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spk06: Good morning and welcome to the Virtue Financial 2021 Third Quarter Results Conference Call. All participants will be in 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 star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Andrew Smith, Head of Investor Relations. Please go ahead.
spk12: Thank you, Anthony, and good morning, everyone. Thanks for joining us. Our third quarter results were released this morning and are available on our website. This morning's call, we have Mr. Douglas Sifu, our Chief Executive Officer, and Mr. Joseph Maluso, our Co-President and Co-Operating Officer, and Mr. Sean Galvin, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. First, a few reminders. Today's call may include forward-looking statements which represent Bertu'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 conditions may differ materially from what is indicated in these forward-looking statements. It is important to note that any forward-looking statements made on this call are based upon information presently available to the company, and we do not undertake to update or revise any forward-looking statements as new information becomes available. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report in Form 10-K and other public filings. During today's call, in addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. Non-GAAP measures should be considered as supplemental to and not as superior to financial measures prepared in accordance with GAAP. Direct listeners to consult the investor portion of 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 terms in the earnings materials with an explanation of why we deem this information to be meaningful as well as how management uses these measures. And with that, I'd like to turn the call over to Doug.
spk11: Good morning and thank you, Andrew. This morning we reported our third quarter results, which reflect an 11% increase in adjusted EPS, in a market environment that was slightly softer than the second quarter. For the quarter ended September 30th, we generated 70 cents of adjusted EPS on $5.5 million per day of adjusted net trading income, bringing our results for the first three quarters of 2021 to $3.38 per share and an average adjusted net trading income of $7.6 million per day. Our performance in a quarter such as this highlights the success of our organic business growth plan, the goal of which is to increase our overall baseline performance in two ways. First, by expanding our addressable market by approaching new opportunities such as options market making, crypto, and virtual capital markets. And second, by increasing the competitiveness and profitability in our existing offerings through the hard work of integrating Virtu's best-in-class technology with the businesses we have acquired, evidenced by Virtu's Algo technology, legacy KCG Quant-style strategies, and our customer-facing ETF Blockdesk. I'll point out some important highlights for this quarter. Our growth initiative generated over $350,000 of ante per day, which represents 6% of our ante in the third quarter. Since 2018, we have grown these initiatives by 61% CAGR, and in many cases, leverage our existing technology infrastructure to build these businesses from scratch. In particular, I would highlight that our options market-making business continues to expand, and while we do not expect this business to simply grow in a straight line, we continue to evolve our capabilities, connectivity, and expand the amount of symbols and venues we trade. In the latest quarter, this business saw strong results despite options volumes being down 15% from recent peak in early 2021. We continue to make select key hires to expand the geographic footprint of this business and accelerate our growth. I also want to provide an update on cryptocurrencies. We have formed a dedicated team of traders and technologists and plan to add additional resources in the near term. With the launch of crypto ETFs globally, we now trade approximately 20 products across the U.S., Canada, and Europe. We are now connected to the principal spot venues to source liquidity and have meaningfully increased the number of venues and markets we can access. Given our historical expertise in market making across a diverse range of products and our scale ETF pricing combined with our global connectivity with institutions and retail clients, We believe Virtu is uniquely positioned to provide liquidity to our customers in crypto products. Our ETF block desk continues to make meaningful progress and we are now a top five liquidity provider as measured by the winning hit rate and total notional volume dealt in U.S. ETFs. I also want to note the progress we have made in our commitment to return capital to our shareholders. Our board of directors has previously authorized $470 million in share repurchases. Through the end of October, we have repurchased 13.4 million shares at an average price of $26.95 for a total of $361 million, consistent with our previously announced targets for share repurchases. In the third quarter alone, we repurchased 5.4 million shares at an average price of $25.71 for a total approximately of $139 million. As we look out on the next 12 to 24 months, we want to reiterate our commitment to returning capital to shareholders and I'm announcing that Virtu's Board of Directors has approved an additional repurchase authorization of $750 million over the next two years. We believe this level is consistent with our expectations for cash flows generated by the business and would target this time horizon to complete the buybacks. As we stated previously, we remain committed to returning capital to investors and have prioritized share repurchases for the foreseeable future. We aim to be in the market consistently, buying back shares as we work to accomplish our capital management goals. Our baseline performance through the cycle is enhanced by incremental intake from our organic business growth plan and the effect of returning capital to our shareholders through share buybacks. We believe that over the long term, This combination will be a powerful driver of growth. The steady growth of these initiatives, as well as the continued less volatile performance of our execution services segment, coupled with the culmination of our multi-year integrations of KCG and ITG, has led us to provide clear detail around where virtual results should be given various levels of A&T in a given time period. We believe our performance this quarter is consistent with that guidance and value creation for shareholders. I'd like to take a few minutes to provide an update on the recent industry discussions around market structure, payment order flow, and