Virtu Financial, Inc.

Good day, and thank you for standing by. Welcome to the Virtu Financial 2024 third quarter results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised. that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Andrew Smith, Head of Investor Relations. Please go ahead.

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

Good morning, and thank you, Andrew. This morning, we reported our third quarter results. The quarter ended September 30th. Virtue earned 80%. 82 cents of adjusted EPS on $6.1 million per day of adjusted net trading income. We generated a 55% EBITDA margin and $215 million of EBITDA, both on an adjusted basis. We delivered strong performance this quarter in both our customer and non-customer market-making businesses. We continue to progress our growth initiatives with strong performances in crypto options and ETF blocks. Our businesses performed well against headline volatility and volume metrics across the globe. Our Virtu Execution Services business was flat quarter over quarter, which we count as a solid performance given the muted environment for institutional volumes. We will talk more about VES in a minute. Overall, these results are especially impressive considering that global volumes remain quite low. U.S. equity share volume and notional turnover were down 4% and 1% respectively versus the second quarter. Volumes and notional in Europe were down 20% and 9% versus the second quarter, while volumes in Asia Pacific were up about 4%. Beginning this quarter again with Virtu Execution Services, our business performed very well. Adjusted net trading income was essentially flat from the second quarter, delivering $100 million of ante or $1.6 million per day. This performance combined with a similar result in the second quarter represents the highest levels of daily adjusted net trading income since the second quarter of 2022, when volumes were 10% higher and volatility was 61% higher. I spoke last quarter about how Virtu's scaled operations afford us the unique ability to continually invest in our global multi-asset platform to meet clients' needs. We have evidence. that our multi-year investments are yielding positive results as demonstrated through third-party validation and recent client successes. A major contributor to this is what we are calling Virtu Technology Solutions, a trading and data analytics infrastructure offering for growing midsize and or major regional broker-dealers. VTS allows us to distribute our scale technology efficiently and strategically to other brokers empowering them with leading technology to better serve their clients in a cost-effective manner. Along with our global suite of multi-asset class enabled product and solutions, we expect to continue growing our VES business long-term. In addition to our VTS offering, we expect our growth to be fueled by our flagship products and solutions, including industry-standard data analytics platform, global workflow and execution management systems, or Triton, and our world class of trading algos. Our multi-asset class EMS platform, Triton, covers equities, fixed income, FX, and derivatives, and our next generation algos integrate machine learning techniques to further align our clients' investment decisions with their implementation results. Additionally, we are focused on increasing our reach in regions and markets previously underpenetrated by Virtu, such as the Middle East, India, and Japan, as well as expanding into new client segments in existing markets to efficiently address opportunities to offer technology solutions. In the past few months, we've seen several client wins in VES as we increase and expand our client relations. These wins include adoption of our new switcher algo, developed with machine learning and allows Virtu to increase its position on broker trade rankings across global clients. We've seen increasing adoption of VTS, as I mentioned earlier, and while it is still early days, our new agency fixed income RFQ offering is in production and growing. The senior hires we made to help us address this important opportunity have been in place for most of 2024 now and are leading key efforts to broaden the distribution of our offerings. I have mentioned before, we are as excited about the future of this business as ever. As always, our VES business is anchored in long-term partnerships and our evolving offerings are driven by client demand and built on our global multi-athlete class scalable technology. Turning to market making, our business performed very well in the third quarter with our customer and non-customer market making businesses both delivering a solid quarter. We continue to improve our team's cross-desk internalization enhancements to help us manage risk and to explore ways to reduce our trading costs and address more of the opportunities we see in the market. Our Asia and U.S. equity segments showed particularly strong performance this quarter. For our customer market making business, the market opportunities as measured through July and August 605 reports suggest an elevated opportunity of about 9% compared to the second quarter. However, based on preliminary 605 reports for September, the opportunity declined significantly in September, reducing the quarter-over-quarter increase in quoted spread to a low single-digit percentage. As we expand the products and markets we trade, we remain very well positioned to capitalize on future volatility and opportunities. We continue to deliver success in new areas where we had no presence only a short few years ago. Our organic growth initiatives generated $632,000 per day in adjusted net training income this quarter, contributing about 10% of our ante. I will highlight results from the standout performance this quarter. Building our global options capabilities continues to be a top priority. Our growing options business delivered a strong performance in the quarter. In addition to our U.S. cash equity options, We are leveraging our growing capabilities and options to target global opportunities by optimizing the brokers we're using, increasing our local data center footprint, and streamlining our technical integrations within local markets. We continue to grow in ETF block by onboarding new clients and broadening our distribution. In addition, our growing symbol and underlier coverage capabilities have opened the door for broader relationships with ETF issuers and fund managers, enabling us to service their regular trading and rebalance execution needs. Our crypto market-making business continued to pace. Spot Bitcoin ETF volumes were up about 2% compared to Q2, and the new spot Ethereum ETFs are trading about 50% to 60% as many shares as the spot Bitcoin ETFs. US options on crypto ETFs are getting closer to launching and it is a natural extension of our crypto and options market making abilities to support these exciting products. We continue to expand our crypto market making efforts by supporting new listed products and thoughtfully adding new exchanges and tokens. As we grow, we continue to build out our cross product internalization capabilities, which allow us to be more competitive, keep more of the spread, and reduce trading fees. With that, I will turn it over to Jeff.

