Virtu Financial, Inc.

Good day and welcome to the Virtue Financial 2021 Second Quarter Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on a touch-tone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Andrew Smith. Please go ahead.

Andrew Smith Thanks, Tom, and good morning, everyone. Thank you for joining us today. Our second quarter of results were released this morning and are available on our website. On this morning's call, we have Mr. Douglas Sifu, our Chief Executive Officer, and Mr. Joseph Meluso, our Co-President and Co-Chief Operating Officer, and Mr. Sean Galvin, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. First, a few reminders. Today's call may include forward-looking statements which represent Virtue's current belief regarding future events and are therefore subject to risks, assumptions, and uncertainties which may be outside the company's control. Please note that our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. It is important to note that any forward-looking statements made on this call are based on information presently available to the company and we do not undertake to update or revise any forward-looking statements as new information becomes available. we refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report in Form 10-K and 10-Q and other public filings. During today's call, in addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. Non-GAAP measures should be considered as supplemental to and not superior to financial measures prepared in accordance with GAAP. We direct listeners to consult the investor portion of our website, where you'll find supplemental information referred to on this call, as well as a reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings materials with an explanation of why we deem this information to be meaningful, as well as how management uses these measures. And with that, I'd like to turn the call over to Doug.

Good morning, and thank you, Andrew. This morning, we reported our second quarter results, which reflect our resilient and balanced business model as well as the continued success of our organic growth initiative. For the quarter ended June 30th, we generated 63 cents of adjusted EPS on $5.4 million per day of adjusted net trading income, bringing our results for the first half of 2021 to $2.67 per share and an average adjusted net trading income of $8.63 million per day. Last quarter, we announced a $300 million increase to our share repurchase program, which brought our total authorization to $470 million. We have repurchased 3.4 million shares for approximately $100 million during the second quarter and over $30 million worth since the end of the second quarter, bringing the total amount repurchased under the current authorization to approximately $230 million. As we stated previously, we remain committed to returning capital to investors and have prioritized share purchases for the foreseeable future. We aim to be in the market consistently, buying back shares as we work to accomplish our capital management goals. Importantly, in the second quarter, our more greenfield growth initiative continued to shine in both relative and absolute terms compared to historical results. On page six, you can see how these initiatives contributed meaningfully to our performance, generating $500,000 per day of adjusted net training income and representing 9% of our ante for the quarter. These initiatives are truly organic in that our ante from these revenue sources was nascent only a few years ago, and we've achieved these results by leveraging our skilled infrastructure and distribution channels supplemented with a handful of individual hires. While these results are impressive, we are especially excited about the continued growth potential of these truly organic opportunities. In options market making, for example, our daily adjusted net trading income grew quarter over quarter despite the 13 percent decline in options market volume. We continue to view options market making as a key long-term engine of growth that complements and enhances our existing market-making business, creating new revenue synergies across asset classes and regions. Other key initiatives include our ETF block desk and our deployment of legacy KCG quant-style strategies, continued their long-term growth trend in the quarter. Market volumes in U.S. ETFs declined about 13% in the quarter, while our ETF block volume was down less than 1%. illustrating the strength of our unique offering in various market conditions. Our expansion into cryptocurrency market making also continues to progress, with our ante from crypto market making doubling in Q2 versus Q1. To date, our focus has been on market making in Bitcoin and Ether in various forms, including spot instruments on a couple of the major venues, as well as ETFs and futures. As a leading market maker in ETFs around the globe, crypto ETFs fit naturally into our scaled market making operations, leveraging our growing ETF block desk. We're also in the early stages of developing our ability to stream cryptocurrencies over our direct-to-dealer streaming liquidity platform, VFX. Through this platform, we will provide liquidity and cryptocurrencies to select brokers and institutions around the globe. The key takeaway here is that the growth of liquid, tradable, crypto-related products is yet another way that the total addressable market is growing for Virtu's scaled liquidity provisioning and execution services. Taken together, our growth initiatives are making tremendous progress and help raise our baseline performance through the cycle. As Joe will detail in a few moments, we believe that this positive growth trajectory, combined with our stock buyback program, provides a compelling long-term story for our investors. We look forward to updating you in the future about the progress we're making on each of these opportunities and our contribution to our growth. Additionally, the steady growth of these initiatives, as well as the continued less volatile performance of our execution services segment, has led us to provide public guidance around where Virtu's results should be given various levels of ante in a given quarter. We believe our performance this quarter is consistent with that guidance. After several quarters of elevated market activity, realized volatility fell nearly 30 percent in the second quarter, dropping to 9 percent below the 2019 average. And as you know, 2019 was a historically low point for volatility. Further, U.S. equity volumes were down 28 percent overall, and retail equity volumes in the United States were down even more compared to Q1. Despite the steep drop in volatility, we highlight the sustained levels of retail engagement and general market volumes compared to historical levels. It is important to note that despite the changing operating conditions versus last quarter, our market-making business realized $232 million in adjusted net trading income, or $3.7 million per day. This quarter's performance is similar to the third quarter of 2020, where we generated $4 million of ANTI per day, albeit realized volatility was 34% lower this quarter than in Q3 2020. Our execution services business also performed in line with the market opportunity this quarter, realizing $110 million in adjusted net training income. We are now two full years past the acquisition of ITG, and looking at the bottom of page three, you can see the steady progression of this business. This continued growth reduces the quarter-to-quarter variability to our operations while still giving investors significant upside exposure from our global market-making operations. Before I turn it over to Joe, I'd like to take a few minutes to talk about the recent industry discussion around market structure, payment for order flow, and wholesale market-making. As I said in the first quarter earnings call, we at Virtue welcome the robust dialogue around the regulatory framework that governs our capital market. However, we and others are concerned that the calls for reform are based on false narratives and factually unsupportable conclusions. These misconceptions obscure the fact that we are participants in the most robust, transparent, and fair marketplace in the world. For retail investors, their experience in the United States has never been better and by comparison is markedly worse in Canada, the United Kingdom, and Europe. Developments in market structure, advances in technology, and the introduction of intense competition have resulted in vastly expanded product offerings, low or no cost trading, and importantly, superior execution quality. In summary, the benefits of today's market structure to retail investors are quantifiable, and the supporting factual evidence is striking. In the current high-profile debate about U.S. equity market structure, many folks, including regulators, politicians, and critics, are looking at the available data to draw a conclusion. However, the data being used to assess execution quality for retail investors comes from Rule 605, which most agree has significant shortcomings and provides an incomplete view of execution quality. Current Rule 605 significantly underestimates the benefits that regulation competition transparency and the current market structure have created for retail investors. We recently published a report, which we furnished to the SEC, that addresses many of 605's shortcomings and proposes updates to enhance the rules. The biggest hole in Rule 605 is that it measures price improvement by comparing an order's execution price to the prevailing NBBO without regard for the number of shares being executed. This means, for example, that when we fill a retail order for 9,000 shares of a stock, execution quality is measured based on the NBBO price level, no matter how many or how few shares are available at the NBBO price. When we fill an order for more size than is available at the NBBO, that provides the retail investor with size improvement, and it happens a lot. In fact, in 2020, 45 percent of the shares we filled were on orders that outsized the entire NBBO. That's 45 percent. If Rule 605 was updated to measure this benefit, as many folks have requested, including numerous retail brokers and exchanges like NASDAQ, Regulators and brokers would see that in 2020, Virtue provided over $3 billion in price and size improvement to retail investors. That's three times the amount reported under Rule 605 today. It defies logic to conclude that this price and size improvement retail investors receive today would exist if, as some critics suggest, retail orders were all sent to exchanges. Thankfully, in part due to the request from Virtu and many other brokers and exchanges, the SEC is now reviewing Rule 605. In addition to having a complete view of all available data, which means actual trade, not theoretical model, having an accurate understanding of our current market structure is imperative to conducting a thorough review and proposing changes that help not hurt retail investors. To this end, we have had multiple meetings with regulators and politicians to help correct various myths and misconceptions that cloud the existing debate. In our report that I just mentioned, which is included in the appendix of today's investor presentation, and in our discussions with the staff and commissioners at the SEC, as well as folks on Capitol Hill, we use data to address their concerns. And we will be releasing a follow-up paper to provide even further important detail. At Virtu, we serve as a trusted counterparty to nearly every retail broker and wealth manager in the United States, but also to all of the top broker-dealers and hundreds of institutional buy-side firms, including the top 10 asset managers in the United States. We are confident that in the end, that data and reason will win the day, and regulators, politicians, and critics will continue to see the massive benefits of the ecosystem which regulation, competition, and transparency have created for retail investors. With that, Joe will now provide more details on our quarter and our growth initiative. Joseph?