wholesale market making. I provided a detailed update in our last public earnings call and there has been no shortage of activity since then. As I have said many times, we welcome the dialogue and we are eager to have fact and data driven discussions with regulators, customers and other constituents as we do on a regular basis. Since I last spoke to you, it is clearer than ever that our markets, especially where retail order flow is concerned, remain fair, transparent and resilient. Study after study and empirical analysis after empirical analysis continues to show that the U.S. equity markets are more accessible than ever, and U.S. retail investor experience has never been better and is decidedly better than any market in the world. As such, we and many other market participants remain concerned that calls for reform are based on false narratives and factually unsupportable conclusions and innuendos. Today, we have a robust regulatory framework that has been developed and maintained by the SEC, FINRA, and others, which was designed to foster competition and has always been transparent, fact- and data-driven, and mostly free of the politics of the day. In an effort to further enhance transparency, we recently petitioned the SEC for specific regulatory reforms, to enhance the measurement and objective disclosure of the enormous benefits that U.S. retail investors receive today. We believe reforms centered on enhancing transparency and enhancing competition will deliver tangible, market-led benefits to retail investors. Despite the noise, innuendo, and political environment, we are confident that the facts, data, and the desire to continue to put retail investors first will win the day. When they look at the data, regulators, politicians, and critics will see that the massive benefits of today's competitive ecosystem, which regulation and transparency have created for retail investors. Now I would like to turn the call over to Joe Malusa. Joe? Thanks, Doug. Sean and I will have some brief comments, and then we will turn to questions. After several quarters of elevated market activity, realized volatility dropped to 11.1%, which is the lowest we have seen in several years, and 10% below the 2019 average. And as you know, 2019 was a historically low point for volatility. Further, U.S. equity volumes were down 8% overall, and retail equity 605 volumes in the United States were down 6.6%. Despite the market conditions that were softer than the second quarter and meaningfully below the market activity of 2020, and first quarter of this year, our market-making business outperformed, realizing $249 million in adjusted net trading income, or $3.9 million per day. We're 5% better than the second quarter. Our execution services business also performed better than the market opportunity this quarter, realizing $106 million in adjusted net trading income, or $1.66 million per day. This is 5% less than 2Q, However, VES is a global business, and market volumes were down a larger percent quarter over quarter in most regions. For example, the U.S. was down 8%, Canada was down 21%, and Europe 6%, with only APAC seeing a slight 3% increase in volumes. VES continues to contribute to our global scale and reduce the quarter-to-quarter variability to our firm-wide results. 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. Last quarter, we reviewed a slide which showed Virtue's ability to generate earnings at various levels of adjusted net trading income, coupled with our sharing purchase capabilities. Our results here to date and this quarter are consistent with prior indications the earnings and growth potential of our base level of earnings power combined with our growth initiatives and return of cash to shareholders. Since the inception of our share repurchase program less than a year ago, we have repurchased approximately 7% of the company on a gross basis. Compounding this effect over a number of years should meaningfully elevate our base earnings power regardless of the environment. With our current overall debt levels now well within a long-term sustainable nominal amount, our quarterly dividend of 24 cents is more than secure, and we have no immediate plans for any major acquisitions. Our ability to devote most of the substantial cash flow to repurchases will continue. The announced $750 million incremental repurchase authorization will target a two-year period and it's a recognition that over a sufficiently long period of time, Virtu will generate significant cash flows, however episodic. Finally, our growth initiatives, while themselves volatile quarter-to-quarter, are real and accrue to our bottom line, with significant runway to grow. It is worth noting that while many of the initiatives included in our growth slide began only a few years ago, they will not grow in a straight line as volumes and volatilities fluctuate. In the most recent quarter, we witnessed continued strength in some areas such as options, crypto, and virtual capital markets, and experienced a slight slowdown in others, like Block ETF. We remain bullish on these initiatives and the potential for them to contribute meaningfully towards growing our baseline performance in any environment. These organic initiatives, together with a substantial cash flow and appropriate levels of debt going forward, evidence Virtu's ability to thrive in any environment while producing significant returns to shareholders. And now on to Sean to conclude. Thank you, Joe.
spk02: In the third quarter, as presented on slide three of our supplemental materials, our adjusted net trading income, which represents our trading gains instead of direct trading expenses, totaled $354 million, or $5.5 million per day, which is 2% lower than the third quarter of 2020 and 2% higher than the second quarter of 2021. Market-making adjusted net trading income was $249 million, or $3.9 million per day, 3% lower than the year-and-a-quarter, and 5% higher than the second quarter of 2021. Execution services adjusted net trading income was $106 million, or $1.65 million per day, which is a 1% increase year-over-year and 5% decrease in the second quarter. Our adjusted EPS was $0.70 for the third quarter, 11% higher than the second quarter of 2021. The third quarter, our overall compensation expense was $84.6 million, which is basically flat from Q2. Our cash and overall compensation ratios were 20% and 23.7% of adjusted net trading income, respectively, which is also consistent with the second quarter. As I previously said about our compensation ratio, consistent with past practice, we approve year-end incentive compensation to a range of percentages earlier in the year.
spk00: We will update guidelines for 2022 expenses with our fourth quarter report early in 2022.
