Virtu Financial, Inc.

Good day all, and thank you for joining the Ferti's Financial 2022 First Quarters Results Call. My name's Louisa, and I'll be operating your call today. If you would like to ask a question, you will have the opportunity to do so at the end of the presentation. Please press star, followed by one on your telephone keypad if you wish to ask a question. I now have the pleasure of handing over to your host today, Andrew Smith, Head of Investor Relations. Andrew, please go ahead.

Thank you, Louisa, and good morning, everyone. Thanks for joining us. Our first quarter 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, 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 beliefs 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 those 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 releases and encourage you to review the description of risk factors contained in our annual report and Form 10-K and other gap results, we may refer to certain non-gap measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margins. These non-gap measures should be considered as supplemental to and not superior to financial measures prepared in accordance with gap. We direct listeners I'd like to turn the call over to Doug.

Good morning, and thank you, Andrew. This morning, we reported our first quarter results, which reflect a 7% quarter-over-quarter increase in adjusted debt trading income to $8.1 million per day and adjusted EPS of $1.27. These results cap another strong quarter for Virtu. I'm pleased with our results for this quarter and particularly pleased with the continued success of our growth initiatives and our global efforts to improve firm-wide internalization. Our market-making business produced $6.2 million per day in the quarter, 6% more than we achieved in the fourth quarter. Our diversified business saw strong performance overall, and in particular in our non-customer market-making businesses. We saw particularly strong results from Asia and ETF market-making, as well as our commodities market-making, where we were able to capitalize on continued volatility in crude and other commodity products. Firm-wide, our strong performance was driven by several factors, including, most significantly, the continued progress we have made on our efforts to improve internalization, which optimizes how we manage opportunity and net positions across the firm. The better we internalize, the less spread we pay away to the street, and the more we can save on brokerage, exchange, and clearing fees. Our global multi-asset footprint and our collaborative culture means VER2 is uniquely positioned to achieve higher levels of inter and intra asset internalization. As we discussed on our prior calls, we believe the benefits of these ongoing enhancements will continue to bear fruit for the foreseeable future and will continue to grow as we expand to new asset classes and geographies. Our execution services segment also performed well in the first quarter, where performance was driven by our workflow products, particularly our EMS Triton Valor. I'm really proud of the work this team has accomplished since the acquisition of ITG. As a reminder, we focused on two principal objectives in our execution services business. First was to streamline our offering by moving clients to our new global enterprise technology, Triton Valor, and second to focus on delivering more value to clients by building new features which help them scale and reduce operational risk. This quarter, we've begun seeing results from these efforts. To date, on the Triton side, We've migrated well over 90% of our clients to the new technology, and with respect to enhancement, we've seen good uptick in the use of automation, where traders are able to routinize busy work in a safe, controlled manner. Our capital markets ATM business was also a meaningful contributor to our organic growth this quarter, and we are optimistic for its continued expansion. We've added more seasoned professionals to the ATM team, and we are excited for the pipeline of new business to materialize. As we mentioned on prior calls, Virtu's unique combination of market-making and execution services allows us to provide liquidity in size and scope unlike any other ATM provider. We continue to see impressive progress in our business this quarter as our stated organic growth initiatives grew to 10% of our adjusted net trading income, or $821,000 per day. Within these initiatives, our growing options business delivered another solid quarter of growth on the back of expanded symbol and venue coverage, as well as new technology deployment as we increase our footprint globally. Growing our options capabilities remains a top priority, and we are investing significant resources to become a wholesaler and option to service our retail partners. As we have mentioned on prior calls, We set out a couple years ago to build an options franchise from scratch by leveraging our infrastructure, technology, and market structure expertise. Additionally, we did this in part to ultimately leverage one of Virtu's most important and unique strategic assets, the connectivity and relationships that exist between Virtu and the nearly 250 retail brokers in the U.S. and abroad. We decided to focus initially on the handful of products that compromise a great proportion of the volumes and options. This allowed us to develop and sharpen our pricing capabilities in hyper-competitive environments. 2021 was an important year for us. As we allocated resources and built and expanded the infrastructure and risk management systems required, we began trading options in Asia and expanded our symbol coverage past the initial index products to single name instruments and grew the team to fill gaps in our capabilities and accelerate our growth. In 2022, We will continue to build out this framework, expand the product set, and add to our core group of talented traders and developers. Our crypto market making continues to progress as well, as we allocate more traders and technologists to expand our activities across major venues. We now trade over 100 crypto products across the United States, Canada, Europe, and Asia, including the ETFs. We continue to support the launch of a US-based spot Bitcoin ETF for crypto, and are working with issuers to be ready to support these funds at launch. Looking at the macro environment, most measures of volatility were up versus the fourth quarter, although some broader market indices like the Russell 2000 saw significantly reduced volatility. That said, retail participation of percentage of overall volumes was down with market-wide Rule 605 volumes down 15 to 20 percent from the fourth quarter. Although, as you will see in our supplemental materials, the shared volumes of retail remain strong at over two times what they were in 2018 and 2019. To us, this indicates the long-term resilience of the retail investor as a significant presence in the market. The outbreak of war in Europe was impactful from a volatility as well as, of course, a humanitarian standpoint. We continue to see disruption in the macroeconomy from record inflation. as well as the continued emergence from the global pandemic and issues around supply chain and other economic disruptions. Our efforts to expand our footprint by entering new markets and products combined with our continued enhancements to our core businesses compounds the sustained growth potential of Virtu from secular and macro tailwinds. Virtu remains committed to disciplined expense management and scaled operations, means that our success is not tied to a single trend or type of macro environment. We are well positioned to success in any environment as we endeavor to continually raise our baseline performance across the gamut of macroeconomic environments. Turning to some of the more recent amendments from the SEC and the impact on our industry, we have been vocal and consistent in calling for fact and data-driven reform where warranted. we believe a data-led approach is consistent with the SEC's mission and practice. In recent weeks, we have joined basically the entire industry in challenging the SEC's proposed amendments to various rules, including Reg ATS, rules regarding share repurchase, and 10b-5-1, among others. While not all of these rules' proposals will have an impact on Virtu, we feel it's imperative that the SEC follow established proper processes for responsible rulemaking to ensure proposals today and in the future are good for the market. As you can see in our published comment letters, these proposals are clearly rushed, ill-advised, and statutorily impermissible because they do not follow the prescribed guidelines for rulemaking under the Administrative Procedures Act, that the SEC won't consult with the industry in good faith and proposed several reforms is disappointing, but sadly not unexpected. On the other hand, we applaud the CFTC and its chairman, who has taken the exact opposite approach. We remain in continuous dialogue with clients, lawmakers, regulators, and key industry stakeholders regarding market structure policies that provide investors with more information and investment choices, and that make our markets more accessible and more transparent for investors. As I look back on the past two years, I would note that we have entered a new phase of post-acquisition integration Virtu, where the benefits of our global business have become evident as the significant cash flows of our business generators are available to return capital to our shareholders. To that end, since the inception of our share repurchase program in late 2020, Virtu has repurchased $732 million of our shares at an average price of about $29. This represents 9% of our company net of normal cost new share issuances for compensation purposes. I refer you all to page 8 of our supplemental materials. We clearly lay out the earnings power of the new post-acquisition virtue and our use of excess capital for the foreseeable future. We believe this presents a clear, compelling investment story. Now I will turn it over to Joe and Shawn. who will provide more detail on the quarter before taking a question. Joe?

