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spk02: Thank you for joining the Virtue Financial 2022 third quarter results. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note that this conference call is being recorded and will be available on the company's website for replay shortly. And now I will turn the call over to Andrew Smith.
spk05: thank you rika and good morning everyone thank you for joining us our third quarter results were released this morning and are available on our website on this morning's call we have mr douglas siku our chief executive officer mr joseph meluso our co-president and co-chief operating officer mr sean galvin our chief financial officer and miss cindy lee our deputy chief financial officer we will begin with prepared remarks and take your questions first a few reminders today's call may include forward-looking statements which represents virtues 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 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 disclosures in our press release and encourage you to review the description of risk factors contained in our annual report, Form 10-K, and other public filings. measures should be considered as supplemental to and not as superior to financial measures as reported in accordance with GAAP. We direct listeners to consult the investor relations portion of our website where you'll find additional supplemental information referred to on this call as well as reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings material 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.
spk06: Thank you, Andrew, and good morning, everyone. This morning we reported our third quarter results. For the quarter ended September 30th, we generated 61 cents of adjusted EPS and $5.2 million per day of adjusted net trading income, bringing our year-to-date results to $2.61 per share and an average adjusted net trading income of $6.3 million per day. Our business performed well. opportunity benchmarks. Our results enable us to consistently return capital to our shareholders through our ongoing share repurchases. As of today, we've repurchased a total of 31.1 million shares or over 870 million dollars in aggregate and at current levels, we will continue to be aggressive approach to everything means we're already finding ways to deploy what we are learning in U.S. equity options to opportunities and options abroad and in other asset classes. Speaking of scale, as we grow in options, For now, being competitive in options requires significant investment in technology and people to ensure that we have adequate capacity to meet our goals. We continue to make methodical progress in expanding our symbol universe and increasing our interactions with order flow from options routers. Our growth in options year-to-date is especially impressive given the market-wide options volume is relatively flat for the same period. Our growth initiative expanded to opportunity that we can address in Bitcoin, Ethereum, and other top cryptocurrencies across various forms, including SPOT, as well as ETFs and futures. EDX Markets, our venture with Citadel, Fidelity, Schwab, Sequoia, and Paradigm to develop a crypto ecosystem to serve the interests of global investors is proceeding nicely. Our global ETF block initiative also continues to contribute to our results. universe in conjunction with key investments we're making to become a dealer in the market for corporate bonds. Before I turn it over to the financial review, I'd like to speak about market structure, what's currently being considered by the SEC, and a reference to provide facts and data to the public discourse. We believe a positive element of the advocacy work we're conducting is creating a broader understanding of the extraordinary value that the current There are a number of points worth highlighting about the market structure. First, I want to be very clear that while there are still no official proposals from the SEC, it would likely be years before certain ideas are proposed, adopted, become rules, and then are finally made effective. Virgil remains publicly supportive of several of the ideas discussed by Chair Gensler in his June 8th speech. Specifically, we agree that exchanges should be able to display narrower quotes, specifically half-penny quotes for tick-constrained symbols, Odd-like quotes should be included in the SIP, and Disclosures and Retail Execution Quality Reports, Rule 605, should be modernized as we requested in our official petition for rulemaking, which we submitted over a year ago. That said, historically, FEC rules proposals with the potential for substantial market impact have followed a deliberate multi-year process of concept release, roundtables, and other forms of industry engagement designed to solicit broad, and substantive feedback on a particular marketplace theme. These processes help ensure that any final proposals ultimately borne out of the exercise are responsive to actual marketplace challenges