Thank you, Doug. I'll just pick up on the market environment this quarter, which was mixed and very similar to the prior quarter. Compared to the lows of the second quarter, realized volatility of the S&P 500 was up about 52%. However, it's important to note it's only up about half as much if you exclude the significant volatility in the first week of August. U.S. equity volumes were down 4%, and U.S. option volumes were up almost 7%. Retail activity indicators in the U.S. were also mixed. The IBKR equity share volume was down 6% versus the second quarter, and the 605 spread opportunity through August was up 9%, but as Doug noted, the preliminary 605 report for September suggests that the full quarter-over-quarter change will be in the low single digits. Global equity volume was also mixed with the realized volatility of Eurostox index up 28%, and then Nikkei up 168%. In fixed markets, FX volumes were mixed. Energy volumes were up 5%, while high-yield credit volumes were down 3% versus second quarter. At September 30th, 2024, our total trading capital, which is on slide 14 in the supplement, stood at $1.8 billion. Our incremental returns on capital, as you can see, remain excellent over a long-term basis, demonstrating our service-oriented model and our ability to use our capital prudently. To that end, in the third quarter, we used a portion of our free cash flow to repurchase 1.7 million shares at an average price of $28.80 per share. To date, we have repurchased 49 million shares at an average price of $25.24 per share. The quarter end share count was 161 million shares outstanding, bringing our buybacks on target to fit within the ranges we have set forth publicly. Since we initiated our share repurchase program, we have repurchased 18.8% of the fully diluted shares of Virtu that's net after new issuances. Our share repurchase program year to date is within the guidelines we've published. Results from the market-related businesses like ours will always vary with volumes and volatility, but slides eight and nine illustrate the sustained earnings power of our business and the positive operating leverage we enjoy from prudent capital management, as well as our growth initiatives and the cumulative impact of the share repurchases. On the expense side, our adjusted cash operating expenses were $173 million in the third quarter, our run rate cash OPEX is up about 5% year-over-year, consistent with the prior guidance. Our cash compensation ratio was 23%, and our total compensation ratio was 28% for the quarter, compared to 26% and 32%, respectively, for the full year of 2023. We expect cash operating expenses to remain within the recent historical range, And we expect the cash compensation ratio to also remain within historical norms. Regarding our total cash operating expenses going forward, we continue to assume low single-digit overall increases in non-compensation expense. And with that, to conclude the prepared remarks, I will turn it over to our Chief Financial Officer, Cindy Lee. Cindy?

Thank you, Joe. Good morning, everyone. On slide three of our supplemental materials, we provided a summary of our quarterly performance. For the third quarter of 2024, our adjusted net trading income, or ANTI, which represents our trading gains net of direct trading expenses, totaled $388 million, or $6.1 million today. Market-making adjusted net trading income was $288 million, or $4.5 million per day. Exclusion Services adjusted net trading income was $100 million, or $1.6 million per day. Our third quarter 2024 normalized adjusted EPS was 82 cents. Adjusted EBITDA was $215 million for the third quarter 2024, and our adjusted EBITDA margin was 55.4%. On slide 11, we provided a summary of our operating expense results. For the third quarter of 2024, we recorded $190 million of adjusted operating expenses. We continue to maintain an efficient cost structure and disciplined expense management, which has helped us to control our operating expenses during the inflationary environment. Financing interest expense was $24 million per day for the third quarter of 2024. With the benefit of our recent refinance and the interest rate swap contracts, that we entered in the prior years. Our blended interest rate was approximately 7.3% for our long-term debt in aggregate. We remain committed to our $0.24 per quarter dividend, and combined with our shared repurchase program, demonstrates our continued commitment to return capital to our shareholders. And now I would like to turn the call over to the operator for Q&A.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while I compile the Q&A roster. The first question comes from Patrick Moley from Piper Sandler. Please go ahead.

Okay, one moment for our next question.

