... It's successful and has been successful because the guys that designed it a long time ago and the people that run it long before we even got here were smart enough to realize that it wasn't just getting the one broker. That's why it was called Knights of the Roundtable. You needed the whole roundtable. And when you got the whole roundtable and the table kept getting bigger and bigger, then you could build a profitable business. You become the marketplace, Chris. That's the important distinction that I think the folks on the outside don't understand. So when I hear... and I talk to investors about, oh, so-and-so is going to internalize their flow, I say to myself, okay, one, that's going to be a nine-figure-plus investment to actually make that happen. Two, it's going to take years. Three, it's going to be not successful because of the reason I just articulated. And four, it creates conflicts and other issues with regulators. Why would you want to bother, right? Do what you do really well. We're good at that. you're really good at something else, we can work collaboratively in business together. And that's kind of how the ecosystem has evolved.
spk12: Great card, thanks. And any thoughts on the transaction tax, which I saw a little probability would just come up in the headlines.
spk04: Yeah, well, you can imagine I have a lot of thoughts, Chris, and I will try to be mature about how I respond to it. I mean, the state transaction taxes are – I understand – the pressures of these governments around their deficits and whatnot. And obviously, as a former New Yorker who now has a residence in New Jersey, I certainly get it. I will tell you that the notion of a transaction tax in New York is, I'll use the word foolish, because I know what we would do. I would shut this office, and we have an office now in Short Hills, New Jersey. We have an office in Florida, and we would just leave the state of New York. We would never pay a penny of the New York state transaction tax. And Stacey Cunningham... God bless her, said the same thing. She would just move the New York Stock Exchange. So state transaction taxes, I think, are foolish. They just don't make any sense. And the governor of Texas, who I was honored enough to meet earlier this year in terms of their interest in having exchanges in that state, has made it very clear. And in fact, you'll see in their legislative docket this year that they will, as a state, state it is their intention to ban any they have a constitutional amendment against income taxes for those that are curious. So that doesn't make any sense. On a federal level, obviously, you have the same type of folks that have been railing against Wall Street, you know, at least for the dozen years or so I've been doing this, and every year you have the same proposals on a transaction tax. Certainly, given the recent events in the marketplace, and given the backdrop of the pandemic, there's been an increased hue and cry on that. But again, it's from the same types of folks that I would loosely describe on the left of the political spectrum. Those folks that are either somewhere in the middle, that look at data and understand what the impacts of a transaction tax are. There's empirical evidence All around the world, Sweden did this in, I think it was 94, to the derivatives market. They shut the lights out on Friday. Transaction tax came in on Monday. And guess what? The derivatives market moved to London, right? And goodbye Swedish derivatives market. The transaction tax generated essentially zero revenue. So people that look at data are smart enough to realize that that is the case. The market makers and the big banks aren't going to pay the transaction tax. It's just going to get pushed back to the pensioners and to the 401k folks. And all it's going to do is just clobber the U.S. financial system, which is in nobody's interest, right? This is a great place for raising capital. Are there adjustments that need to be made to the market? Reforms? Of course, people can look at that. But ultimately, slowing down the market and taxing it and forcing... those of us to fleet other jurisdictions and moving liquidity outside of the United States to Europe or to some other, you know, jurisdiction is really in nobody's best interest.
spk12: Thanks a lot, Gus.
spk04: Thank you.
spk15: And our next question will come from Kimmo Chung with Evercore ISI. Please go ahead.
spk00: Hi, thanks. I just want to get your perspective on how the industry market structure functioned during Q4 around volatility and other reports of some market participants experiencing some glitches. How did your assistance inform? And then following that, I know you're trading capital up a bit during the quarter. Can you just remind us what you think the right level of capital is to operate from here, given the heightened level of volatility?