and enjoy broad and diverse support across a range of market participants. Effective and efficient rulemaking is a methodical process. Doing it right takes time and benefits from the experience and requirements for rulemaking. Unfortunately, as was recently reported by the SEC's own Inspector General, the current chair and his political appointees tend to preference speed over accuracy, and as the SEC's Inspector General stated, lack the resources to keep up with their self-appointed agenda, potentially at the risk of adherence to the agency's own prophecies and ultimately the rule of law. The SEC's unchecked speed and lack of resources is especially worrisome to a broad range of market participants and investors, including hundreds of our clients, given that the SEC has assigned itself an ambitious agenda with numerous interrelated market structure reforms that, if enacted, could significantly and permanently alter our efficient, accessible, and resilient financial market. Despite the industry's general agreement around where the SEC should focus its efforts, the Chair's repeated misstatement of facts regarding retail order routing practices and payment order flow provides little comfort that the staff are empowered to actually listen to industry feedback or are incorporating readily available data into the decision-making processes, but are instead engaged in, as a prominent buy-side commentator noted this week, in regulation by hypothesis. We support Schwab's comments in its recent white paper that the U.S. equity markets are, quote, the deepest, most liquid, and most efficient in the world, which allows investors to enjoy narrow spreads, low transaction costs, and fast execution speeds, close quote. We also echo Schwab's concern that the SEC's, quote, calls for reform are obscuring the benefits of the current ecosystem to retail investors long-standing goal of enhancing and protecting the retail investor experience. We will remain earnest in our endeavors to engage the SEC in hopes they embrace the constructive engagement that the industry continues to offer to advance policies that enhance transparency, competition, and that promote investor choice and superior execution quality, rather than the current SEC's obviously politically motivated agenda. I will now turn the call over to Jeff.
spk08: Thank you, Doug. Based on the guidance we have previously provided, we are on pace to meet or exceed our target buybacks and financial earnings ranges for the year. Given the opportunistic refinancing we completed back in the first quarter, we would anticipate sharing purchases that correspond to the previously shared public buyback ranges for the foreseeable future. As was mentioned above, we have generated an average of $6.3 million per day in adjusted net trading income through September 30th, totaling $2.61 in adjusted EPS and $733 million in adjusted EBITDA, both on target with the ranges provided. As we said in the past, we believe the range of outcomes are sustainable through the cycle, as these levels are the result of significant growth we have achieved to date to raise our baseline performance over the years, both organically and through acquisitions. Consistent with our ethos of disciplined expense management, we have successfully held costs in line, despite the worst inflation since the 1970s, producing a 61% EBITDA margin year to date. As Doug mentioned, we remain committed to returning capital to our shareholders, both through our current quarterly dividend and the shared purchase program. Since inception of the share repurchase program, we have repurchased 12.2% of Virtue shares, and that's net of new shares issued for employee compensation. We have a long-term perspective and will continue to repurchase our shares in accordance with the ranges that we have previously shared. Touching on the performance of our segments, market making performed as expected. Broad measures of overall and retail volumes versus the second quarter were down materially. Average realized and applied volatility were down 25% and 10% respectively. U.S. equity share volumes and notional value trading were down 13% and 22% respectively. Average daily shares at IDKR, which is a proxy for retail activity, were down 9%. Rule 605 share volume in the third quarter was down 5%. All in all, our diversified market-making business performed well against this environment. Our execution services business also performed in line with the market opportunity this quarter, realizing $93 million in adjusted net trading income. It's important to note that in a quarter such as this, the multi-year integration of the XITG platform in particular that we recently completed allows us to maintain, invest in, and provide critical services to clients in a less than robust environment. We have overhauled and replatformed this technology in the Algo product suite, reduce cost dramatically, and retain our broad, blue-chip client base. And now I'll turn it to Sean to wrap up the discussion.