Our question comes from Ken Worthington from JP Morgan. Please go ahead.

Hi, good morning. Thanks for taking the question. Maybe first we're seeing a proliferation of brokers offering retail investors a access to options and now futures. This seems to play directly into the business model of Virtu. Are futures products developing the same payment for order process that we see in equities? And how is the attractiveness of futures trading for Virtu versus, say, options and equities just based on a profitability basis?

Yeah, thanks, Ken. And it's a keen observation. Obviously, we've been following that closely. And I think, you know, as you suggested, it's an exciting opportunity for us. I mean, I think it's very complementary to what we do in our existing, you know, cash equities wholesale business in that we have connectivity and relationships with all of the aforementioned retail broker dealers. We've been, you know, in the prior night and now virtue have been doing business with these firms for, in some cases, 20, 30 years. So they're very, very confident in our ability to provide efficient two-sided liquidity to these clients' needs. I think certainly if you have active day traders that are looking for more intraday leverage, perhaps the futures products and derivative products are more attractive. We see that with our retail offerings and our retail clients in Asia in particular, I would say in Japan in particular, where there's a very active CFD market. So we think it's complimentary. We're excited about it. We don't think it's going to cannibalize the cash equities business. It's probably a different sleeve, if you will, of retail investor that's more of an active day trader as opposed to a more cash continue to partner with these great retail firms that we've had great long-term relationships with. And I think it's under appreciated that that really is a customer service business in part, obviously price matters a lot, but we get scored by all of our retail brokers on uptime and customer service and all of those things. And so it is very much a white glove business for us. And that goes back, you know, the 20, 30 years, the folks that we inherited, the wonderful folks that we inherited from Knight Capital that continue to provide that service to these customers. So as they expand offerings, that's great for Virtu.

Okay, great. Just a modeling question, brokerage costs were at the highest level since COVID-19. we've definitely seen some bigger activity quarter since then with low brokerage costs. So was there anything about the mix of business that drove brokerage costs higher this quarter? And how do we think about the go forward?

Yeah, no, it's a great observation. It's a great question. It's one of the quirks, unfortunately, of the Section 31 fees. You probably know how they work. Actually, they are a transaction tax. I shouldn't call them Section 31 fees. They are a transaction tax. They're very lumpy because they're measured in arrears by statute, and the theory is they're supposed to fund the SEC. So, yes, we are funding the agency that then goes and tries to do bad things to the market, ironically. But that rate changes twice a year, and so it's not as smooth as it otherwise would be. You know, you can kind of go back in history and smooth it out and see what a normalized Section 31 fee would be. And I suppose in a perfect world, you know, that, you know, if they had like a more normalized one, you wouldn't see the ups and downs within our adjusted net trading P&L. I think on top of that, you know, we started to pay some cap fees, unfortunately, as well, which were not hugely significant in the quarter, but that kind of started up in earnest in September. So those are the two items.

Great. Thank you.

Thanks, Ken.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. One moment for our next question.

Our next question comes from Craig Siegenthaler from Bank of America.

Please go ahead.

Good morning, Doug. Hope everyone's doing well. Our question is on your organic growth businesses. So in the quarter, we monitored three big positive drivers, the Ethereum ETF launches, strong ETF volumes, and also record index option activity. So we were a little surprised to see a sequential decline in ANTI. So I was wondering if you could talk about what drove this.

Yeah, it's a good question. Thank you, Craig. I think, you know, the biggest driver was probably within crypto where we saw a pretty significant drop off in Bitcoin ETF ADV. Andrew's telling me it was down about 11% quarter over quarter. So there's that. And I think, you know, within the index options family, obviously volume is important. But, you know, we obviously internally measure spread of those products, and spread was down quarter over quarter as well. So that's the opportunity set for a market maker, as you know. So it's not just X times Y equals Z. And in this instance, the Y decreased. So those are the two big drivers of it. Again, nothing alarming from our perspective. We continue to perform. We continue to grow. And certainly, we're optimistic. As we continue to expand those businesses, particularly in options where we now have a meaningful Asian options business, which is now contributing daily adjusted net trading income. And we're, you know, guardedly optimistic as we continue to grow that business, particularly in Japan and India. And the investments that we've made in those areas will pay off in future quarters.

Thanks, Doug. And just for my follow-up, we now have a final SEC equity market structure proposal. So I wanted to see if you could give us your updated view on the REG NMS amendments on the market at large and how it'll impact Virtu. And then can you give us a sense of how big your on-exchange market-making business is to help us size up the risks? You know, specifically, we're roughly looking for how much income you're receiving from on-exchange rebates. Thank you.