spk04: Great question. Certainly, I mentioned this before in answer to another question, I would say going back to 2015 and the events of August 24th, the industry got together to give the New York Stock Exchange, BlackRock, NASDAQ, a lot of really good market participants got together. and improved the infrastructure limit up limit down volatility calls all those kinds of things so i think there was a good improvement there uh the exchanges invested a lot of money and their service has been great and their technology is fantastic and i'll throw cbo cboe into that as well i don't want to leave those guys out right so that that part of the ecosystem works well you know we at virtu have had to make the same investments right as retail volumes have increased and we've increased our market share as new participants have come in We've had to invest in our systems to make sure that we can stand up every day and perform our service. Are we 100% perfect? No. Have we had glitches here, there, and everywhere? Of course. Every market participant has them periodically. We make good on them. We have a standard operating procedure on how we recover, and none of them have had any material impact on what we do, and our clients understand that, right? And that's why they want to have a multitude of service providers so that if we're having an issue, they can adjust flow to somebody else and vice versa. It happens, unfortunately, it happens periodically in the marketplace. In terms of capital, I am going to ask either Joe or Sean to answer that question. Joe, you want to jump on it?
spk02: Yeah, sure. You know where, you know, the capital that we show here in the materials is at a high point. You know, that's not surprising, you know, given the time of year. and given the performance in the fourth quarter, the answer to your question is that we're in a better position from a capital standpoint and from a liquidity standpoint to meet our daily obligations than we ever have been, that this is more than enough capital and we need to run the firm with an appropriate buffer. And we've got access to holding companies, unsecured borrowings. We've got more unsecured borrowings to meet margin calls at our broker-dealer than we ever have before. We've got extremely high levels of capital on our broker-dealer. We spent early part of 2020 consolidating the broker-dealer. So I think we are very well capitalized, and we have access to more than adequate liquidity. So we're in very good shape.
spk00: Thank you. And just one quick question. Did you guys disclose your Rule 605 market share and how's that trending in the current quarter?
spk04: No, we didn't put it in. I mean, I've said this many times before. I think there's an undue fascination, I'll say that, with our 605 market share. Yeah, I look at it, but it will go up, it will go down. It probably went up in January. My guess is it'll go up a little bit in February. It went down a little bit in December. We're always going to be in that kind of sweet spot, hovering around like 30-ish percent. I'm very, very comfortable there. We have different shares with different brokers. Some of that is just history. Some of that is performance. Some of that is... You know, just our preference, their preference, that kind of thing. So I wouldn't read, frankly, too much into it. I know people like to kind of amalgamate it and kind of draw conclusions, most of which I kind of scratched my head about, to be candid with you. If we wanted to have, you know, 10% more market share, could we do that? Yeah, it would probably not make a lot of economic sense. I'm all about trying to find that right balance. It's a little bit of art and science as a firm between market share and profitability and providing good price improvement and service in the retail segment to our clients.
spk00: Thank you.
spk15: Thank you. And our next question will come from Alex Cram with UBS. Please go ahead.
spk01: Yeah, hey, good morning, everyone. Just shifting gears, to the execution services business. Can you actually give us an update on how the conversations are going with new and existing clients? Are you leading on execution quality? Are you talking about, hey, we can be great in certain names? And what is really the pushback that you may be getting, I think you said 41 of 50 top institutions. What is it that you're not providing or how do you get new clients? Is it because you're not providing capital? How can you have a bigger addressable market as you think about this business more realistically?