spk05: percent below the second quarter market making adjusted net trading income was 238 million dollars or 3.7 million dollars per day four percent lower than the year ago quarter and nine percent below the second quarter execution services adjusted net trading income was 93 million dollars or 1.5 million Our adjusted EPS was 61 cents for the third quarter. For the third quarter, our overall compensation expense was $103 million, which is up slightly from the second quarter. Our Q3 cash and overall compensation rate was 25% and 31% of adjusted net trading income respectively, and we're 21% and 25% year-to-date. Adjusted EBITDA was $181 million for Q3, which was down 14%. seven times. Finance interest expense was $23 million for the third quarter of 2022 compared to $20 million for the prior year third quarter. We remain committed to our $0.24 per quarter given, which we have consistently paid over 29 quarters in every environment since our IPO and are approximately $432 million the operator of the Q&A.
spk02: Thank you. If you would like to ask a question, at this time, please press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roister. The first question from the phone lines comes from Rich Rapeto of Piper Sandler. Your line is open.
spk07: Good morning, Doug. Good morning, Joe. So I guess the first question is you pointed investors towards looking at normalized earnings. And just trying to understand, you know, over the last eight quarters, you've averaged over a dollar in EPS per quarter. The last couple of quarters have been a little bit lower. But I guess what's your view on what normalized earnings are? You know, are the recent quarters more sort of the trend of what retail flow should be like going forward, or do you still expect, you know, the outsized quarters just from sort of event-driven volatility?
spk08: Hi, Rich. It's Joe. Look, I think the answer to that question is that, you know, that slide that we put in, we don't have it in this quarter because it was just so repetitive, so don't read anything into it. But you're right. I mean, through the cycle, we think we're going to wind up on that page, right? We had 6 million on that page as the lowest number. You know, and I think we're 6.3 year to date. I wouldn't read anything into the last two quarters as a view on the future in terms of retail participation, in terms of the institutional business, in terms of the prop business. It's just part of the cycle, right? And I think that we you know, our long-term goal is to continue to kind of move, you know, down that page, move from, you know, six to six and a half, seven, you know, up the chart by growing the business and by buying back shares. We bought back, you know, an eighth of the company here in the past 20 months or so. And I think that's incredibly powerful. The buyback ranges that are in that, And that's why, again, we didn't repeat it here, but you guys should use those as the future state, wherever we are. And we're just going to continue to grind through that. It's nothing more than that.
spk07: Got it. Thanks, Joe. I guess my one follow-up will be on regulation. And, Doug, you're pretty forceful in your prepared remarks. So I guess just on two topics, you know, Now that it appears, at least the media reporting that a ban on payment for water flow is off the table, but two things being like tick sizes and this order-by-order competition. Could you just address, like you are in favor of some tick size adjustment, but could you just comment on those two aspects? I think those are still traveling down the line.
spk06: We've been very front footed and we put a rule making proposal in over a year ago on a number of topics that we would be very for odd lot, including the odd lot, stocks that in the CBOE put out a great report on this that if you look at the penny quoting size there's ample liquidity at you know either side of the touch and it's a significant amount of midpoint executions are actually done either in dark pools or you know on exchanges and so on national securities exchanges. So we're all, there's a number of things along those lines, Rich, that we are in favor of in terms of payment for order flow and what the chair refers to as order by order execution without any detail. We've been very front footed on that, that there's just a fundamental lack of understanding by the chair as to how the entire ecosystem works, that there is competition for every order and it's very, very wholesome and between eight or nine different wholesalers and that the benefits of size improvement and the aggregate amount of price improvement is, you know, so overwhelming and so, you know, data-driven. I mean, the facts are out there. If you look at the Schwab white paper, they talk about $120 billion of price improvement over the next 10 years. And essentially, by aggregating the responsibility and exchanges. There are retail brokers that say, we're not going to send orders to wholesalers. We're only going to send them to national securities exchanges. So in my view, and I think in the view of people that appreciate and want competition in free markets, all the things that the chair wants are out there. If an ATS or an exchange wants to create an auction, there are a couple out there. will do so when regulators and this chair in particular Then, you know, institute a pilot program. Say, okay, you know, 100 names, 10 names, 20 names, 50 names, whatever it is needs to be sent to an auction six months. Collect the data, see if execution quality will improve. It won't, right? But otherwise, you know, changing an entire market structure or attempting to change and procedures of the FTC and certainly wouldn't stand muster under the United States Procedures Act. And it's not just Virtue saying that. It does have the firm's feedback with that same sentiment.