Yeah. Yeah. Great. It's a great question. Obviously, you know, we followed it closely, filed comment letters. And, you know, our overall view is that the final rule, if you will, which I don't think – well, there's been one litigation filed, so I don't know if it ever is going to be final, final. We'll see how it works out in the courts. But we think it's a bad result for the markets. I have said many times, we are not a rebate trading firm. We are a net payer of exchange holding fees. So reduction of the rebate won't impact us from an adjusted net trading income perspective. I always kind of scratch my head at people suggesting, hey, we just collect rebates. Nothing wrong with that. We just never figured out the way to become a net rebate trading firm as a market maker. There's a suggestion, because obviously the quoted spread is going to be reduced in a significant and not a lot of names. I think, but paired with the liquidity incentives, i.e. the rebates being significantly reduced down to 10 mils, we think that maybe some spreads will narrow, but a lot of them will actually widen because people underestimate the value, if you will, that those rebates provide to the marketplace. And so you may have, you know, nominally tighter spreads in some names, investors want to access you know any meaningful liquidity they're going to have to they'll be forced to go out a number of ticks and so the net effect is and this is why a lot of our institutional clients are very very happy that you'll see more trades going through multiple price levels which creates more volatility and we think larger orders will actually have increased transaction costs so whatever compromise Our friends at the SEC thought that they were crafting We don't think that they got right and we think there's going to be a lot of unintended Consequences I mean net net to the firm there are some positives in terms of you know our ability because we on The retail wholesale side as I've said many times we don't internalize a hundred percent of the orders we receive we still are obligated to price improve and pay to payment for order flow on some of those orders. So our ability to access liquidity at a cheaper price because spreads have been narrowed is a strong net positive to the firm. But again, overall, for our institutional clients, we think the proposal is going to ultimately end up being a net negative. And if the intent was, which I think it was, to drive more liquidity to exchanges and away from dark markets, I think Gensler failed. I think the result of this will be that there will be less liquidity driven to exchanges, and it's yet another example, just like MIFID II, of regulators trying to pick winners and losers and whiffing and actually having the opposite result.

Thank you, Doug. Thank you.

Thank you. One moment for our next question. Our next question comes from Chris Allen from Citi. Please go ahead.

Yeah, morning, everyone. I wanted to dig in a little bit on options. Just wondering, obviously you talked about the APAC opportunity. Just wondering, A, how is the progress going in the U.S. options market specifically, which is obviously a competitive marketplace? And then how would you frame the opportunity set moving forward in terms of international versus U.S.? Is there a greater opportunity set internationally?

Yeah, thanks, Chris. It's a really good question. I mean, the 800-pound gorilla, obviously, elephant in the room, what other bad analogy can I use, is becoming a retail options wholesaler. It remains in our median for long-term plans. We've made investments and we've ramped up on-exchange trading in a number of symbols. As you're aware, all of those Transactions, unlike in cash equities, happen on options exchanges. There's been a further proliferation. I've lost count of having the options exchanges. I think we're up to 18 now, or maybe 19. I can't quite remember, so that's an opportunity. So that's certainly in the medium to long-term plans, and we've expanded our symbol range. I think there are parts of the world, particularly in Asia, I mentioned India, Korea, Japan, You know, some of the smaller countries like Malaysia, et cetera, have small options businesses as well. But we think that's an opportunity. So we've built capability out there. You know, again, it's Virtu 101 blocking and tackling. It's understanding the market. It's finding the right local broker partner. It's setting up a data center. It's tuning our connectivity to the exchange system. Every marketplace is different. Every marketplace has a nuance. It's getting people on the ground in Mumbai that understand the ins and outs of how the technology of the various exchanges work there. You know, it's stuff we've been doing for the last 16 years exceptionally well here at Virtu. It's kind of, you know, the last inch of the market, and that's what we're really, really good at. And so, you know, quarters will fluctuate up and down, but long term, we've made the investments. We're committed to it. We've been successful. It's a you know, margin that's typical to the rest of our, you know, proprietary non-customer trading businesses. So we're very, very pleased with the results. And it's just another example of what global scale and having a large global firm with great trading infrastructure provides to you. So medium to long-term, continue to be optimistic about it.

Thanks. And just want to revisit Ken's question earlier. Just on retail futures activity, is there a wholesale market making opportunity or is that more of an on exchange opportunity? And then how are you thinking about the incremental opportunity from players such as Robinhood adding index options moving forward?