spk04: Yeah, yeah. I thought 41 out of 50 was pretty good, Alex, but – or anyhow – uh look i mean taking a step back i think when we bought itg you know there was a lot of noise about oh the hft firm and a bunch of our competitors i'm sure sold against us because of that that's always a failing proposition if you're not selling something positively i don't think you're really selling you're just kind of making noise but you know there were definitely itg clients that said, we're going to turn off when we want to see. And there were clients that probably didn't even say that, but said, you know, we're just going to click the mouse less to you guys and kind of see how this all goes. We want to see how the performance goes. We want to see if you're really going to invest in technology. And so we did what we do at Virtu. We put our heads down. We worked. Steve Cavoli has done an amazing job. We have migrated the lion's share of U.S. and European ITG algo clients to the Virtu frontier multi-country single algo stack. No other firm in the world has what we have in terms of a single algo stack that literally is ubiquitous around the world in every marketplace. in which it currently works, right? And we built the same thing in Canada and Asia, and now we have that product to go sell to clients. And so we've seen a pickup of people just trying the product and saying, wow, this is a great product. It's really performant, and we're going to use it. And on top of that, as I mentioned in my remarks, in the United States, we have this, you know, people are very fascinated with, Retail, retail, retail. How can I get access to that as an institutional investor? The answer is 1-800-VIRTU, right? So opt in to having your orders interact fully disclosed with our market maker, right? And you'll see that you get significant sales. Yes, you know, when we bought ITG, I had no idea that people actually published their market share. That's how naive I was, you know, on Bloomberg. And if you go to the Bloomberg website, you know, market share reports, you can see in a lot of names that people have interest in, in just about every name, Virtu will be the number one broker. Why is that? Because we have a large business of wholesaling, of non-cultural market-making institutions, and that's attractive to people. So it's, you know, literally the blocking, tackling, Alex, of going to clients And we certainly are focusing on the top 50, right, ones that we don't have. But more importantly, ones that we have to say, you know what, we do this for you in the U.S., can we do it for you in Europe? Or will you give our EMS product a try because you're already using our algos? Or will you use commission management? Can you quote an RFQ hub? You know, there's a whole multitude of things that we're trying to cross-sell. So we're really seeing that growth. It was a 29% increase. in Q4, and Q1, as I said before, is, you know, significantly kind of where we were in Q4 in execution service. I'm very jacked up about that business.
spk01: Okay, great. Thanks. And then just a quick one. You talk a lot about share buybacks, but in terms of capital allocation, how do you feel about your debt levels? I know that the ratios look pretty good right now, but you've obviously been in a very, very sweet environment. So, you know, that can certainly turn the other way, right? So would you think about leveraging a little bit more so you have a little bit more power for the tougher times or for potential deals or whatever it may be, or is this a good level to assume from here?
spk02: Yeah, no, Alex, I think I said in the remarks, you know, we consider this a permanent capital structure for the same reason why we're confident, you know, around, you know, the base level of earnings of $2 a share. That's the same reason why we're confident this is a a permanent capital structure because when you look at historical troughs, you know, you'd come out, you know, three to one, and we're comfortable there, right? This is all about kind of looking at the business through the long term, right? There's nothing that we need to do with the overall debt level to, you know, to take it down, you know, to kind of batten down the hatches for a poor environment. our cost base and our capital structure would do very well in a poor environment.
spk05: Makes sense. Thank you.
spk02: We want to focus on returning capital to shareholders.
spk05: All right. Thanks again. Thank you.
spk15: And our next question will come from Ken Hill with Bloop Capital. Please go ahead.
spk05: Yeah, thanks. Good morning. Just one more on the capital front. I know, you know, on slide seven, you guys have a lot of great organic growth initiatives there and you're making a lot of progress. Any of those that you think could get a boost from an M&A type activity there? And can you also remind us maybe what the criteria you guys look at internally for transactions and how the markets kind of appears to you right now? Thanks.