Thanks, Doug. Sean and I will be brief before we get to Q&A. We thought it would be a good time to review some of the measures we began to take in our communications with investors around clarity of expectations for Virtu, drivers of growth and what we believe was and continues to be a significant opportunity to create value for our shareholders by repurchasing our shares. at these levels. If you look at slide 8 in our supplemental materials, you can see a snapshot of our expectations across a range of outcomes. I would note that we have met or exceeded the guidance provided. We began presenting this information in significant detail in the middle of 2020. Revisiting today allows us to provide an update as well as to reiterate some of the core principles. First, volatility is one of the largest drivers of our business, and so investors should expect our results to be variable. However, we believe given the initiatives around growth, the reduction of variability in our expense base, and the consistent application of excess cash to share repurchases, we have more clarity and confidence around the growing baseline of our anticipated results. Second, in addition to the growth we have demonstrated in new initiatives, and expansion of our core businesses, we believe we're well-positioned to benefit from favorable tailwinds as the global economy anticipates and reacts to an inflationary period with contemplated interest rate increases as well as continued elevated historical levels of retail activity. Third, we have made good on our promise to manage our capital structure, and we believe this has created value for our shareholders. Early in this quarter, we refinanced our long-term debt and now have $1.8 billion of term loan outstanding, a leverage level we believe is acceptable at any outcome on this page, which allows us to buy back our shares at what we believe are attractive long-term values. Given our successful acquisitions in the past, we are often asked about the potential for more acquisitions. The hurdle for an M&A opportunity continues to be very high given the number and size of opportunities already on the table with options, crypto, ETF block, fixed income, and ATM. Of course, we explore any opportunities. However, at the present time, we do not see any investment that competes with repurchasing Virtu shares and anticipate that this will not change going forward. Combined with our growth initiatives and enhancements to our core businesses, our continued buyback should help elevate Sean for some brief comments before Q&A.