All right. Thanks, Doug. I will review some thoughts on Virtue's ability to generate growth through both organic initiatives and through the excess cash flow we generate and how this all translates into revenue and earnings growth rates over time. If you look at slide five in our supplemental materials, we tried to distill what a peak-to-trough growth rate for Virtue looks like. We had published this slide previously, and we're reproducing it here. Understanding that our results will be volatile on a quarter-to-quarter basis, on this slide, we have distilled the historical pro forma median anti for Virtue. So that's assuming Virtue, KCG, and ITG will one company from the time virtue went public. So you can see that this is the $5.5 million per debt. Using the current operating expense projections, this translates into $2.69 of EPS. And using the current capital structure, produces $831 million. This is the historical median performance over a six-year period that excludes any of the growth initiatives that I've talked about. So next, we look at the parameters around the growth initiative. These amounts may be themselves volatile. We believe a near-term set of organic initiatives can generate between half a million per day to one and a half million. Then apply some marginal cost figures to these amounts and arrive at the 18% revenue and 26% growth rate you see on this slide. And that is assuming no sharing purchases. We understand this growth is difficult to determine on a streamlined basis. wanted to point out this real underlying significant growth in Virtue's core business. Layering on top of this growth is our ability to generate significant cash flow. Virtue generates significant amounts of free cash flow across any environment, including an environment like this one and this quarter. It's worth noting that even in this more subdued environment, our business generated 63 cents of EPS almost 58% EBITDA margins, and we were able to buy back approximately $100 million worth of our shares. With our current overall debt levels now at a long-term sustainable notional amount of $1.6 billion, our quarterly dividend of $0.24 more than secure, and no immediate plans for any major acquisitions, our ability to devote the substantial cash return to repurchases will continue. believe this cash flow is substantial in relation to our current market capitalization and allows us over time, in any sample time period, through a cycle, to acquire through open market repurchases a meaningful percentage of our company. Importantly, if you look at the chart at the bottom of the page of slide five, you see the annual amounts of free cash flow expected to be generated by Virtu at various hypothetical anti-American. Corresponding percentages represent, based on shares outstanding, the amount we can repurchase in any one year. It's important to note that these are annual amounts. So even if you factor in a full year at the lower end of the chart, at any given time period, we should be able to repurchase a significant amount in a company. For example, in the first half of this year, we have averaged $8.6 million per day, and we have repurchased $195 million of our shares year-to-date. representing approximately 4% of the total share of outstanding, and this is consistent with the guidance we've provided. Finally, our organic growth initiatives, while again themselves volatile quarter to quarter, are real and accrue to our bottom line and have significant runway to go. These organic initiatives together with the substantial cash flow and appropriate levels of debt going forward enhance our evidence of Virtue's ability to thrive in any environment while producing significant returns to the share. John?