spk02: cost kinds and actual performance for 2021. Adjusted EBITDA was $210.8 million for Q3, up from $196.8 million in Q2, down from $248.7 million in the prior year quarter. Our adjusted EBITDA margin was 59.5% for the third quarter, which is an approximately 2.0% increase from the second quarter. Capitalization remains adequate. Our long-term debt was $1.6 billion at quarter end. Finance interest expense is $20 million for the third quarter, which is flat from both the second quarter as well as prior year third quarter. We remain committed to our 24% quarterly dividend, which we have consistently paid over 25 quarters in every environment since our IPO. And our approximately $130 million demonstrates our continued commitment
spk06: We will now begin the question and answer session. To ask a question, you may press 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 2. Please limit yourself to one question and one relating follow-up question. At this time, we will pause momentarily to assemble our roster.
spk05: Our first question comes from Rich Rapido with Piper Sandler. You may go ahead. Hey, good morning, Doug.
spk10: Good morning, Joe and Sean.
spk05: And congrats on the good quarter and thanks for your candid remarks on equity market structure.
spk10: So, you know, strong quarter. We're trying to understand, you know, one of your peers had very dismal results and, you know, blamed it on the lower volatility. You yourself recognize that, you know, volumes were down and volatility metrics were down as well quarter to quarter. So I'm just trying to see where the outperformance came from, if you could just highlight that. Any of the areas, whether it's geographical or asset class or whether it's in retail marketing, just trying to understand how you guys outperformed in the market making segment.
spk11: Yes. Thank you, Rich, and I appreciate the question. I think what you've seen in this quarter, and we've been attempting to describe it quarter by quarter, is the strength of a scaled market. global franchise. Obviously, I know the competitor you're referring to, which is a great company, but they are much more of a specialized market-making firm in that 90% of the revenue comes from global ETF market-making, which is a great business, but that's a small part of what we do globally. And the philosophy behind Virtu always was Let's try to be the best bid and best offer in every marketplace you possibly can electronically around the world in every asset class. That's been our goal. And so through the years, we've built this scale franchise. And certainly like ETF block market making in the U.S. was a little bit down this quarter, but it gets lost. like our ETF business is now internalizing off of our single object market making business and our options group doesn't have to worry about hedging their delta risk because you can hand it off to our single object market making business and we're able to leverage everything that we do globally to really improve our market making capabilities. Retail had a nice quarter. Obviously, we don't break these things out independently and individually because retail We look at this all as a single franchise and a single firm. And so a lot of the investments we've made over the years in technology and internalization, you know, continue to pay off. And I think this quarter is just emblematic of what we've been talking about, you know, over the last five, six, seven quarters, which was, you know, we're going to continue to, you know, put our heads down, work on the blocking and tackling, integrate the firm, manage our expenses.
spk00: And even though like six or five bonds were down like five,
spk10: six percent uh this quarter we did better in retail market making this quarter than we did last quarter because we worked hard and the strategies performed better oh okay that's helpful doug and uh my related follow-up would be uh you know you sort of outlined the crypto and option opportunities and they both look like great opportunities for you know, electronic market maker like yourselves. But just trying to see where you see the bigger opportunity, like with crypto, did the ETF approval of futures, you know, ETF that sort of jumps out a bit or where do you see more opportunities, I guess, crypto versus auctions?
spk11: And, you know, sitting here today, I would say options to me is a very large, compelling, very well-known opportunity. I mean, we can all look at what the total addressable market is. You all know what the volumes are. You know, everything is published by the SEC internationally. You look at the Nikkei. You look at the Nifty 50. Obviously, there's some big index options in Europe, right? So all of that kind of plays right into the Virtu market. strengths, which I just outlined in terms of being a scaled global electronic market maker. As I've reiterated a number of times in these calls, we obviously made a strategic decision to get into this business a couple years ago, and it's been a bit of a slog, obviously, reorienting our technology, our infrastructure, everything from the GUIs to the trading infrastructure to the middle and back office to make sure that we could be a competitive options market maker. We've done a lot of the work. There's more work to It's a significant customer segment here in the United States, and there's international options, and then there's a whole category of non-equity options. And as you know very well, we're a market maker of commodities products and FX products and whatnot, so the Delta Hedge there is well known and understood by us. So we're in a unique position to be quite scaled in options. When it comes to crypto, obviously, it's a newer asset class, if you will. You know, we've been monitoring it very closely. Again, we've made a strategic decision that it fits nicely into what we do as a firm. clearly with the SEC approving at least a futures-based ETF that has widened the number of participants in the marketplace and kind of plays right into the core strengths of what Virtu is all about, which is to say we are a market maker that is quite capable of interconnecting asset classes, whether they're expressed as a spot, a future, or an ETF, and that's exactly what is happening with crypto products. So, you know, you see it in Canada, you see it in Europe, and now you see it in the United States where ETFs have been launched. Clearly, if the SEC saw fit to approve ETFs, the corpus of which were spot crypto coins, you would see an explosion in ETF volumes in the United States. And that's obviously going to be good for Vertica because we're an authorized participant with all the issuers that have filed ETFs. We're very well known as a lead market maker on the New York Stock Exchange. So all the things that we do exceptionally well would play right into our hands. You know, you saw like our friends at the CBOE decided to buy Harris, which we thought was which is that people have concluded that this asset class is going to be institutionalized, right? And institutional traders want access to it. So, you know, CBOA, I hope, and we're a part of that. We were a part owner of Everest, so we're excited about that as an opportunity to further institutionalize crypto products as an asset class.