Thank you, Joe. In the first 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, totaled $505 million, or $8.1 million per day, which is 7% higher than the fourth quarter of 2021. Market-making adjusted net trading income was $382 million, or $6.2 million per day, was $123 million, or just about $2 million per day, which is a 12% increase from the fourth quarter of 2021. Our adjusted EPS was $1.27 for the first quarter, 7% higher than the fourth quarter of 2021. Adjusted EBITDA was $344 million for Q1, up 5% from $328 million in the fourth quarter. Our adjusted EBITDA margin was 68% for the first quarter, which is the same margin that we reported for the fourth quarter and full year 2021, and continues to be reflective of our efficient cost structure and disciplined expense management. For the fourth quarter, our overall compensation expense was $103 million and our cash and overall compensation ratios were 17% and 20% of our adjusted 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 later in the quarters as we refine our specific compensation dollar targets. Looking forward to the remainder of 2022, We do not expect a significant fluctuation in our cash compensation expense from historical levels. However, I do want to note that compensation will vary based upon the overall performance as well as the number of employees. We believe that we have reached a relatively steady state with the balance of our operating expenses, which are outlined in slide 9 of our presentation. As such, we expect our communication and data processing, operations and administrative, and depreciation and amortization expenses for 2022 to remain in line with 2021 actual amounts. As Joe mentioned, in January we successfully revised the $1.6 billion of long-term debt that was outstanding at year end and upsized that to $1.8 billion. As a result, we expect that our annual interest expense will increase proportionately to approximately $83 million per year, as outlined on slide 9 of our supplemental materials. Our capitalization remains adequate. We remain committed to our 24-cent quarterly dividend, which we have consistently paid over 25 quarters in every environment since our IPO, and our approximately $287 million share repurchase in the first quarter demonstrates our continued commitment to return capital to our shareholders. We'll now turn the call back to our operator for Q&A.

Thank you, team, for your presentation. If you wish to ask a question, please press star followed by one on your telephone keypad. If you wish to remove your question or feel like your question has been answered, please press star followed by two. We ask you to kindly limit your question to one to allow all participants to ask their question. And if you wish to ask a follow-up, please repeat the process. Our first telephone question today comes from Richard Rapito of Piper Sandler. Richard, please go ahead.

Yeah, good morning, Doug and Joe and Sean. So the buyback, you know, pretty impressive, you know, $287 million in the quarter. And I guess, you know, there was some – it appeared it was opportunistic, you know, block repurchases from GIC. But going forward, I guess – Should we go back, Joe, I guess, to the table on page 8? In other words, are we going to deduct the excess buyback in 1Q from future how we calculate buybacks going forward? If you average $100 million a quarter roughly at this NTI, are we turning $87 million through that? Are we going to count?

uh all the get buybacks in there yeah rich i get uh i get your question uh i would say going forward use the uh numbers in the buyback ranges on page eight so you know for the remainder of the year uh whatever proportions left and however we perform you know should correspond to the level of buybacks i say the level of buybacks in the first quarter were elevated for a couple of reasons. You mentioned some of the opportunistic block trades that we did. When we had the opportunity to refinance, we applied some of the excess proceeds from that refinancing to buybacks, not all of them. So that's driven some of the excess you see in the first quarter. And then I think as you and I have spoken in the past, there's going to be some quarter-to-quarter changeability, and I think maybe in Q4 we did a little bit less on a proportionate basis, and so we did a little bit more on a proportionate basis in Q1. So all those factors in the mix elevated it, I would say, which we're obviously very happy with at these levels, but going forward, I would apply the ranges on page eight.