Thank you, Joe. The second quarter, as presented on slide three of our supplemental materials, our adjusted net trading income, which represents our trading gains, net of direct trading expenses, total $342 million, or $5.4 million per day, is 49% lower than Q2 of 2020 and 55% below the first quarter. Market-making adjusted net trading income was $232 million, or $3.7 million per day, 58% lower than the year-ago quarter and 61% below the first quarter. Execution services adjusted net trading income was $110 million, or $1.7 million per day, which is a 6% decrease year-over-year. Our adjusted EPS was 63 cents for the second quarter. The second quarter, our overall compensation expense was $84 million, or 20% less than Q1. Our cash and overall compensation ratios were 21% and 25% of just net trading income, respectively. As I previously said about our compensation ratio, consistent with past practice, we accrue year-end compensation to a range of percentages earlier in the year. Depending upon how the remainder of the year unfolds, this may result in adjustments to our compensation ratio in later quarters this year as we refine our specific compensation targets. Overall, we believe that our full year cost results will be consistent with the specific cost guidance we previously provided for 2021. Adjusted EBITDA was $197 million for Q2, 59% lower than the prior year quarter and 65% below the first quarter. Our adjusted EBITDA margin was 57.6% for the second quarter, which is down 20 points from the first quarter, but continues to be reflective of our efficient cost structure and disciplined expense management. As Joe mentioned, our capitalization remains adequate. Our long-term debt was $1.6 billion at quarter end, reflecting a $35 million repayment in the second quarter. Finance interest expense is $20 million for the second quarter of 2021 compared to $22 million for the prior year second quarter, with this decrease primarily due to the repayment of $289 million of long-term debt in 2020. We remain committed to our 24-cent quarterly dividend, which we have consistently paid over 24 quarters in every environment since our IPO, and our approximately $100 million share repurchase in the second quarter demonstrate our continued commitment to return capital to our shareholders. I will now turn the call back over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, press star then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, press star then 2. And the first question comes from Rich Rapeto with Piper Sandler. Please go ahead.

Good morning, Doug. Good morning, Joe and team. I guess the first question is a follow up on the size improvement. You know, Doug, I've got a chance to go through the deck and we see the deck again on it. I guess the question is about the reception that you're getting with regulators. You know, you said you brought it to them and they're reviewing the Rule 605 reports, but are you getting any, what do you call it, indications that this is actually sinking in? You know, they're absorbing and getting this and that it may factor into... whatever evaluation of the market structure that they come up with, you know, in the next, in the coming months.

David Morgan Yeah. Good morning, Rich, and thanks for the question. Yeah, I think it has been very, very impactful. The response from, I'll talk about the regulator in a second, from the industry was, wow, I mean, we recognize that 605 was outdated and that there was need for reform. And frankly, the primary driving force behind our report was, you know, there was this, narrative myths out there that somehow, oh, you know, odd lots are skewing the data, and a lot of the critics were saying it's just about odd lots on Robin Hood, blah, blah, blah. Well, that was complete bunk. We knew it was complete bunk, and we debunked it. We just showed the data and said when you actually include odd lots and assume they're quotes, then it actually improves the 605 statistics. So we kind of flipped the script, if you will, on the critics there. And so we're all about misbusting here and providing facts and data. And so when we brought this to the regulators, I think they were frankly shocked and in a positive way. I don't think they recognize the value. And it's not just Virtue. It's the entire wholesaling ecosystem. It's Citadel, Susquehanna, the other six or seven competitors that provide this price and size improvement. It's meaningful. When you segment order flow, it permits the wholesaler to the great benefit of the retail investor to have meaningful size and price improvement. I said it in my script, and let me reiterate it. Forty-five percent of the shares that we fill, the orders that we get exceed the liquidity that is at the top of the book on national securities exchanges. Forty-five percent. Fifty-four percent of the notional size. So there we are providing real liquidity to small and mid-cap issuers. This is exactly what the regulators and the critics want, and this is what helps capital formation. There was an intense focus at the FTC in the last 10 years in terms of how do you get liquidity to small and mid-cap names. Well, there it is, folks. That's what we do. And so if the wholesalers weren't there, you would have enormous widening of bid-offer exchanges, and the capital markets would suffer. So the evidence is compelling. And at the end of the day, the SEC has always, always been driven by facts and data. I mean, that's what they're there for, right? Analyze the facts and data that are available to them, and then propose rules and regulations that enhance the marketplace. So every one of the proposals I've heard thus far, bantied around in the Twitter sphere, if you will, would have the opposite effect. So we're going to continue to be forceful advocates for what we think is right. We're going to continue to be very, very transparent and positive in how we present this information. And we're going to continue to be responsive to requests for data. And as I said in my prepared remarks, we're updating our reports to include Some supplemental questions, we've got to address the narrative somehow that execution quality in Canada and Europe is better because they've banned or they've limited PFOP. Actually, the opposite is exactly the case, that there's lack of competition out there. The opposite is exactly the case. Price improvement has increased 750% since 2013. So the facts and data don't lie. And when regulators look at that, and this is a country of laws and rules, right? And so, you know, the Administrative Procedures Act is very, very clear. If you're going to start changing rules and regulations, you better have the facts and data support them. This isn't about politics. This is about impacting marketplaces. And we take our responsibilities very, very seriously as a market regulator. And we know that regulators will do the right thing, and we're here to assist in that process.

Thanks, Doug. You know, that's very helpful. And the follow-up, and maybe if you could do it simple so I think most of us can understand it, but, you know, a lot has been said about payment forward flow not being accepted in Canada and Europe. And could you explain, you know, why that is in sort of simple terms, brief terms, so a lot of us can follow along with it? But that's been used as a big comparison, I guess.