spk10: Got it. Great job, guys. Thanks.
spk06: Our next question comes from Chris Allen with Compass Point. You may go ahead.
spk07: Hey, morning, guys. Nice quarter. Just kind of following up on Rich's question just on kind of the performance in market making, maybe digging in a little bit of the competitive environment in wholesale market making, looking at Bloomberg reports that provide payment for data and retail shares executed. It looks like you guys are picking up share And coincidentally, it looks like Citadel has seen a decent amount of share since Gensler made comments around concentration risk. So if you can just provide some commentary on what the competitive environments look like, where there's been some changes, maybe in response to the regulatory pressures, any commentary there would be appreciated.
spk11: Yeah, it's a good question. And I think, you know, the chair obviously made some comments which I thought were frankly off-target in terms of the competitive nature of the environment. It's always been a very, very competitive marketplace. This, you know, somehow the notion that it was dominated by one firm, Citadel, I mean, obviously they had significant market share, but we've been punching and fighting trying to get market share for them. And other competitors have been doing the same thing for years. It's not an easy business to be in. You need to be scaled. You're providing effectively guaranteed execution to hundreds of clients in 8,000 individual names. So it's a very, very difficult marketplace to be in. Frankly, three years ago, we had effectively zero market share with Robinhood, which is one of the largest participants. We need a concerted effort, Chris, to, you know, adapt our algos to make sure that we can handle their flow. It's obviously, you know, voluminous, to put it mildly. And so, you know, I think we're now like somewhere in the neighborhood of 37, 38 percent of their marketable. This is all public information from the 605 and 606 report. You know, a number of other firms have announced that they're entering the wholesale business. Jane Street, Hudson River, these are great firms, and we welcome the competition. We think it's a good thing. It keeps up sharp, and it demonstrates the myth that somehow this is a, you know, concentrated marketplace where there's, you know, impossible barriers to entry. It's just that. It's a myth, right? So this is a very competitive market, and the winner is ultimately our retail investors. Because what has happened is retail brokers have made a business market-driven decision that rather than trying to internalize or route flow on their own, there are firms called wholesalers or market makers that are really good at it. So we provide a service, a service of ordering, of routing, excuse me, non-marketable and marketable orders. And we internalize some of them. The other ones we obtain price approval liquidity and pass it on. And we absorb all of the costs. all of the exchange and ATS costs as part of that. And that is really what this wholesaling ecosystem is all about. The retail brokers have made a conscious decision that it makes business sense for them to outsource this business because they save on expense, and also their customers get a much better execution. So I know this is not the question to answer, but I can't help myself. I have to answer it. So when you peel back the onion and actually look and understand how the ecosystem works, It is impossible for me to conclude that someone would look at this and say, you know, we need to throw this entire ecosystem out. I mean, first of all, there's no statutory basis for that, so we're really talking about nothing. But at the end of the day, the facts and the data are just so overwhelmingly competitive, it just shocks me every time I have a conversation with someone, most of whom are really uninformed about how this all works. So I answered a question it didn't even answer. It didn't even answer.
spk07: In the competitive environment, is it stable? Is that the answer there? I'm sorry, I didn't hear you. In the competitive environment, I mean, how has that evolved maybe over the last couple of quarters?
spk11: We haven't seen much of a change. Obviously, new entrants are in, and frankly, I don't want to sound flip, but we don't really worry about the competition. We're in constant dialogue with our broker-dealer clients. We understand the targets they want us to achieve in terms of price improvement. That's how they route their flow. And, you know, obviously, you know, we continue to improve what we do. And we have always been the scaled, low-cost provider. That's really the key here. That's really been the key to our growth and will continue to be the growth. And it's the same thing in our wholesale business. We view this as being a scaled business, and it is part and parcel of everything we do. So obviously the fact that we're good at non-customer market making and we've invested a lot of technology just makes our wholesale business that much better.
spk07: Thanks, guys. We'll get back to you. Thank you.
spk06: Our next question comes from Ken Worthington with J.P. Morgan. You may go ahead.
spk09: Hi, good morning. I'd love to hear how FX and commodity market making did this quarter. Was there growth in those markets from 2Q to 3Q? And I know you don't break it out, but when looking at the U.S. equity business, given sort of flattish volatility and lower volumes, how did revenue capture fare in that business? And I know you don't provide specific numbers, but directionally, was it, you know, up, down, or flat? Like, that would help me a lot. Thank you.