Got it. Thank you. I'll get back in the queue. Good, solid results.

Thank you for your question, Richard. Our next question comes from Alex Blaustein of Goldman Sachs. Alex, you may begin.

Hey, guys. Good morning. Thanks for the question. So I was hoping we could spend a little bit of time on the sort of unit economics in the retail business versus the sort of the institutional business. And while I know the answer is probably going to be no, we don't talk about it, I was hoping we could at least help delineate kind of how does the mix in the business between retail and institutional might impact NTI, right? Because what we're, I guess, seeing now is retail is really strong relative to kind of pre-COVID levels, but seems to be moderating. But volatility is high and institutional activity is really high. So helping kind of put that together would be super helpful. Thanks.

Yeah. Thanks for the question, Alex. I appreciate it. And, you know, you're right, obviously, we have not broken down our results by, you know, those subunits for a reason. I would say your observation is correct. You have seen as a mix of business and U.S. equities, an uptick in institutional participation. The point we made in the script, and it's in the supplemental materials, however, is that you've seen a systemic change in the U.S. equities market in the sense that you have significantly more aggregate notional retail participation in U.S. equities than you did in pre-pandemic levels. prior calls, it wasn't the pandemic that triggered this. It was the commission-free training phenomenon that was initiated, obviously, by Robinhood and then challenged and met on a competitive basis by Schwab and Fidelity and the others, right? And so that really has driven the opportunity, and we've made the case continually that that is systemic. In terms of opportunity and capture rates and whatnot, I mean, the answer is obviously it depends. It depends on the macro environment. It depends on what's happening in that particular day in the marketplace. So when there's excess volatility, bid offers tend to accelerate. People need more immediacy or desire more immediacy in their executions, and you'll see a corresponding expansion in bid offer spread. The second thing I would say, if the retail business is meaningfully different than our non-customer market making segment, which is I assume what you're referring to when you say institutional in the sense that in the retail business, you know, we're in the market continuously and we need to be in the market continuously and we have, you know, an arrangement with our 250-odd clients that when they send us market orders, they're printed and done. So that can be very good and it also can be painful when there are retail imbalances. So, again, I'm not trying to avoid your question. I'm giving you the kind of it really does depend on the market condition. And that is, frankly, if you take a step back, one of the benefits of the scale and the diversity that we have built in our business, and that was intentional. So that we have quarters like this where retail can be strong, but our non-customer retail segment, not a GAAP segment, but you understand what I'm saying, can have an outsized quarter because of pockets of volatility in commodities and in Asia and ETF block. And so, again, more prosaically, the core strength of this firm is the diversified financial services platform that we have built that we are attempting to add more products and more widgets to. So, again, I'm not trying to avoid your question. I'm just trying to, as an investment thesis, provide a larger framework for understanding why and how Virtu will continue to drive. all to page 8, which I think is a very nice way of looking at our business and saying, okay, within the following conditions, you know, X times Y is going to equal Z, right? And excess capital is going to be applied to buybacks. And so over the next, as I've always talked about in these calls, the next 8 to 12 quarters, just if you look back at the last 8 to 10 quarters, you know, you'll have a very good sense as to where this firm is headed.

Got it. All right. Thank you, guys. And by the way, totally unrelated, but thanks for doing the call early. There's a ton of burnings going on today, and thanks for overlapping less other calls. Appreciate it.

We recognize your responsibilities, and we try to adjust accordingly. So thank you.

Thanks.

Thank you for your question, Alex. Our next question today comes from Ken Worthington of J.P. Morgan. Ken, please go ahead.

Hi, good morning. I'm going to follow up on Alex's question and also his comment. Thank you for the time in the morning. It's very helpful. So digging into the market-making business, market-making revenue, or NTR, looked like it was up about $10 million sequentially to the 382. If we think about the business in equity versus FIC, I would assume that FIC was up sequentially from 4Q to given the volatility in the volumes we saw coming out of energy and FX and your progress in options, and it suggests the market making business revenue was actually down in 1Q versus 4Q. So I guess first, is that right? And if the issue is sort of the retail equity business, which you guys have sort of highlighted throughout the presentation, if we look at the business today, what portion of equity market making or America's equity market making is really tied to that 606 business versus what is left of sort of legacy for two to kind of fall upon Alex is just trying to size this. And I know it will change, but is it, are they split? Is it 90% retail? Is it 90%? It's totally not 90% institutional, but help us get a better sense of, of how that equities business breaks down.