Yeah, I mean the index options is obviously really, really exciting to us because that's kind of right now wheelhouse and Robinhood is a terrific firm. and a great partner of ours, and we do a lot of really great, interesting things with them. You know, futures are a little, you know, more different because those need to be executed. It's a different marketplace, needs to be executed, you know, on the CME or one of the futures exchanges. You know, we don't have any concern that it really competes. As I said earlier in an answer to the question that I think Ken asked, you know, we think this is a different you know, subgroup, if you will, within their client base that's more of an active trader that wants to get a little more leverage. Again, you know, anything that kind of expands the pie and expands interest and gets more eyeballs, if you will, at our retail broker partners ultimately is a good thing for the firm.

Thanks, guys.

Thanks, Chris.

Thank you. One moment for our next question. Our next question comes from Patrick Moley from Piper Sandler. Please go ahead.

Yeah, good morning. Thanks for taking the question. Sorry about the disconnect earlier. I just had one on a regulatory question. The latest implementation or phase of the OCC intraday margin rule that they proposed that's aimed at addressing some of the perceived risks around zero DTE. Just wondering if this is something that's on your radar at all and what impact do you expect it to have on trading volumes not only in zero DTE, but possibly across other asset classes as well if margin goes up across the industry.

Thanks. Wow, Patrick, you're really trying to dive deep here and get me on one. I love it. Good thing the guys prepared me for all this stuff. Look, we've looked at it. We think it's very unlikely to have any direct impact to Virtu or the FINRA capital rules. already stipulate that members maintain capital adequacy to settle all positions. And based on our understanding, the new margin changes for the zero-dated options are effectively just moving up delivery times. It's really just a timing difference. We don't think it's an overall capital difference. I mean, Joe, you've looked at this more closely. Would you agree with that?

Yeah. I mean, we obviously have a – we're not direct members. We clear through a third party.

So, I mean, we think it's manageable. Okay, great. Thanks for the color. Thanks, Patrick.

Thank you. One moment for our next question. Our next question comes from Dan Fannin from Jefferies. Please go ahead.

Thanks. Good morning, guys. Question on just slide eight. I know this is you guys have had this framework for some time, but given you've strung together three quarters in a row, you know, that are pretty strong results. How we think about the buyback, do you become valuation sensitive at all? Or is it just more of an output based upon what ANTI is doing?

You know, I think it's just an incremental investment question. I appreciate that our stock has gone up, and so we're buying back less shares at every target amount here. We made a strategic decision when we embarked on this journey, I think in the fourth quarter of 2020, that we were going to set these targets and that we were going to just dollar cost average our stock, given how volatile it's been. And we look at this as an investment. So our stock is in the low 30s now. We've bought back almost 20% of the company at $25. We compare. We're shareholders and we want to create value. So we look at this as a value creation exercise. And if there was an incremental opportunity that's in front of us, Whether organic or inorganic, where we thought the value exceeded, buying back our shares at 30, we would pivot. But for the near term and the midterm, this is what we see in front of us and we're going to continue to execute on it. It doesn't mean that we're not excited about the growth opportunities, but we're adequately capitalized, we're adequately resourced. And, you know, so we're going to continue at these levels to meet these targets. You know, I expect in 2024, when it's all said and done, we'll be, you know, obviously it depends on where we come out in net trading income. But at these run rate levels of net trading income, I expect that we're going to be at the high end of the guidance.

Great. That's helpful. And then just also on expenses. You guys have been pretty consistent in your messaging there, just thinking, you know, given, again, a good backdrop for you year-to-date. As we think about the fourth quarter, the cash comp versus comp ratio dynamic, just a little bit of color there in any other seasonal expenses that we might be – should be thinking of.

Yeah, no, I mean, comp isn't seasonal, right? We try to accrue because we – you know, we try to accrue appropriately. I mean, we have to accrue appropriately. And – you know, getting compensation right is a huge priority for us. We want, you know, we've always been within this comp ratio, and I think, you know, when we are in an environment that's not as, you know, robust or even, you know, sort of middle of the road like we've been in, we try to take care of people and compensate them well, even in the down years, and I think, you know, that's allowed us to kind of you know, maintain where we are. We've hired an enormous amount of people in the past three years. We've significantly upgraded our talent, you know, and we will, you know, continue to do that. And, you know, there's pressure on cost all the time. We manage our market data, you know, plant. We manage our, you know, infrastructure. We manage our overhead actively. And, you know, I think the guidance is important It's been pretty consistent for a long time, and I think we've stayed within it, and we expect to stay within it.

Great. Thank you. Thank you.

The question and answer session is now closed. I will now turn it over to Doug Sifu for closing remarks.

Thank you, Antoine, and thank you, everybody, for joining us today. We look forward. Everybody enjoy the holidays and the end of the year. We look forward to speaking with you.

Thank you for your participation in today's conference this does conclude the program you may now disconnect.