spk11: Yeah, sure. I mean, again, we've gotten away from looking at the various, like, sub-segments, I would call it, of our market-making business as they become smaller parts of what we do. And, you know, again, I'm not trying to avoid the question. I'll try to answer the best I can, but we do look at the firm. you know, as a mosaic of market-making and the scaled opportunity to continue to grow. And we pointed out, like, some new areas we've gotten into. So in terms of, you know, like a sub-area, you know, FX has been under pressure the last couple quarters or longer. I mean, Andrew will give you the volatility statistics. We put them all out there. So, like, you know, volumes were down in – and in commodities and volatility has been down. So in terms of how they performed, Ken, what we do is we look at like internal metrics as to what the opportunity is and then measure our performance against those metrics. And on that basis, which obviously is all internal data you don't have access to and all that kind of stuff, but on those metrics, both segments performed well. In commodities in particular, we've seen good growth in our metals segment, clearly, and in natural gas as well during the quarter because you saw the spikes in natural gas as we come into the September-October period, and finally we have some volatility in natural gas. I will say crude has been a slower area for us in the last you know, a couple, three, four quarters, and that's largely because of the dislocation in the crude market. I can't even remember when crude went negative within the last year or two. And that really impacted the ETF market as well, right? So you saw a lot of folks and a lot of the volumes in crude were impacted by that, you know, strange market event. So things like that that are out of our control, if you just look at, like, you know, crude volumes since that event have obviously been pretty dramatically down. So I would say overall, we continue to be pleased with those segments. Yeah, we're pleased with the segments, Ken. If you look at it, quarter to quarter is always tough. Even if you look at it versus 2019 and 2020, in foreign exchange, 2020, if you look at the volumes on the spot venues, they weren't really up much versus 2019. and they're kind of flat year over year. And in some of the other areas, there's been an energy as well until recently, really muted environments. And I think over the long term, if you look versus 2019, versus where we are today, we're pleased with where those businesses are.
spk02: They're still very good, solid businesses.
spk09: Equity capture, up, down, sideways?
spk11: it was up this quarter which helps our results obviously Rich had asked that question earlier and I guess I kind of vaguely answered it but again we don't publish equity capture because it can be a little bit of serendipity sometimes particularly in the retail business when you have you know moments of these meme stocks that kind of blow out and there's extreme volatility so bid offers widen but as an overall firm including customer and non-customer in terms of certainly U.S. equity which is a the numbers that we're looking at right now. We saw an increase in capture over the quarter, and I would characterize that more as kind of a growth of same-store sales. I'm trying to recall if there were moments of volatility. I'm sure there were during the quarter, but nothing really sticks out. So that's just really blocking and tackling getting better at an increase in same-store sales.
spk09: As a follow-up, I'd love to get a little bit more in-depth in the crypto rollout scenario Can you talk about the evolution of the business maybe through the quarter? And I see the prepared remarks where you broaden the resources in crypto. But are you market making at this point in spot tokens or futures? If so, what tokens are you doing? Or is the focus heretofore still been on the crypto ETFs?
spk11: Yeah, good question. So to be more specific, we are connected and trading on four major spot venues with plans to add four to five additional ones. You know, it's FTX, Coinbase, Binance, and Gemini, I think, is the other one. And we're going to add LMAX, Kraken, and a couple others. So, you know, we've obviously done our due diligence. There's more counterparty risk and whatnot because... Right now, you know, there's not really the kind of the prime brokerage and centralized clearing, all that kind of stuff. So it's a little bit of a different asset class for us. We are obviously connected to the futures world and we are a market maker in the U.S. ETF and then all of the ETFs up in Canada and Europe as well. So I would, the analogy I would use, Ken, is it feels to me it's a little bit like our commodities business in the sense that we've got, you know, spot gold and silver. We've got gold as a future and we've got clearly obviously gold ETFs and in U.S., Canada, Europe, and in Asia. So we look at that as a similar style business. And, you know, one of the things we're looking to add would be, you know, direct market making to retail and institutional customers that want a stream of products. Right now we're market making in five tokens or coins, I guess you'd call them, or, you know, however you would describe them. And, you know, we'll be judicious about adding those. Again, we're not going to go too far out on the skew in terms of adding, you know, 50-odd venues because of risk management. But we think, you know, being connected to those four and then ultimately those seven, eight, nine venues, we're going to be covering 85%, 90% of the addressable market in the universe. So that's kind of the business plan there. I would say, you know, we're doing a lot of blocking and tackling in terms of understanding the operations around borrowing and handling the wallet and, you know, moving coins back and forth. It's a little bit different. and try to do it securely and intelligently in the virtue kind of way because, as I've always said, I don't want to have a Mt. Gox type of situation, right, where all of a sudden our collateral disappears someplace. So I'm excited about it as an asset class. We don't have to have the burden of saying or deciding whether or not there's any value to these things because the marketplace has spoken. People are interested in it. We've had retail clients come to us and say, can you provide us a stream? And we're in discussions with institutional counterparties that are anticipating that. their clients will want this as an after class. So as it becomes more of a regularized, I guess I would describe it as a re-institutionalized after class, that's exciting for us in terms of what the total addressable market would be. Your analysis would probably be better than mine in terms of there's no central repository of these things, but clearly there's a ton of volume and you can see other institutions getting involved with it. So I think we're very, very early innings in terms of where this is going to head, but I'm excited to That is very, very nicely into what we do as a global market maker. And, you know, obviously we're going to add people, but in terms of like, you know, connectivity, in terms of trading strategies, in terms of like operational, in terms of being a lead market maker and being an authorized marketer. participants and connectivity. We have all those things, right? So the incremental spend for us to get into this is effectively, you know, de minimis or zero. So that's what, you know, the, again, the beauty of our scaled model is we can pivot and shift and get into these new opportunities with very, very minimal cost. Obviously, there's a focused cost and we're reallocating people from other trading areas. But we think in this instance, it's well worth the investment. Great.