Hey, Ken, it's Joe. I, I, I'd say first off, you're right, we don't break it out. We provide market-making results because of the reason Doug said and that there's a very diversified business there that includes non-equities businesses. You're right as well that the businesses that were up or performed well or exceeded the were more in some of the legacy FIC areas. Energy, in particular, obviously with the volatility around crude and crude products, we did well there. I wouldn't draw too many conclusions, therefore, about customer market making versus equities in customer and equities outside of customer. equities market-making businesses that are not part of the 605 business. And, you know, as Doug pointed out in his remarks, that the retail participation for the 605 business remains elevated historically and is at actually very favorable levels and, you know, looks very resilient, right? So I'm not sure I'd want to go into 90-10s versus 80-20s. We do have a diversified business outside of 605 that includes fixed income currency, commodities, equities, and all the other things that you're familiar with.

Yeah, but to be clear, I mean, you can go back, obviously, we used to break this out, and certainly Knight was a separate public company. I mean, it's nowhere near 90-10. It's much more of a balanced business. Yes. And the non-customer market-making sub-segment, if you will, had a really, really strong quarter. The retail market-making business performed consistent with the metrics that we tracked and opportunities internally. As I have said to you guys, I mentioned this in VOCA and I've said it in prior calls, it is difficult as an outsider to look at a retail customer market-making business and just look directional, you know, days and situations where you have significant retail buying and significant retail selling. Virtu and the other market makers don't have some magic elixir to, you know, satisfy the market makers can lose money in those marketplaces. If you look at retail share volumes versus the fourth quarter, they drop roughly 18%, right? So that's kind of like an indication of what the opportunity is, and that's what we track internally along with, obviously, retail buy versus sell imbalances, which can have an impact on trading in a way that won't impact our non-custom market-making business.

Okay, great. Thank you. I tried. Great.

You get an A for effort.

Thank you.

Thank you for your question, Ken. Our next question comes from Alex Cram of EBS Investment Bank. Alex, please go ahead.

Yeah, hey, good morning, everyone. Maybe the comments at the beginning, you mentioned several times, Doug, the benefits from internalization within the firm. Certainly not something new, but curious you mentioned a few times. So just thinking through here, where are you in this process, I guess? I assume you're constantly improving things, but can you maybe – Also put in the context of unit economics, if you think of the last couple of years in particular since ITG came on, like how much of your, I guess, unit economics has gone up and how much you still think there is room for improvements here outside maybe the constant improvement, like any low-hanging fruit that you still haven't pursued?

Yes, it's a great question. Let me answer it more generally, and I'll ask you this, George. Sure. What would not show up in the financial statements, obviously, is, you know, spread, fade away, right? Like, in terms of, you know, the easy example I always give is, you know, when you have an option market-making business, you're trying to grow, and you obviously need to, you know, do a delta hedge. It's a hell of a lot easier. It's less of a distraction, frankly, to pass all those needs and fills and opportunities on to a separate business. group within Virtu that obviously that's what they do for a living. So that's the kind of point I've been trying to make which is, hey, we are one firm. It's part of the collaborative culture we have. We don't pay people separately based on debts. We don't have guarantees. This is not a trading firm. It's a financial technology firm. So when you look at like our overall compensation, yeah, it will ebb and flow somewhat with results but it's not like people are making 50% of what they bring in. part of the cultural overlap. The reason I started to emphasize it, and these guys will go through some of the results, is you're exactly right. We've made these two significant acquisitions. Some of the challenges around internalization was, you know, you had to collapse broker-dealers and the equivalent outside of the United States. And some of it was technological, right? When you're on a single platform and you can effectively, Virtu is a series of matching engines. If you think about architecturally how we're set up, once you have migrated all of the flow into a single Virtu stack, if you will, it becomes just a heck of a lot easier for the quants and the traders and the technologists here to realize the fruits of that endeavor. As well, you obviously have more negotiating power and tiers and things like that that you can negotiate with ATSs, exchanges, and whatnot around the world.