spk07: That's very helpful. Thanks, Doug. Yeah, thanks, Rich.
spk02: We now have Chris Allen from Citi. Your line is now open.
spk03: Morning, guys, and thanks for taking my question. I want to talk a little bit about expenses and just some of the different adjusted OPEX lines. Cash comp ratio is up to 25%, which is high relative to prior quarters, but on an absolute dollars basis, looks like it's pretty kind of steady. Just wondering if that's being driven by the adjusted cash comp ratio. We should be thinking about it from a percentage perspective or just in terms of the run rate from a dollars perspective moving forward. And then just in some of the other lines, where are you from a scale perspective, looking at G&A specifically, any factors that are going to deviate or drive the run rate higher from here? Are you fully built out? Do you have capacity in areas like options and things like that, or do you need to build out further? Yeah.
spk08: Thanks, Chris. You know, on comp, It's a really simple story. We have been accruing flat. And for the third quarter, we're going to look at the year-to-date ratio. So the flat accrual generated a 21% cash comp ratio year-to-date. And we're very comfortable there. So if you look historically, that's right in the zone. And you shouldn't expect too much of a deviation from that. you know, depending on where we come out in revenues, obviously. But, you know, we've always oscillated between kind of the high teens and the low 20s on the cash comp ratio, and we shouldn't deviate from that too much. So I wouldn't expect it to be the higher number in this quarter. You know, this quarter is just a consequence of net trading, including in Q1 we're at 17%, Q2 we're at 22%. So we're kind of 21%. In terms of your other question, you know, the good thing about the growth initiatives is I think a lot of the investment is kind of done and behind us. I mean, you know, we're, you know, the comms and data processing line, you know, I think we're in the, you know, the right kind of accrual range there. It was 56 in Q1, 56 in Q2, 56 in Q3. should see things pretty similar going forward so I wouldn't expect any any surprises on the on the offense and you know opposite administration kind of fluctuates you know there are some things that are causing that to go up you know like everything else you know things that we pay for like insurance and rates go up and and there's some things that kind of help us in there you know we've got foreign subsidiaries and paid bills and in different currencies, and some dollar exchange rates help a little bit there. But there's not too much noise, and I wouldn't read too much into it. I think when I look at our quarterly expenses in the past four, six, eight quarters, and I think about the inflationary environment we're in, I think that's a pretty good story there in terms of holding the line.
spk03: Cool. Maybe just a quick follow-up on just options. Just wondering where you are and your capabilities there from an infrastructure perspective. Is everything fully developed? Is your coding system fully developed? Is it now just basically blocking and tackling in terms of adding symbols, or is there more to be done in terms of building out your capabilities there?
spk06: Yeah, it's a great question. It's kind of a hard one to answer. I don't think you're ever really fully developed and fully done with anything. but so yeah there's continuing development work and options we have a very robust infrastructure that allows us to quote frankly any and and hopefully be profitable between different asset class for us. You know, we've made some great strides in terms of the symbology that we are competitive in and in taking the first step towards you know the good news is as I indicated in my prepared remarks if you know it's very easy to once we have built up that scale which we have to pivot to options that have other than equities that they're underlying delta because as you well know we have connectivity and excellence and a lot of experience and commodities and effects etc. So in terms of where we are, you know, it's very early, maybe we're in the second inning in terms of, you know, opportunity. The good news is that from a, you know, scale infrastructure, you know, relationship with the exchanges and making sure that we are, you know, capable of expanding, you know, we're in a kind of very
spk03: Great. Thanks, guys.
spk06: Thank you, Chris.
spk02: Thank you, Chris. We now have Ken Worthington with J.P. Morgan. Please go ahead.