Yeah, look, and I understand the appeal and the headline of saying, well, you know, payment port of flow is banned in Canada, for example. Well, in Canada, there's, and I want to be very careful about how I describe this, because I don't want to discourage anybody's motivation, but there's no price improvement in Canada. And the retail brokers, which in large measure are the large financial institutions, because of the market structure in Canada, which provides for price broker time, so if you are a broker and you're posting as a market maker an order, you're able to have priority over other market participants. So if you have a retail broker that has the order, the order gets sent to a national securities exchange, and so the dealers can selectively internalize. because of the price broker time preference. And firms like Virtu, Citadel, and others are effectively excluded, even if we have the ability to match or even improve that price. And so you have selective internalization in Canada. So talk about conflicts. There's concern that payment order flow creates a conflict between the broker. How about a marketplace where the retail broker is the market maker? People's hair would be on fire here in the United States if they saw that level of conflict. And as well, in Canada, there's, you know, taker-maker venues. So if you're a retail broker and you choose not to internalize an order, you can route that order to a taker-maker venue, and you have a firm like Virtu, Citadel, et cetera, that they're making prices, right, we're paying to make, and then the retail broker effectively routes it to an exchange and gets what's known as a rebate provided by Virtu. Well, that's just payment of order flow by another name. Again, I have no problem with that. I think that's part of what makes markets function. But let's not mischaracterize a marketplace. So you're mischaracterizing a marketplace through material omission by suggesting somehow that payment for order flow has been banned. And, sure, it has. But if you look at the entire ecosystem, the experience is just materially worse. So, yes, I'm a very proud American. I'm very proud of everything that we've accomplished here at Virto, and I'm very proud of the ecosystem because it's just much better. I'm happy to go through Europe. I don't want to belabor it there. Effectively, the bid offer is just widened out, so rather than having a direct rebate, the retail investor gets a worse experience. So, really, at the end of the day, Rich, when regulators ultimately look at the facts and understand how marketplaces work in the United States and other places, I think Categorically, I have no concern that the level of competition and transparency here is just markedly better and the experience is markedly better than any other jurisdiction. So, you know, the facts and data don't lie. We'll continue to be front-footed about that. And, you know, we're very, very confident that at the end of the day, sense and sensibility will prevail.

Got it. Thank you very much.

Thank you, Rich.

The next question comes from Ken Worthington with JP Morgan. Please go ahead.

Hi, good morning. When thinking about new initiatives, it seems to me like Virtu is well positioned to further expand into the 606 or 605 versions of market making for both equity options and crypto. And both seem like big businesses and potentially big opportunities. So, I guess, is it logical to extend your current presence in options in crypto to the equivalent of the 605 business? And is this where you ultimately expect to take these asset classes for virtue? And then, if so, what are the challenges you see in expanding your market making there? And then, what is a reasonable timeframe to build up these businesses to scale in those asset classes?

Greg, great question, Ken. Thank you, and good morning to you. So let me address options first. Categorically, that's the plan. We have all of the infrastructure in place. That's a nice way of saying we have the relationships with the Robinhood, the Fidelity, the Schwab, the E-Trade, and all of the other aggregators. of retail options flow in this country. I've said many times on these calls and in my conversations with investors that we began our path towards being an options market maker by taking on the most challenging of challenges, which is to be a market maker in index products on lit exchanges in the United States, right? That is what I would call, you know, the knife fight. And you got to bring a big machete for that knife fight if you want to be successful. Well, we have seen success. We built the infrastructure where we have a very robust, low-latency infrastructure that we were able to leverage off of. We built the technology in order to become a firm that could vote in options and to be competitive in options. So we have all of the two tools to compete, and we've got significant resources to do that. Now we have the relationships on the other side, and, you know, candidly, all of our counterparties, which trust us, and which have gotten great service and experience from us in cash equities, have asked us to be a competitor. They want more competition. I mean, there are two firms today that are very significant players. They're great firms. We're not suggesting we're going to overtake them tomorrow. We're not. It would be wonderful to be number three at some point. That would be success in the first instance. In terms of when that will launch, we will launch that sometime in 2022, probably in the first half, Ken, and we hope to see meaningful runway. I'm excited about it. This is just a similar feeling to what I had back in 2008 and 2009 when we were starting Virtue. We had nothing. It was Vinny, myself, and another partner, a bunch of capital, and some great ideas. And we grew Virtu really from nothing to something that I think is very meaningful. So it's the same kind of feeling we have in options. We have a wonderful team. which is both an internal team and we've supplemented with some wonderful people from the outside. So we're excited. There's a ton of runway there, and you can make your own estimates on the total addressable market. With respect to crypto, it's a similar story. Obviously, we want to make sure that the regulation sort of catches up to the marketplace. We've taken great strides in Canada and Europe where there have been ETFs that have been launched. The chairman was on television this morning talking about regulation of crypto exchanges and how that's so important. I couldn't agree more with him. We think that's incredibly sensible. And so, again, we have all of the accoutrements, if you will, to manage the counterparty risk, to be a meaningful participant in crypto. It's spot future risk. uh an etf it's kind of right in our wheelhouse and so that's the the beauty and the scale of the model that we've created right we've always said we wanted to be a ubiquitous market maker that could be at the bid and the offer as much as possible for as long as possible during the day and that's you know the virtue dna we've supplemented that with customer market making through the acquisition of night so we've expanded our reach and these two initiatives are in addition of that expansion

Okay, great. And then just following up on that, as you expand into the, you know, the 605 business, how should we think about capital requirements or even other risks to further building out those businesses?