spk09: Thank you.
spk06: Our next question comes from Dan Fannin with Jefferies. You may go ahead.
spk03: Thanks. Good morning. Doug, just wanted to follow up on the options market making. You talked about increased symbol and venue coverage and the prepared remarks. Can you, I guess, give us an update on kind of where that sits? Either, I don't know if you want to use a baseball analogy or just thinking about what percentage of the market you're actually interacting with and how we think about the kind of full coverage or what's the goal or time period for the kind of meeting what you think will be kind of the end state?
spk11: Yeah, look, it's a great question. I understand people are very focused on it. You know, to use the baseball analogy, we're definitely out of the dugout. You know, whether it's the first, second inning or the third inning, I don't know. But it's still pretty early innings. You know, it is a very different marketplace and very different market structure from what we are used to. We are now trading, you know, complex instruments. We're involved in auctions, which is like the, you know, a very important step to getting into what I would call customer market making or the kind of quote unquote 605 options market making. Because as you know, the market structure and options is very different than it is in cash equities in terms of off-exchange trading. Everything is done on an exchange through these auctions. processes. And so we're doing that. We are very, very active in the index options in the United States, and we are now market-making in index options. I'm happy to report in Asia, which is a significant expansion for us. We have gone out of the firm to hire laterally where we need it. We've hired options clients and experienced options traders that have been fully vetted. We've combined them with virtue technologists and people that understand market structure. And as I articulated in early in my prepared marks and in answer to a prior question, the fantastic thing about the firm is that when it comes to handing off the delta hedge or understanding pricing around either an underlying stock or an ETF or a commodities product or an FX pair, all of that DNA is already within the firm. So, you know, my friends that are options market making infer to effectively, you know, have the best hedge desk in the world, which is their own internal colleagues, right? So that's really the core strength of the firm in terms of The setup, we're now connected to all the principal options venues in the United States and understanding their DNA. I will say we're getting approached by options venues all the time because people are excited to have us as a new participant. And the last piece of the puzzle is obviously from a business development standpoint when we want to get into direct business. you know, quote, unquote, retail market making, we obviously have all of the relationships with all of the big and small players that have options flow. So all of the infrastructure and business development and, you know, people understanding who Virtu is and do we have credibility, they're all there. So it's really just the hard work, which we're very good at, and doing the blocking and tackling and getting better. I'm very, very pleased with the progress we have made, very, very pleased with the progress we've made in options, and I continue to be very optimistic in terms of where we'll be. I think 2022 is going to be a key year for us. I've said publicly, and I'll say again, we fully intend to be active in the 605 business early in 2022. Whether that's by the first quarter or second quarter, I'm not quite sure. It kind of depends upon how we do. But the beauty of that market structure, Dan, as you well know, is that you can experiment in terms of retail options market making by participating in the auctions, and that's what we're doing right now. So we're learning, and we fully intend to be a meaningful participant in that marketplace for the foreseeable future.
spk03: Great. Thank you. And then, Sean, just to clarify, I think you reiterated the previously stated expense guidance for this year. And then I know it's early for next year, but just remind us there's no more synergies coming out from legacy transactions. And we can just think about kind of a normal kind of inflation plus some ongoing spend as kind of a reasonable base framework to think about 2022?
spk02: Yeah, big picture I'd say yes. There's always a little bit more synergies that we continue to work on, but I'd say most of that has been realized already.
spk06: Okay, thank you. Our next question comes from Alex Blostein with Goldman Sachs. Go ahead.
spk04: Hey guys, good morning. A quick follow-up, I guess, on slide five around some of the new initiatives. I was hoping you guys could break down how much various initiatives certainly kind of contribute to this organic growth numbers you put on the slide, you know, either for the quarter or year-to-date. That would be helpful. And the kind of secondary part to that, I haven't heard you guys talk much about credit. And I think that, you know, obviously that corner of the market continues to get more electronically traded. What are some of the aspirations and the ideas you might have in credit? And I think you had a partnership with Market Access at some point of time that could maybe propel some of those initiatives. I'm curious to get an update there as well. Thanks.