spk01: Hi. Great. Thank you for taking the questions and good morning. The Virtu new initiatives have been about 10 percent of NTI for the last three quarters. Why has this been so stable this year as you kind of continue to build out the options and crypto initiatives rather than showing either sort of steady or episodic growth so far this year? And maybe you can highlight the major milestones you see for the crypto and options build out over the next two or three quarters or so. Thanks.
spk08: Hey, Ken. It's Joe. I think, you know, the 10% number really as a function of just where we come out overall in their trading income. It has been pretty steady. There are new initiatives in that they're greenfield and that they were only a handful of years ago. We generated nothing from these businesses, and now we're generating in this quarter half a million dollars a day. But they are subject to the same kind of volatility that the rest of our businesses. I wouldn't read anything into the 10%. I think Doug just went through some of the milestones in options in terms of building the business to scale and going for a broader set of symbols. In crypto, I think it's still kind of early days. It's probably even earlier innings than what Doug mentioned in terms of options. We're connected to multiple venues. We're trading in multiple coin, and we are doing things in a few ways, kind of being very incremental around it.
spk01: Okay. I guess maybe just to follow up on that, if you're having success in these build-outs, I would think that they would be a bigger part of your franchise over time. They don't seem to be. Is this maybe pricing where you're building the business, but it's not necessarily translating proportionally into earnings right now or NTI right now, but it will in the coming quarters? I guess I'm just trying to connect those dots.
spk08: Again, I wouldn't read too much into the percentages. You're comparing greenfield businesses that are growing yet are still sub-scaled you know, to more developed, fully scaled businesses. And I think that's kind of the two moving pieces that kind of cause these percentages to drop out.
spk06: I think the other point, the good news, is that like our non-growth initiatives, so I guess you would say our more mature non-customer businesses had a really nice quarter joke. I mean, they outperformed our metrics. So relative, so it's the, you know, the numerator is improving, but the denominator growth initiatives, you know, have expanded, but they're obviously subject, as Joe indicated, to market conditions as well, right? So the fact that they kept pace with the rest of the business, which is, which, you know, did well, outperformed our internal metrics, and that's a positive.
spk08: Yeah, I mean, Ken, another way to say it, and obviously, if you use an exaggerated example, it's the non-organic references that you know, had declined or deteriorated, you know, the percentage of anti would be a lot higher, but that wouldn't be a good thing.
spk06: Right. We would have denominator, like, you know, declines, and you all would be even more unhappy. Okay.
spk01: Okay, great. Thank you very much.
spk06: Thank you. You're welcome.
spk02: We now have Daniel Fannin with Jeffrey. Please go ahead.
spk04: Thanks. Good morning. Just a question, Joe, on the buyback. Obviously, just a quarter to date, I mean, sorry, year to date numbers, I think tracking close to 430 million. And I want to just go back to the normal sensitivity tables you're tracking, obviously well above that. I think you mentioned the debt pay down as a reason. But as we think about the fourth quarter and beyond, where do you think, where's the normalized level? Should we be referring to, I guess it's just not matching up with the ANTI numbers.
spk08: Yeah, that is a very good question. Actually, I I think the the year to date number is well above that range because of the financing we did in in Q1 and and took that opportunity to dedicate some of those excess proceeds to the to the buyback. I think in the future we should refer to those those buyback ranges that correspond to the ante per day and you know hold us to to kind of being
spk04: we'll be tacking more you know hopefully to the midpoint or higher those ranges but uh yeah that's that's the way to look at it just said i guess so just even for this quarter you uh you know you're tracking you know you did that in the first quarter but obviously even this quarter your number is quite higher so um if we just annualize the anti for 3q versus what you bought back so is that benefit of the the financing done and that still pulled through this quarter as well?