Yeah, it's a great question. I'll address the risk first. I mean, obviously, when you're making markets in single names, there's, you know, idiosyncratic risks, both from a dividend and a corporate action perspective with regard to those names, right? So there's clearly more risk, no different um than the risk we took on when we bought knight and we became a market maker in 8 000 names very different from what we did at legacy virtu um options are a different breed right i can you know i don't speak to greeks particularly well we have people here that do and so clearly in terms of idiosyncratic and volatility curve risk you know there's there's more exposure and we will manage those in a virtuing kind of way we have our global risk management framework can cover that we'll supplement it with subject matter experts and options which you already have and we will continue to market make in the virtue style this is not going to be affirmed as betting on volker that's just not what we do we don't bet on directions of market we certainly don't bet on the direction of volatility we need to understand the ball curve and we've built models to price it but at the end of the day that's not really what we're about we're not a hedge fund that makes that something so managing risk there will be meaningful in terms of capital i'm actually asked joe to address that because they'll do a much better job than I will.

There's nothing, it's a market that is suited to virtue style market making, like Doug said. There's essentially cleared, you know, we would use a prime broker. We have a, you know, anything that we put out there in terms of the capital plan for share buybacks and different amounts of cash flow at different levels of ante, you know, contemplates, you know, required capital for, you know, for expansion. It doesn't matter whether it's options or ETF block or even crypto. You have to have crypto. It's a little bit different in that we're managing different counterparties, but we are very conservative initially here in terms of how we access counterparties and how we just manage that exposure.

The last thing I should mention is Joe, if you were finished, which is with regard to options, I mean, the thing that's obvious, and I'll state it again, is that we have the Delta hedge in all these products, Ken, right? So we're really, really well positioned. I mean, we're obviously a large market maker in U.S. equities, but also commodity products. And then internationally, we're going to be launching an Asian options business in the fourth quarter this year, right? And we're already there. So that's just in terms of adding, you know, some subject matter experts. We have connectivity and we have the Delta hedge. So, you know, the growth in options just enables us to achieve, you know, more synergies within our equities business globally and within our commodities business. So we're excited about it going forward. Great. Thank you. Thank you.

The next question comes from Dan Fannin with Jefferies. Please go ahead.

Thanks, and good morning. And I guess as a follow-up, we think about options market making, and you obviously saw strong quarter-over-quarter growth despite industry volumes coming down. As you look at the capabilities and what you've built out, is there anything that you're lacking? And just trying to think about the potential of this business and kind of the growth from here, is there anything on your end from either a capability, technology, functionality that still needs to be built out, or is it now just more you know, kind of the blocking and tackling of normal competition?

Yeah, no, Dan, it's a great question, and good morning. Look, it really is blocking and tackling. Like I said in answer to the last question, it feels to me like it's 2009, and, you know, I'm a younger man, and we're at Virtu, and we're starting to launch U.S. equities, and then we launched FX, and then we launched energy products. You know, it is a laborious time period. you know, time-taking, if you will, activity to grow a business. It's what we have done exceptionally well here. And you grow in step functionality. I remember when we launched Virtu the first day we traded, we had spent, you know, a year getting the thing ready, and we made $24,000 the first day. And Vinny said to me, don't worry. The next time, you know, you'll get excited when it's $100,000, and then you'll get excited when it's a million. And you know what? He was right. He was right about a lot of different things. It's the same thing with options. We started two years ago. We were making a pittance. and we're banging our head against the wall, and all of a sudden you have a good day, and you get connectivity, and you add new venues, and you learn about the micro-market structure of each venue. It is a very difficult thing to build a market-making business. The good news is we've done it before. We have all the blocking pieces and all the credibility and all the capital that we need to do it. It's just a question of doing the hard work to build the business. And we've done it before at Virtu, and we will be successful in it because that's what we do. So there's no impediment. The only impediment is the frustration of time and of having the right personnel to do it. We have all of those things, and so it's just going to take putting our heads down and doing the hard work, which we like doing here at Virtu.

Got it. Obviously, the environment is much different to Q versus the previous several quarters. Can you maybe talk about the progression of ANTI on a monthly basis throughout the quarter? I know you've gone away from the shorter-term stuff, but maybe some context for how Q3 has started and just from a run rate perspective.

Yeah, that's fine. Obviously, we've got to wait for monthlies. But yeah, I mean, the quarter was – I don't recall each of the months. I could probably look them up here. I mean, it doesn't – I have no recollection that there was a big uptake and then a downtake. It was kind of around the same feeling for the entire quarter. It felt like a little bit, Dan, like the market was just taking a deep breath between the election and all of the – events, shall I say, surrounding that, you know, new administration, you know, COVID spending bills, potential changes to tax policy, opening, reopening, you know, what's going to happen, vaccine rollout, all this kind of stuff. It was clear that the marketplace was taking a deep breath. Volumes overall were down. Volatility was markedly down. Payment for order flow for equities, for example, was down 41%. from Q2 to Q1 is obviously a significant indicia about retail engagement. You know, there was just a lot narrowing of spreads during the quarter. You could see because of realized volatility being down, you know, almost 40 percent. So, look, we were very, very competitive during the quarter. We gained market share in our 6.05 business. Our options business continued to grow. So, it's a constant, you know, fight here, if you will, to continue to maintain and grow our market share and to improve our growth initiatives. And that's what we continue to do. So was I satisfied with the quarter? No, I'm never satisfied with the quarter. If we had made 68 cents, I would have said we should have made 72 cents. So that's what you want out of it. I've never been satisfied with any quarter we've ever had, even when we've made $2.05. So I know we can do better, and we will continue to do better. The most important thing, though, is that the plan that we lay out you know, a year and a half ago, whatever it was, where we said, listen, this is what we're going to do. We're going to grow this firm organically. We're going to continue to fight to maintain and to grow same-store sales. We're going to manage our expenses the way we've always managed our expenses, and we're going to be incredibly judicious about capital management. That's a nice way of saying if a penny, every penny here that we don't need for market making that's not nailed down, we're going to return to our investors in the form of our 96-cent dividend and buying stock back. And that's my game plan for the foreseeable future.