spk11: Thank you. Let me handle the credit part, and then I'll turn the initiatives over to Joe, because he does a much better job than I do. In terms of credit, yes, you're right. I didn't put it in my prepared works. Probably should have, in hindsight, because it is. We have so many things going on. It's like you have to prioritize opportunities. Look, we think it's an important opportunity. continue to be electronified. We are now connected and trading corporates anonymously on market access. We're being onboarded for basket trading in credit, which is a first for Virtu. We've done our first portfolio trades in credit, which words I never thought I would say publicly. You know, I didn't think this would be an asset class that would be, you know, addressable by Virtu, but it is. It is. And certainly, you know, having an ETF desk that is a significant market maker in fixed income ETFs has really helped us. So I continue to see more automation. We're quoting a significant amount of size that counterparties want to deal with us. But it's a very nascent business for us, and so it has an immaterial impact on our performance today. But again, strategically, we think it's really, really important. Our block desk has real credibility. We're ranked in the top five in the United States in terms of just hit rates and volumes that we're executing. So we have become a trusted counterparty. So we have dedicated folks, Alex, that are now in our, I guess how we call it, our credit marketing group. They're attached to the ETF desk, and so we're ready, willing, and prepared to to be a liquidity provider. We've hired some business development people to go out to, you know, asset managers and pension funds and folks that need, you know, liquidity in credit. So it's going to be a growing area. Joe, you want to handle the rest? Yeah, I mean, you know, on slide five, we've kept it at this level of detail because it's really a mix of things between, you know, New businesses, if you look at the 2018 bar, a lot of these businesses underneath that $160,000 a day were zero. Obviously, options for crypto were zero. And there was a block ETF test, but it's been really overhauled and we're adding to clients. As Doug just spoke about, and he also spoke about options and crypto at length. So, Alex, I think We're gonna continue to present it this way. I think the opportunities are there. We could add things to this as we need. I think the virtual capital market business is something to highlight. That business just started last year and performance is already double .20. We hired a team and they've done extraordinarily well. You know, we are very excited about that business. We expanded the team. We're hiring someone else to market. So, look, I think we're going to keep it at this level. And part of the reason is because it's going to fluctuate quarter to quarter. You know, the decline in, you know, in realized volatility, you know, mute some of the real progress we've made here. We're going to keep it at this level, and we're not even talking about execution services on this page. That business has been really transformed, and I think outperformed this quarter as well. We're talking a lot about market making, but when we look at it internally, the meaningful expansion in the margin of that business since we acquired ITG has been really outstanding. We don't want the focus to be only on these businesses. This is a good way for us to highlight some incremental revenue that was really next to nothing just a few years ago.
spk04: Gotcha. Thanks very much.
spk06: Our next question comes from Michael Cypress with Morgan Stanley. You may go ahead.
spk08: Thank you, Marty. Thanks for taking the question. I just wanted to circle back on crypto. It sounds like you're starting to make markets in the underlying crypto coins, the physical. Just curious your perspective on what you think it's going to take to be successful in crypto market making. How different do you see that from other asset classes? What do you have to do differently there? And if you could also talk a little bit about which coins are you making markets in today and maybe talk a little bit about your process around determining which coins to add.
spk11: Yes, great question. Thank you, Michael. Look, I mean, as a general matter, as I said before, it feels like, you know, any other one of our commodities market making business. So take gold, you know, we trade gold as a spot instrument, we trade gold as futures, obviously, in Chicago and in other places around the world. And obviously, there's been a proliferation of gold ETFs in just about every jurisdiction where we are a market maker. So if you just equate crypto coins effectively to some digital measure of wealth or value like gold, it's no different. And the strategies that we are running in crypto right now are analogous to what we would do for our gold market exchange. So that's the kind of 10,000 foot why it's going to work and why it makes sense for us to be in it. As I mentioned before, however, it's an operational difference in the sense that like, you know, in For our gold market, we would go to Morgan Stanley or J.P. Morgan or somebody like that and say, hey, could you be our gold manager? We need someone actually to manage the gold for us. Can you be our prime broker in futures and in spots because we need someone to give us leverage and to handle settlements? And in ETFs, obviously, we'd be our own settlement person because we're self-clear in the U.S., but otherwise we'd use ABN, our partner in Europe and in Asia. In crypto today, as I said, those institutions, the JP Morgan, the Morgan Stanley, are largely not providing that service as a prime broker, as a settlement agent, and they're not providing leverage in capital. So we're doing it largely on our own. There are new types of institutions today. that are attempting to provide some level of, like, you know, they obviously will manage your wallet and help you move coins back and forth, and there's some leverage, but it's a different asset class in the sense that it's a new asset class and the institutions have not yet embraced it as part of a traditional financial services offering. So it's a little more work, and certainly from a risk management perspective, we have to be, rather than having... counterparty risk to JP Morgan or Morgan Stanley or Goldman, we now have counterparty risk to Coinbase or to an FTX and things like that. So we have to monitor it more closely. Those are obviously large institutions that we feel very comfortable around the risk. So it fits in nicely as a segment that we can market make in. But obviously, operationally, there are some nuances that But we're really good at understanding nuances. That's what Birch has been really good about it. I would then extrapolate to say, as I mentioned earlier, there are obviously retail brokers today that are providing crypto access to their clients. Robinhood is one, and there are others that are doing it. Those firms need liquidity as well. And so think of that as like our customer market-making business, right, where we act as a wholesaler. So it's no different. And obviously all of those firms know us very well, think we provide good service, counterparty. So we are in the process of launching, we'll just call it vCrypto, like Virtu, providing a stream as well. The other counterparty would be Robinhood or whoever the retail broker is, and obviously we know them very, very well. The last thing I would say is obviously we've got an EMS business, Triton. We've got analytics products as well. So as this asset class becomes more institutionalized, there's going to be a need for institutions as well to have, you know, EMS, if you will, to access the market. And then they're going to have their own best execution obligations. So they're going to need someone to provide analytics. So everything we do, all the products and services we provide, either as a market maker or as an institutional execution services counterparty, we intend to encrypt each of those products. like page one of the Virtu playbook. You've got something, it's a widget, we can market make it, and we can provide services as an execution service to counterpart.
