Virtu Financial, Inc. Class A

Good morning and welcome to the Virtue Financial 2020 Second Quarter Results Conference Call. All participants will be on listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Debbie Bellivan. Please go ahead, Madam.

Thank you, Operator, and good morning, everyone. Thanks for joining us. Our second quarter results were released this morning and are available on our website. 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. On today's call, we'll have Mr. Douglas Sifu, our Chief Executive Officer, and Mr. Joe Maluso, our Co-President and Co-Chief Operating Officer. They will begin with prepared remarks and then take your questions. Please note that our actual results and financial conditions may differ materially from what's indicated in these forward-looking statements. It's 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 the disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report and Form 10-K and other public filings. During today's call, we'll refer to both GAAP and non-GAAP results. In addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margins. non-GAAP measures should be considered as supplemental to and not as superior to financial measures prepared in accordance with GAAP. We direct listeners to consult the investor portion of our website where you'll see supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings materials with an explanation of why we deem this information to be meaningful as well as how management uses these measures. And with that, I'd like to turn the call over to Doug.

Thank you, Deborah. Good morning, everyone, and thank you for joining us to review our second quarter results. Before I begin, I'd like to say on behalf of all of us at Virtu, we hope that you and those you care about are safe and healthy. I will start with a review of our second quarter performance highlights and then provide updates on our strategic initiatives. Joe will then review our financial results and balance sheet before we open the lines up for Q&A. But first, an update on how we've adapted to the COVID environment and how it continues to test all of us across the globe. We understood early on that a crisis of this scale demanded that we do more than simply protect our business. We needed to support our people, our clients, and the communities in which we live and operate. We pivoted quickly, enabling substantially all of our employees to work from home, and I am humbled by how smoothly this transition was implemented and continues to this day. More impressive still was the speed at which our teams deployed our technology and resources to address a wide range of urgent needs across the globe with respect to our clients and the capital markets overall. These improvements are especially visible when we look at our client engagement. Not only have we continued to serve our global client base, we have also expanded our outreach to clients. To date, we have hosted over 20 Virtu University sessions, nearly all of them virtual sessions. on a wide range of topics from workflow and analytics tools, algos, liquidity sourcing, programming skills, and best practices for managing a virtual trading desk, to name only a few. We've seen tremendous levels of engagement with over 1,000 clients in attendance from every corner of the globe. We are keeping clients informed and up to date on how Virtu products, services, and market structure expertise can support them while they navigate the evolving liquidity landscape. With respect to financial performance in the second quarter, as you can see from the details in our release and supplement presentation on slide two, we delivered a second straight quarter of exceptional performance. In Q2, we achieved an average of $10.6 million per day, or $669 million in total of adjusted net trading income. We delivered adjusted EBITDA of $486 million, an impressive adjusted EBITDA margin of $72 million. an adjusted EPS of $1.73 for the quarter, reflecting our high operating leverage. As you will see on slide four, our strong performance has also continued into the third quarter, with July's average daily adjusted net trading income up in the range of $6.7 to $7 million per day, roughly 75% higher than the daily average in 2019, and almost 70% higher than 2018. we are encouraged that our results for market-making and execution services segments remain significantly higher than our historic averages. The driving force behind these results are continued higher trading volumes across global asset classes, robust levels of retail engagement in U.S. equities, and most importantly, the strong progress we are making in our organic growth initiatives. As illustrated on slide five, in the second quarter we witnessed Elevated average daily U.S. equity volumes as average daily volumes in Q2 2020 were almost 80 percent higher than in Q2 2019 and 13 percent higher than Q1. The continuation of robust levels of retail engagement as evidenced by Rule 605 volumes and equity volumes with retail trading now accounting for up to 20 percent of all U.S. trading volumes, about twice the historical average. Average realized S&P volatility of 32 in the second quarter, although down 44% from Q1, it remains at nearly three times the prior year quarter and nearly 130% higher than the 2018 and 2019 combined full year averages. As you can also see in the slides we posted this morning, retail brokers have seen continued growth in new accounts, trading volumes, and net new assets. Rule 605 volume is up significantly as a percentage of overall market volume, which itself is up dramatically as well