Thanks for answering my questions.

Thank you.

The next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hey, guys. Good morning. Thanks for the question. So, I mean, look, so the market-making business continues to be volatile, as we know, quarter to quarter. But I was hoping we could take maybe a little bit of a step back. And, Doug or Joe, if you could talk about – the confidence level around sort of the lower end of the range of NTI per day, so call it about $6 per day in your slides, as you look out this year, next year, the year beyond that. So maybe help us frame how much in your budgeting plans and your growth initiatives is expected to come from things that are smaller today, like options that might scale, that could compensate for any of the volatility in some of the legacy businesses. So just trying to get a better framework of how to think about the minimum revenue levels for the company.

Hey, Alex. It's Joe. The answer really isn't any different than over the past year. When you look at slide five, those illustrative ranges of outcomes where the chart starts with six, I think from the first time we put this chart out, every time I've talked about it, we emphasize this is manual. This is an annual illustrative range. And that quarter to quarter, we could be below it. Look at first half to date, we're at 8.6. And why are we confident kind of starting to try to stick? Again, look at slide five. Look historically, stripping out all of the initiatives, stripping out the organic growth options, block and everything else we talked about. You know, there's three companies together. You're going to start with 5.5 average, empty. You're going to add on the growth initiative. This is why on an annual basis I think we're very confident you're putting out this chart and saying, you know, that's the low end. But quarter to quarter, you know, things are going to continue to be volatile. You know, and we take a step back on this quarter and look at kind of the levels of volatility. Look at where we are. We're printing a $0.63 quarter in a pretty cool environment. And buying back $100 million worth of stock, 4% of the company. I think, as Doug said, we're just going to keep hammering on that. Year to date, we're between 8 and 9. All the numbers that we put out in terms of share we purchased, in terms of where we should come in EPS, We're spot on in terms of that guidance. So I still feel pretty good about kind of simplifying the story that way.

Okay. And I guess just around the new initiatives, again, like options, when you look out the next, let's say, year to two, what percentage do you think of anti could come from things that are much smaller today? Okay.

Well, again, you know, I look at it, you look at the new initiatives chart, you can see, right, there's in 2018, you drew $160,000 a day. And in a, you know, muted quarter, they were half a million a day. First quarter of 2021, they were almost a billion. We put that range of half a million to a million five. I mean, I think pick your, you know, they'll continue to grow through the cycle, like options for health care. and just look at it versus the median, I think. It's hard to pinpoint on a straight-line basis, Alex, but just look at it at this quarter as 9%. It's been consistently between 7%, 8%, 9% over the past couple of quarters and past year. I'd expect it to uptick a little bit as we continue to hopefully get closer to that 5% a day. I'd expect it to

All right, cool. Thanks very much.

The next question comes from Chris Allen with CompassPoint. Please go ahead.

Hey, morning, guys. Maybe just to follow up on Alex's question on the new initiatives, we saw year-over-year decline from 2Q20 to 2Q21. I'm assuming most of that decline was driven by lower contribution from the quant strategies from KCG. Maybe you could just give us some color there. What's your year of your growth, and what businesses within the new initiatives feel better on a near-term basis versus others right now?

Yeah, I think I'll take that one. Yeah, you hit it right on the head, Chris, which is, you know, there's going to be volatility within the growth initiatives because there's more marketplace opportunity. I mean, so, for example, ETF blocks, in the second quarter of last year. You know, maybe, you know, I kind of wish that would happen again today, right, because we'd be better positioned for it. But you probably couldn't have a better environment for like fixed income ETF, block market making than you had in the second quarter of 2020. So, it's kind of hard to compare Q2 2020 to this period because realized volatility down 65 percent. So, you know, a lot of the what we're doing there you know, options block ETF is susceptible, right, to the whims, you know, the whims of volatility, right? You're going to see that, you know, capital markets, which is more of a commission-based business, you know, know, but the lion's share of what we're doing in the growth area will be impacted by volatility. So the way to look at it is, you know, look at it over the longer cycle, as Joe indicated. You look at what the CAGR is, and it's, you know, it's meaningful. So there's nothing really to read into there other than, They are parts of our market-making business. They will, you know, continue to grow organically as they have, but there will be periods where volatility, you know, ramps it up and ramps it down. And as Joe said, it is consistent. It will be somewhere between, you know, 7%, 8%, 9% of our adjusted net trading income. And our expectation and hope is that as a contributor to the overall firm P&L, that they continue throughout the cycle to grow.

And you know, Chris, we bucket the initiatives into the existing markets, growth versus new markets. But if you go back to the earlier periods, if you look at 2018 on that slide, most of those amounts, 2019, most of that was from the existing markets. So in a volatile business where you have a quarter like the second quarter of 2020, which is a great environment, you know, the growth in the existing markets, you know, the legacy case strategies, you know, block of business, you're going to, you know, perform better, right? So you're starting from a much smaller base in the options market making, market, and some of the other stuff, and those are continuing to grow, but they're just growing from a smaller base. So that's another reason why your intuition is correct. Yeah.

And then I also wanted to ask about execution services. Last quarter, if I recall correctly, you talked about some of the growth in the recurring elements of the business. It had been taking market share from other players. Maybe you could give us an update on both of those angles and maybe talk about where you are from a customer penetration perspective.