spk08: Great. And just as a related follow-up, if I could, I recall in the past you were a little more hesitant about getting into physical market-making for crypto, and I think you had thought about ARIS as more of your entry point into crypto as a separate entity. So I guess what's changed from a regulatory or market structure environment that's made you comfortable to enter the marketplace? What hurdles did you overcome? And if you could just maybe share some updated thoughts on ARIS and the opportunity there.
spk11: Yeah, it's a great question, a very, very fair question. I mean, I guess I got... But now Cox, which I referred to earlier, and hacking and all those things, but as We've gotten to know firms like, you know, Coinbase and obviously Gemini and Galaxy and FTX, you know, a couple of, obviously Coinbase is now a very large public company. And as Robinhood has got into it, it's been very, it's become clear to me that, like, number one, this is an asset class that's here to stay because there's so much value associated with it. I don't have to make that qualitative judgment. But more importantly, number two, there are very credible, scaled institutions and a lot of money there. I don't know what Coinbase's market cap is, but it seems extraordinarily high. And obviously, they've generated significant EBITDA and all those kind of things. So looking at them as a counterparty with transparency, it's less about regulation. It's more about understanding the counterparties and the transparency behind them. The other thing that has evolved is that there are a number of these wallet, you know, infrastructure, I call them crypto infrastructure companies. I don't want this to be a PSA for who we're using. But there are a lot of really good companies out there that are getting into the marketplace and understand. I mean, one I will name is Gemini, who we do really good work with, and they're regulated by the New York Department of Financial Services, that kind of thing. So we feel very comfortable, Michael, with them as kind of trusted counterparties. They've got a clearing service and all that kind of stuff that we take advantage of. So it's not quite, obviously, as I mentioned before, not quite – you know, goal, if you will, in terms of the infrastructure that has been built up. But you've seen, you know, baby steps towards it. And that's really why we've kind of changed our tune and why we're excited about it and why we think we could kind of be in the middle of it.
spk08: Great. Thanks. Thank you.
spk06: Again, if you have a question, please press star then 1. Our next question comes from Chris Allen with a compass point. You may go ahead.
spk07: Hey, guys, thanks for taking my follow-ups. Maybe a quick follow-up just on crypto. Maybe you can give us some color just in terms of how much capital you're deploying this opportunity right now and how that compares to maybe how much you deploy in commodities, for example.
spk11: Yeah, great question, Joe. Yeah, Chris, obviously we don't break out segment capital, but it's not an amount that would be considered material overall in VirtuLand. I think just following up on the answer to the last question, you know, despite there being no kind of central clearing or even settlement mechanism, you know, like a CLS and FX, the market's matured in terms of some of these, you know, services that Doug was referring to. The companies have matured in terms of the size and their access to the capital markets themselves. And, you know, our ability, it's not just the amount of capital that we look at very closely here, You see we put the, in our supplement, you know, we put the amount of capital that we have deployed overall. It really has kind of remained constant over a long period of time. I mean, crypto's matured enough that it's very liquid. You're able to borrow it. We've got, you know, these, you know, wallet management, you know, transfer kind of services. And we, you know, feel like, you know, we're able to better examine the counterparts, right? That was always the thing, the bilateral thing. It's one thing to be bilateral to a prime broker that's a large global bank, and it's different with some of these venues. But again, the maturity and the amount of capital around them and the visibility to us is kind of a lot more comfortable, but we still manage it very closely in terms of maximum exposure, et cetera.
spk07: Understood. Just getting some investor questions just on the expense. I just want to confirm that there's no changes there, which implies on the cash comp side about $40 million, $50 million in 4Q comp. Is that the kind of correct way to think about that?
spk11: I think when you look at the full-year guidance, we will be at the high end of it, maybe a touch higher. I would say that full-year cash comp and total comp, I think, Year-to-date, we're at 16% and 19%, respectively. We'll be under 20%. We're just right around that. So we may be a touch higher, but we're comfortable with where we are, especially when you look at Comp 2 net trading income and then you look at some of the peers that were referred to earlier as well. I think we still stack up well. And I think just to... reiterate what Sean said about 2022 guidance. I think we've always been very specific about guidance because we've been going through large integrations where the cost base was moving a lot. I would expect it to move less in the future as things settle down.
spk07: Thanks, guys. Appreciate it.
spk11: Thank you, Chris. And I'd like to thank everybody for We'll talk with you sometime in 2022. Everybody enjoy the rest of the year. Thank you.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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