Joe, I don't know if you want to add any color. The color is that if you look at page 16 in our supplement, we break out the net trading income by segment. And if you look at just the market making segment, if you convert the adjusted net trading income results, for example, this quarter, 382 million, just look at the gross trading income of 516, that percentage is 74%. And that's the highest level since the first and second quarter of 2020. in those kind of frenzied days. So I think a lot goes into that calculation. There are multiple asset classes obviously included in that market making segment. Some of those asset classes are more expensive to trade from a conversion of the gross to net than others, but all things being equal last quarter of 73, and then in the second and third quarter of 2021, it was 61 and 64%. So that's kind of how we convert our gross trading income into net trading income. Obviously, the higher percentage, the better. And you see that, you know, and that's part of that is the fruit of this kind of, you know, reduction in brokerage credit and exchange fees, you know, from better fee tiers, internalization, et cetera.

Very good. Thanks. I'll jump back in the queue. Sure. Thank you.

Thank you for your question. Our next question today comes from Dan Fannin of Jefferies. Dan, please go ahead.

Thanks. Good morning. I guess, Doug, I wanted to follow up. You've mentioned in past quarters your optimism around the sustainability of retail participation. You mentioned earlier today just with regards to zero commissions. I guess we're starting to see the slowdown. Can you just kind of walk through why you don't – I guess your outlook from here in terms of what you think retail participation may or may not look like and if you're still as bullish as you were before?

Yeah, great question, and thank you for it. Look, I mean, I look at the same metrics you do, and obviously we talk to our clients all the time. I look at, like, account openings. I look at, obviously, balances, and then I look at how that has rippled through in terms of market share and notional size. And, you know, we put a slide in the supplemental materials about on page 10 that kind of tracks it from pre-zero commission to today. Obviously, you saw the upswing in the mean stock period and then it certainly has fallen off but to me the new normalized level is where we are at now and I think a lot of that is just because of the proliferation of accounts and sizes and also I think you can't minimize the proliferation of all the new crypto venues which have driven interest in markets overall and that will continue to percolate through. FTX has talked about becoming and equities business as well. So I think that will continue between zero commissions and mobile trading and ease of use and self-directed trading and participation among young people being a thing that is here to stay. That really drives my optimism around this being a systemic shift as opposed to some secular everybody's stuck in their basement pandemic shift. I mean, people are now out of their basements. doesn't appear like we're going to have any more stimulus checks. It doesn't seem to be a policy that has any support in Washington, and yet we continue to see heightened participation among retail. I would also point out, Dan, that this is a global phenomenon. We have seen a significant increase in Europe in terms of retail participation and clients that are coming to us with interest. We continue to see very strong interest in Asia, and indeed, In both of those regions, we see interest in 24-hour trading from those clients into U.S. equities. So I think the world will continue to become more 24-hour driven. And then the last phenomenon, which I think is important as well, is brokers innovating and creating this opportunity for fractional shares, which we have helped them to facilitate. So that obviously reduces the notional size I want to buy. a share of textbook, but it's $1,000, I can buy a tenth of a share for $100. So I think all of those factors drive my conclusion that this is a systemic change. Will there be fluctuations to quarter to quarter? Yes. But I do think it really has kind of changed the playing field in a dramatic fashion.

Helpful. Thank you.

Thank you.

Thank you for your question. Our next question today comes from Sean Horgan of Rosenblatt. Please go ahead, Sean.

Hey, guys. Good morning. Just first questions on the organic business and the organic growth initiatives. Obviously, doing well there, growing to 10% of the overall business. So I'm just curious if we could get an update on sort of the components of that and specifically on crypto and options and how we should think about the size of each of those and the contributions towards growth going forward.