spk08: A little bit. We also had some realizations from some of these investments that we had done as part of market structure initiatives where we get pulled in and use some of those proceeds. We did this transaction with Market Access with our QHub and Aris did a along the way. Again, our view is we have more than adequate capital to run the firm. We have a debt level in place that's sustainable through any cycle that's on that range. And everything else will be returned to the shareholders. So you've got two factors this year. You've got those investment proceeds. Like I mentioned, you've got the debt refinancing proceeds. those public buyback ranges.
spk04: Understood. Okay, thanks.
spk08: Sure.
spk02: Thank you. If you would like to ask any further questions, please press star then one on your telephone keypad. Our next question comes from Alex Dawson of Goldman Sachs. Your line is now open.
spk09: Hey, guys. Good morning, everybody. Thanks for the question. Maybe a little bit of a bigger picture question, Doug, for you, just around the market quality. You know, we continue to hear liquidity concerns in sort of various pockets of the financial ecosystem. You guys obviously participate in many different asset classes around the world. Any different areas of concern you see from just the market structure and the market quality perspective? Any particular asset class that you highlight? And in light of those, are you augmenting your sort of trading and behaving activity?
spk06: yeah thank you it's actually a great question i think within uh global equities uh you know there's in most instruments as adequate liquidity certainly as you go out the skew to uh stocks that maybe and a lot of our institutional clients I think that is wholly regulatorily driven. And so bad facts make bad law and end up in bad results. And then the government scratches their head and says, how come banks aren't holding the inventory? Well, because you told them not to and you charge them a lot for it. So that's, you know, unfortunately an offshoot of the financial crisis and, you know, maybe the unintended consequence of that is that, you know, the treasury market, you know, has had some creakiness in it. One of the reasons, that we have gotten into in such, for us, such large scale, fixed income ETFs and now credit trading, is that there's an opportunity for non-dealer, non-big dealers, if you will, to be significant market makers. I would not have thought five years ago that Virtu would be a quote unquote dealer on market access, which we now are. I would not have thought that Virtu would have, you know, the ability to price and create and redeem on pockets of liquidity and the need for incremental liquidity providers. We're never, ever going to replace the large dealers. We're not Goldman, we're not JP Morgan, and we don't want to be. Those are very, very different and wonderful institutions, but there is a need for non-bank liquidity providers like Virtu and the Dozen or other firms that can do that. And look, it leverages our core base that we have the same great clients that we have in retail and in other areas that are looking for prices and so it's just another incremental benefit to the scale that we have and it's not just here in the United States you know we are building out and have a fairly robust ETF block
spk09: in the narrative got it um super helpful thanks for that um my second question a little bit more nitpicky but i guess i was hoping you could unpack the dynamic between trading revenues and sort of cost of trading uh this quarter particularly on the market making side um i guess we could look at you know some of this closure you guys on the back the the trading income i think is flattish quarter of a quarter uh but bcme and uh payment for the flow was up um i want to say in the teens Again, sequentially, typically these two kind of move together. So maybe just give us some sense of kind of what's been driving the divergence this quarter. Is it just higher margin requirements and maybe higher interest rates charged by the FCMs and prime brokers? And how should we think about it as that relationship going forward?
spk08: No, it's not the latter. It's just more of what you were kind of alluding to before and former. It's just a mix of business. It's just a mix of business between, you know, the prop market making, the customer market making, and execution services.
spk09: Okay. Within asset classes, right? Because on the execution services, I think it was fairly consistent, but the divergence was larger on the market maker.
spk08: Correct. Exactly. And again, that's just a mix of business.
spk09: Got it. Okay. Thanks very much.
spk07: Thank you.
spk02: Thank you. We have no further questions on the lines. We'd like to hand it back to Doug for any final remarks.
spk06: Thank you so much, and thank you, everybody, for participating today. We hope you all enjoy the end of your year, and we look forward to chatting with you in late January or early February. Thank you. Have a great day.
spk02: Thank you all for joining. That does conclude today's call. Please enjoy your day. You may now disconnect your lines.
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