Yeah, sure. Great question. So, look, I mean, that is – I love that business, right? We obviously – We've grown it organically from an inorganic start because we combined the Knight and the ITG businesses together. We extracted a meaningful amount of synergies. And let's be candid, like we, you know, when you buy a customer business and you effectively fit every customer, we're migrating everything you've been using for the last umpteen years is terrific. But guess what? We're migrating onto this new technology and this new platform called Frontier, which is the Virtu platform. Trust us, it'll be better. You'll have a better experience. And so that's been a bit of a process. I am very grateful and thankful to our customers who took the time to do the A-B testing. And they have seen that the Virtu system is highly performant. And so as a result, we are winning share and winning wallet. Our market share in Q2 was higher than it was this time last year. We are adding new asset classes. to Triton. Triton executed its first fixed income trade and its FX trades during the quarter. We've added new asset classes, CDS and swaptions to our RFQ hub products. So we're doing things that we talked about when we bought ITG, we merged with ITG rather, that we thought would be impactful to our customer base and will help us grow. And that's what we're doing. So we're focusing on leveraging our core technology to do more for our clients, and addressing opportunities that we find in the marketplace. And we will continue to grow. In terms of the, you know, the capital markets business can be a little more, you know, up and down, right? A little more lumpy is probably the right way to describe it. And, you know, similar to, you know, I guess what you'd see at a large investment bank. And so capital markets has been a fantastic business for us. The guys that run it are wonderful and have vastly exceeded even my own aggressive expectations as to performance. um you know and but it was down from q2 to q1 not by any fault of their own just because the market was less robust and so uh you know i continue to be excited about the trajectory of our execution services business led by steve cavoli who's done a great job great job and you know the last thing i'll say with regard to some of our subscription businesses we really launched these big data offerings i guess you would call it our open intelligence and our open python um products out of our analytics business, which clients and customers really like a lot. So, again, a lot of really, really good tailwinds in that business. Again, it's still going to be driven a lot by volumes and what the marketplace offers, but excited about that business going forward.

Thanks, guys.

The next question comes from Sean Logan with Rosenblatt Securities. Please go ahead.

Hey, guys. Good morning. I hate to continue to harp on payment for water flow, but I do have one question maybe for you, Doug. It seems there's some misperception of wholesalers' dependence on PFOP. So I was just wondering if you could explain in your own words how what the impact of a ban, putting aside the chances of that happening, would be on Virtu or wholesalers in general.

Yeah, I mean, thank you, Sean. It's actually a great question. I should have actually, in my little diatribe before, I should have actually mentioned this. I mean, payment for order flow is an expense to Virtu. It's picked up in our B, C, and E line in our GAAP financial statement. So it's an expense to us. It's not revenue to Virtu. Obviously, we're paying it, right? Every single retail broker, wealth manager, whatever you want to call them globally that sends us 605 eligible order flow does it based on the amount of price improvement we are providing to that broker. Let me repeat that. Every single broker we get routes to us based on price improvement, not payment for order flow. There is a small subset of retail brokers, and we all know who they are. It's all public. It's all transparent. It's all out there. Yet it's a conflict, but yes, it's fully disclosed. that as part of our arrangement with them, asked us to pay them a rebate. And that's fine. It's been going on for 30 years. This is not some new, nefarious market structure, niche of the market that somehow some people uncovered. So the ecosystem works. So if payment for water flow were to be banned, which it will not be because that is nonsensical, It has fostered initiation in this country, so I cannot believe in a rational world that that would happen. But putting that aside, it would have no net effect to Virtu at all. They might ask, why am I doing this and why am I so strident about it? Because, one, my customers like it, and two, I think it's just the right thing to do. I think the ecosystem, I'm very, very proud of it. So at the end of the day, You know, there are brokers, including a very big one in Boston, that everybody knows that doesn't take, you know, payment for order flow for cash equities, and that's fine. And they route, you know, 99% of their marketable orders to wholesalers. Why? Not because they're getting any payment for order flow. They don't take a nickel of it in cash equities. They route because we provide superior execution quality and a guaranteed execution. And so they've effectively, you know, outsourced that service convert to and to the six or seven other wholesales that they deal with. And these are really, really smart, really, really successful people with access to every piece of technology, understanding of the market that they possibly could. So in what universe is that wrong? And in what universe is that not good for the retail investor? And again, that's why I will continue to be front-footed on this, positive and strident and very transparent, because I know that the wholesaling ecosystem is has provided an enormous amount of value and has enabled an enormous amount of innovation. People talk about lack of access to this and that and equality and whatnot. We should all be very proud that in this marketplace, anybody that has an iPhone or some type of device can download an application from I don't care what broker it is and for no dollars, zero dollar commission, can buy not only just a share but $5 worth of some stock that they may have interest in. That's empowering. That's democratization of a marketplace. And so, you know, that's what competition and regulation has brought to this country. We should all be very, very, very proud of that.

Great. Thanks. And then sort of along those same lines we've heard, we've heard talks of vertical integration from the retail brokers and and things like that. So I just wanted to get your thoughts on that or, you know, just an update on, you know, what you're seeing on the M&A front in general.