Yeah, it's a great question. Obviously, we've talked a lot about options, and that's been a big driving force. With regard to crypto, I mean, in the fourth quarter, we traded roughly like 30 crypto products, and it was really like a nascent, very new endeavor for us. It was really literally doing the API connectivity work and things along those lines. Now we trade over 100, as I said in the script. I still think it's extremely early days. It feels like circa 2008 for Virtu Financial when Vinnie and I had started the firm and we were focused on equity. So it feels like a greenfield opportunity for us. We're going to run it and grow it the exact same way we grew Virtu organically, which is to look at the big opportunities, develop the relationships with the 8, 9, 10 key venues. On a regulatory front, we think that the SEC's determination with regard to not approving a spot ETF is just legally and, you know, not defensible, frankly. Our friends at Grayscale put a letter in this week from the Davis Polk Law Firm, which was unbelievably compelling. So I would be floored if the SEC ultimately either on its own volition or through litigation doesn't approve a spot crypto ETF in the next fill in the blank. It should be tomorrow, but it won't be. So I think we will continue to see opportunities grow as that marketplace evolves. We're adding direct counterparties to roll out our vCrypto solution, which again, getting back to one of the core assets and strengths of this firm, which I think people don't value in the way that we do is we have this network of relationships built over the last 30 years with over 250 retail brokers that frankly use us for guaranteed execution, trust us, know that we'll be there and provide superior execution quality for their liquidity needs. That can't be understated and it's very difficult to break into that market. It's one of the main reasons frankly why we bought So I'm very optimistic and bullish that this asset class will continue to provide revenue opportunities for us. And again, the key takeaway is it really demonstrates the value of this scaled, multi-asset class collegial environment that we have created here where we can add these widgets, which is effectively how we look at financial instruments, to our network at virtually zero incremental cost and drive bottom line P&F.

Okay, great. And then I wanted to just get your latest thoughts on as it relates to equity market structure. So what are your expectations, if any, around tangible actions from the SEC around equity market structure, specifically as it relates to PFOB? And if so, how are you thinking about timing? It seems like it's sort of been a series of head fakes and sort of socializing that it was something that was going to happen, and then it sort of seems to fall out of the conversation. So just curious what your latest thoughts are.

Yeah, that is a politically incorrect softball that I will do my best to muzzle myself on and swing at, but try to be as positive and CEO-like as I possibly can. So, look, we've seen, frankly, a tidal wave of proposals the SEC on topics as varied as shared buybacks and climate change disclosure and ATS reform. In my prepared remarks, you know, I was maybe not as politically correct as I should have been, but it just seems that these are rushed, not particularly well thought at, and this isn't just Virtue saying this. I mean, there's a great letter from CISPA, there was a great comment letter put in by Bloomberg and Fidelity and others that just really point out the Mistakes, frankly, in a lot of these proposals, just things that just don't really make a lot of sense. It's very clear that these are not data-driven proposals. And, you know, if history is any guide and if the Administrative Procedures Act continues to be followed, which it will be, you know, a lot of these proposals just frankly won't ever see the light of day. And they have varying impacts on virtue and will continue to be. zealous and positive and advocates for what we think is the right answer in all of these situations. We believe in data-driven reform. We believe in transparency. We believe in competition. And where the ultimate big market structure proposal comes out, frankly, I don't have a great – I don't have a crystal ball. And I think the chair has bounced a number of thoughts out there from – questioning the continued viability of payment for order flow to what he calls order-by-order competition and whatnot. Again, as we have said, we will continue to be collaborative. We have provided all types of Virtu-specific data with regard to price improvement. We are 100% convinced that the ecosystem drives significant multi-billion-dollar value from Virtu and over $12 billion of price improvement as an industry. We are frequently engaged with representatives from both sides of the aisle on Capitol Hill and senators from both sides of the aisle. We're not political. We just want to make sure that people understand how the marketplace actually works and ignore the rhetoric and ignore the headlines and, more importantly, understand how we have a fantastic, very efficient, very transparent, very, very low cost, ecosystem here in the United States, which in our opinion and in our experience is substantially better than any marketplace for retail investors in which we transact today, which is basically the entire civilized world. So we will continue to constructively seek ways to improve our great markets. We'll be collaborative. But ultimately, we're going to vigorously defend what we think is the right result here And we'll do that regularly. I'm happy to go and testify. We're happy to be transparent. And if it means that various participants from the industry end up sadly in litigation for years and years with the SEC, as it has happened historically in the past, we know we'll be a participant there as well. I'm optimistic that's not going to be the case because that makes little sense. But unfortunately in Washington, it's hard to look at a result and say, well, that's a sensible result and have it happen because there are different inputs called politics in Washington that we can't control.

Got it. Thanks for taking my question.

Thank you. Our next question today comes from Chris Allen of Compass Point. Please go ahead, Chris.

Morning, guys. Thanks for taking the question. I just wanted to follow up on a comment you made earlier about investing to become a wholesaler and options. I'm just wondering... where you are in the process there, what that entails, and how does that change the revenue opportunity within options market making?