spk04: Yeah, look, it's good. It's a fair question. Obviously, we did two large acquisitions. I think the hurdle is for an acquisition is really high at this firm. I mean, I'm 100% convinced based on everything that I've seen in my experience that we can grow an options business and a block ETF business organically. We're doing it. We're doing it. Are there competitive firms out there that are in this business? Of course. You know, do I want to pay, you know, a lot of money to go buy one and then go through the, frankly, the aggravation and years of trying to integrate them into Virtu culturally and technologically? No, I really don't. But I know that I can do it organically with people that I know and I trust. And we've got the stadium built. So I don't need technology from anybody. I just need time. Just need time. And that's what we're going to have. And we have the benefit of having a vast business to support that. And indeed, these businesses are profitable on their own. So the criteria for M&A is It has to be really accretive. It has to be really attractive. It has to be something that's not going to give me and the rest of the management team a giant headache. And based on everything I saw in 2020, nothing even came close to that level. You know, we're kind of mature as a firm where we have this very large stadium and this very large opportunity set in front of us that we know we can build organically. What do I need to overpay somebody, you know, for that privilege?
spk15: All right, thank you. And our next question will come from Michael Cypress with Morgan Stanley. Please go ahead.
spk06: Thanks for taking the question. Just hoping you could dig in a little bit on the FIC and options business. All the revenue is down a little bit there in the quarter. Just hoping you can elaborate on some of the moving pieces from third quarter into the fourth quarter in any color you could share on that part of the business here in 1Q.
spk04: Yeah, it was really just look at the opportunity metrics. I'm trying to find them in the supplemental materials. Joe pointed them out to me. But if you look in particular at like volatility in the currency market, it's down like 50%. So it's really just, you know, if you understand kind of our businesses and the drivers of each of them, you can really just, all the information is right there for you. So it's sort of, you know, really just driven by on page five, if you look at realized volatility in the FX market, it was down 50%. So kind of says it all right there.
spk06: Okay. And I guess how would you sort of disaggregate or provide any sort of color on the, you know, say top three contributors to that revenue line as we think about looking at which metrics will be driving it? Are you suggesting that FX is the biggest component there? What would be the top three? How would you sort of rank them?
spk02: And how would that evolve? You know, in the past, we thought it was important to consolidate this as FIC options and other. It's going to fluctuate, Michael. And that's why, you know, we consolidated in FIC, which a lot of companies do. So that's a category we look at. It includes energy. It includes foreign exchange. It includes commodities. And, you know, those things are going to fluctuate over time, and I couldn't give you a one, two, three. It includes all those asset classes, and we're going to report it as fixed.
spk06: Got it. Okay. And then just a quick follow-up just on the back to the capital and the balance sheet. I recall you guys were looking to free up, I think it was about $100 million of capital with merging the broker-dealers. This was maybe a year or so ago. Just curious, you know, how that progressed and if there's anything incremental at this point that could be released.
spk02: No, we've done all of the capital release from, you know, the mechanics of merging broker-dealers. So we operate principally out of one broker-dealer. And we are pretty efficient about capital. That entity, as Doug said, has got over a billion dollars of total capital now. And it's not our entire business, but it's a good portion of our business. And as I said, from the beginning of the year, we've enhanced our liquidity. meaningfully just by having the operations in one broker-dealer as an enhancement. As I said, we've got holding company lines, we've got lines at the broker-dealer. And as Doug mentioned, we've outsourced a good portion of the clearing uh for the business where you know the the requirements are are less predictable and you kind of need to accommodate clients uh and and that could generate you know an unpredictable large large margin call and that's been outsourced as doug said to three large financial institutions so uh we are we feel like we've done a lot of optimization around that and realized a lot of the benefits you know but the excess cash flow The real answer to the question you're asking is, look at the grid we gave you in the third quarter at various levels of investment, just in the trading income, and hold us to that in terms of how much excess cash should be generated, because that's really the entire company. That's not just the broker-dealer that's operating out of Europe, operating out of Asia Pacific, or non-broker-dealer business in the U.S. in terms of FIC and FX and other.
spk06: Great. Thanks so much. Thank you.
spk15: And this will conclude our question and answer session. I'd like to turn the conference back over to Doug Sifu for any closing remarks.
spk04: Thank you very much. I just want to thank the senior management team here for doing a great job and for all of our employees. And we look forward to speaking with you guys at the end of the first quarter. Thank you, everybody. Stay safe.
spk15: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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