Yeah, yeah. So it's a great question. Look, I mean, I think when people say, and look, I'm not trying to talk about any particular broker or anybody, what anyone has said. You know, they're all my customers. We love them all, okay? I am the Switzerland here of customers. At the end of the day... People are concerned about conflict. So the notion that a retail broker would somehow start up a market-making unit and try to internalize its own flow. I mean, if there is concern about payment for order flow where you have a third party, multiple third parties in a fully transparent, regulated way providing a rebate, can you imagine what the regulators down in Washington and at FINRA would say about a – a retail broker starting up its own wholesaling unit. That's the first thing. The second thing is it's actually, it lacks a fundamental understanding of how wholesaling works. The reason the ecosystem works for Virtu, Citadel, Susquehanna, Two Sigma, UBS, and everybody else is because we have 200 relationships. If we were solely a market maker for pick your name of ABC broker, we would not be in business today. It doesn't work that way. You need a full cornucopia of these orders that balance against themselves You know, we have had many periods of time, days, weeks, months, this will surprise people, where we are losing a meaningful amount of money from large retail brokers, individuals, right? And we adjust our execution quality. Sometimes it gets better, sometimes it gets worse. But if we were solely trying to provide market-making services to a single retail broker, it would not work. So the notion that a retail broker which has No ability to do this today would somehow wave a magic wand and throw some fairy dust on a situation and become a wholesaler with regard to its own order flow. I mean, candidly, it's almost naive, I guess, is the right way to describe it. I mean, Schwab sold its market-making unity to UBS years ago. E-Trade got out of the business. That is what Susquehanna is today. So that ship has sailed. I don't think it's getting back into business. into court anytime soon, because in the intervening 10 years since those firms got out of the business, it's just gotten more competitive. And execution quality, thanks to the competition and the fine efforts of all of our retail broker partners, has improved 750 percent. So the margins in this business have shrunk dramatically. So it just doesn't make sense to try to do it for an individual broker. So anyhow, I've talked too long on that answer. I think it's kind of counterfactual to suggest otherwise. And I'm happy to answer any other questions you got.

Thanks, Doug. Appreciate the answers.

Again, if you would like to ask a question, press star then 1 to join the queue. The next question comes from Michael Cypress with Morgan Stanley. Please go ahead.

Okay, thanks for taking the question. I just wanted to ask about buybacks. In the sensitivity table that you guys show on page 8, if I'm just looking at the scenario of $8 a day of daily trading net income, which is like $2 billion of adjusted trading net income for the year, and then I kind of offset that with the expense guide and say at the high end of $645 million, would suggest that your cash generation is, call it, about $1.4 billion. or about a billion after tax yet the range you show for buybacks is about 300 to 400 so that's like a 30 to 40 percent payout ratio and then you think about the dividend on top that's another 10 so all in it looks like what you're showing on the page is a 40 50 sort of capital return payout ratio on that eight dollars it would just seem uh that you have a lot more capacity to potentially return more than that, particularly since you stopped paying down debt. I just wonder why that's not the case to pay out substantially more. Maybe you could walk us through the different uses of your free cash flow. Sorry for the long question.

You have interest. You have taxes. You have business. You have, you know, we do model in here some excess cash flow suites. because we have that in the terms of our debt. So you've got to factor those things in as well. I think the nominal amount of debt is appropriate going forward. And obviously, if we had an outsized quarter where we were called on the debt and had to repay a chunk of it, we would obviously look for an opportunity to refinance and kind of get that back to the nominal level that we think we are at today. So we're at the right capital structure today. So I guess to the extent that you want to model in kind of like a re-upping of any kind of reduction because of a required repayment, then you're right.

Got it. Okay, thanks. And then apologies if I missed this earlier. I hopped on late, but just hoping to talk a little bit about the monthly progression of the adjusted trading net income throughout the second quarter. And maybe you could also touch upon the mix and composition within the different strategies, how that sort of evolved, and then how you see the environment shaping up in July for the environment relative to those three months of the second quarter. Thanks.

Yeah, sure. Good question. I did. Dan Fannin, I think, asked about this before. Obviously, we've gotten away from monthly results. But what I did say is, you know, there was, to my recollection, there wasn't a material, you know, swing from, you know, April, May, June. I mean, it was kind of a consistent month, I said earlier. and I'll repeat, which is that, you know, it felt like the wind kind of came out of the market a little bit, and people kind of took a deep breath. Volumes were down almost 30%, and realized vol was down 30% to 40%. All of the metrics I know you have access to and you're aware of. So, you know, that kind of combined for the type of quarter that we had, which, again, if, you know, if this is the new normal in terms of volume of volatility, you know, we'll take it. It's obviously... you know, it provided a reduced market-making opportunity. But, you know, we gained 605 market share. Our options business did better. You know, relative, you know, our ETF block lines were roughly flat relative to the marketplace being down. So, you know, we continue to march forward. Again, we're not, you know, I've kind of gotten away from the monthly financial, and I've gotten away from prognosticating about, like, the next quarter. So I'm not going to really comment on July other than, you know, to note that it looks like some of the volumes and volatility numbers, Reno, are coming back in July. You know, August has always been either kind of a feast or famine kind of month, Michael. You know, sometimes, you know, when the S&P downgraded the United States in 2012, it was a great month for a market maker. And then other years, everybody's in the Hamptons. So it's hard to Maybe they're in the Hamptons already because they've been there for a long time. So it's kind of hard to look forward beyond that. Again, you know, we're running this firm for the long term and trying to get away from kind of, forget about quarter-to-quarter fluctuations, but certainly month-to-month because I just don't think that they're really meaningful in the longer story that we're trying to lay out here. Great. Thanks so much. Thank you.

This concludes our question and answer session. I would now like to send the conference back over to Doug Sifu for any closing remarks.

I just want to thank everybody for taking the time, and I would be remiss if I did not note and comment, as Chris can and Billy Holtz have, about Rich Rapetto's running style. Rich, we're proud of the fact that you're out there exercising, and we assure you that you are much faster than Joe and myself. We are not a running management team. We would beat you in the shot put. Anyhow, we look very much forward to engaging with our investors and talking to you all next quarter. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.