Yes, great question, Chris, and thank you for it. Look, we have said ultimately our end goal here is to be a significant competitor in options. It's obvious to anybody that looks at the marketplace that there's a significant opportunity there because retail participation is in options is pervasive and significant and there are two significant players there and a host of others that provide services. As I just said before in answer to another question and it was in our script as well, one of the assets we have, Chris, is the relationship with the retail brokers and cash equities and so it won't surprise you to hear that they have implored us to get into 605 having that, it's clearly a knock-on benefit of the 20 to 30 year relationships that the former Knight Capital firm built with all of these wonderful clients that we have. And so we are, and the other interesting thing about options, as you well know, is that internalization, put that in quotes, is done on exchange, which means that there are these open periodic auctions that the various options exchanges have created the architecture around where the wholesalers, if you will, exercise their internalization from the flow that they receive, which means that we are capable, as is any other options market maker participant, to attempt to participate and to attempt to execute internalization on an exchange. We are currently doing that in a beta fashion with a handful of So the good news is we don't have to go to X, Y, or Z clients and say, hey, can you turn on the full spigot of 1,000 to 1,500 names and all the associated strikes, which is obviously a significant endeavor. But we can and are making the investment to test out our strategies and to begin dipping our toe in the water of internalization, if you will. with regard to customer options. We'll continue to do that in 2022. How aggressive we get and when do we start turning the tap, I guess, to the right so that more flow starts coming in, I don't know right now. It's obviously a significant opportunity. If you look at some of the published statistics around rebates that are paid for options as compared to rebates that are paid for cash equities, it's significant and so that's a significant opportunity for us as we continue to grow this firm. There's a lot of work to do in non-customer options right now, both here in the United States and in Asia, and so the guys have a lot on their plate right now, but I do see it as a very significant revenue opportunity in the future, Chris.

Great. Thanks, guys.

Thank you.

Thank you. My final telephone question today comes from Michael Cypress of Morgan Stanley. Michael, please go ahead.

Great. Thanks. Good morning. Thanks for taking the question. I wanted to ask about the Execution Services business. I was hoping you might be able to remind us here what portion of the revenue within Execution Services relates to the recurring contractual recurring revenue stream and maybe you could talk a little bit about how that revenue pool is growing within the execution services pool compared to overall execution services revenue and maybe talk about some of the initiatives that you guys have in place around growing that recurring revenue stream.

Sure. Hey, this is Joe, Michael. Obviously, we don't break that out again and it is There's a mix of revenue there that has remained consistent. I think the old ITG used to break it out in some of the quarters before we acquired them. I think it is a great business that we like. It provides a really steady stream of recurring revenue. We've been able to grow it modestly. I think the product set that it supports complements the brokerage business, and if it gets to a point where the growth in here is worth us breaking out, I think we would do that. I think right now it's a business that we like, that we've gotten, I think we've made a lot more efficient around the technology and continue to do so, and again, remains an important part of execution services. you know, from a presentation standpoint right now, I don't think we would gain much by breaking it out.

Yeah, one thing I will say, and it's a great question, is that we looked at, like, the analytics business, for example, here, and some of the other workflow technologies, that these are businesses that should be more automated and more platform-driven and more, shall I use a loaded word, more thinking of it as, like, software as a service as opposed to, like, more of a consulting kind of business. And so particularly within analytics, we now have a platform where clients can come to us and effectively pay, as you say, on a subscription basis to use our APIs and they can customize them as they see fit in order so that they can do their own analysis within their own shops. And so our larger asset managers and pension funds globally really like that a lot because they have access to our analytical tools but also Obviously, on an anonymous basis, they can look at a full compendium of their competitors and understand how they are performing on a relative basis. So that creates a real halo effect with clients because they can say, wow, that's pretty darn unique. I can have my own data scientist in my own shop as opposed to getting reports pushed out to me. I can do my own work. So that's a significance. evolution of the business. Again, as Joe says, it's a part of execution services, which is a part of our overall business, so it tends to get a little overwhelmed by what happens in market making, but clearly it is something that we're very excited about, and it creates a real stickiness with these clients that obviously have significant wallets. A $2 million a day quarter in the first quarter was a pretty impressive quarter for a non-volts bracket execution services business. I was really, really pleased with the results this quarter.

Great. Thank you.

Thanks very much.

Thank you all. That concludes today's virtual financial 2022 first quarter results call. Thank you for your questions and thank you for the management team for their presentation. Have a lovely rest of your day. You may now disconnect your lines.

Thank you.