this year, while Virtu's share of retail activity has been consistent at roughly 30 percent. There has been much media and industry speculation about the sustainability of the elevated levels of retail engagement. This is not, in our opinion, a short-term phenomena, but a broader structural change. While the work-from-home paradigm has also been a contributing factor the drivers of increased retail activity are part of a long-term secular trend which has been accelerated by events this year. Among the long-term factors are the dramatic decline in transaction costs, culminating in the move to commission-free trading last year, and the prevalence of a more sophisticated and accessible trading technology. These latest developments are opening up trading to a much broader user base, activating a new generation of participants. This democratization of market access is not a new nor transitory phenomenon. It has been building for decades through major long-term market structure shifts. Long before zero commissions and work from home, we witnessed major policy changes starting in the late 1990s, such as the order handling rules, Reg ATS, decimalization, and Reg NMS, which contributed to leveling the playing field and reducing explicit and implicit costs for all investors. Despite the many headlines focusing on the large U.S. e-brokers, levels of retail engagement at or well above 20% of overall market volumes are not unprecedented in other markets, as that has long been a feature of markets in China, Hong Kong, Japan, et cetera, for many years. We believe this systemic shift will continue for the foreseeable future. I'll now cover the highlights for each segment and organic initiatives, and then Joe will provide further details on our financials. In our market-making segment, we saw another incredible quarter. Within this segment, global FIC options and other benefited from extreme volatility in energy, due in large part to the historic phenomena we saw with negative crude prices in April, precious metals, where we saw volumes in volatility impact the spot, ETF, and futures markets, and currencies. In our global equities business, we continue to see the encouraging results from a strong market share of 605 volumes in retail engagement. Today, we execute over 30% of market orders placed by retail investors in the U.S., and we provide a price improvement of $308 million in Q2 and $572 million in the first half of 2020. In our execution services business, we had a fantastic quarter with several milestones, record days, product launches, and industry recognitions. To start, we posted record days for notional value traded on positive alert in both Europe and Australia in Q2. These record trading days are a testament to the commitment we made when we acquired ITG, which was to continue improving the client experience by making the platform more transparent, faster, and easier to use. In May, we also expanded client access to electronic block liquidity via our new interlisted conditional offering, allowing PositAlert Canada and U.S. Frontier Algo clients to seamlessly access cross-border U.S. and Canadian interlisted securities and benefit by matching these two sources of block liquidity in the same security but priced in different currencies. Finally, we continue to receive accolades on our trading tools. Most recently, our Frontier Execution Algos earned the top score in the trade's annual global algo survey of hedge funds, featuring 31 other algo providers. While our existing market-making business will continue to benefit from the market's new baseline level of retail activity, as well as elevated opportunities like this quarter, our strategic investment in organic initiatives has contributed over $100 million of adjusted net trading income in the first half of 2020 alone, or 7% of adjusted net trading income compared to $75 million for all of 2019, as you can see on slide seven. In market making, these initiatives included continued deployment of quantitative trading strategies across Virtu's global trading platform, our global ETF block desk, and our options and corporate bond market making businesses most of which are now making meaningful contributions to our results. In our execution services segment, organic initiatives like Virtu Capital Markets, which we launched towards the end of last year, continues to expand as more corporate equity issuers look to tap into the capital markets via the at-the-market offerings and buybacks. In the first half of 2020, the VCM team have already raised an impressive $1.2 billion from our public equity markets. In addition, we completed the sale of Match Now to CBOE Global Markets. The after-tax proceeds of approximately $27 million will be used to further reduce debt. This reduction is in addition to the $188 million we paid down in the first quarter. Including the Match Now proceeds, we anticipate a total of approximately $100 million in incremental debt repayment in Q3. As we have stated publicly, it is our plan to return to targeted forward expense guidance later this year. We remain committed to our decision given the COVID crisis that we will have no specific reductions in force as we continue to support our people during these trying times. Our performance thus far in 2020 demonstrates the strong operating leverage of our business model. We remain focused on our strategic priorities to continue expanding our scale and global reach enhancing our technology, and growing our organic initiatives. I'll now turn the call over to Joseph Maluso, our co-president, who will give further details on our financials. Joe?