Virtu Financial, Inc. Class A

Good day and welcome to the Virtue Financial 2021 Second Quarter Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on a touch-tone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Andrew Smith. Please go ahead.

Andrew Smith Thanks, Tom, and good morning, everyone. Thank you for joining us today. Our second quarter of 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, and 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 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 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 release and encourage you to review the description of risk factors contained in our annual report in Form 10-K and 10-Q and other public filings. During today's call, in addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. Non-GAAP measures should be considered as supplemental to and not superior to financial measures prepared in accordance with GAAP. We direct listeners to consult the investor portion of our website, where you'll find supplemental information referred to on this call, as well as a reconciliation of non-GAAP measures to the equivalent GAAP 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.

Good morning, and thank you, Andrew. This morning, we reported our second quarter results, which reflect our resilient and balanced business model as well as the continued success of our organic growth initiative. For the quarter ended June 30th, we generated 63 cents of adjusted EPS on $5.4 million per day of adjusted net trading income, bringing our results for the first half of 2021 to $2.67 per share and an average adjusted net trading income of $8.63 million per day. Last quarter, we announced a $300 million increase to our share repurchase program, which brought our total authorization to $470 million. We have repurchased 3.4 million shares for approximately $100 million during the second quarter and over $30 million worth since the end of the second quarter, bringing the total amount repurchased under the current authorization to approximately $230 million. As we stated previously, we remain committed to returning capital to investors and have prioritized share purchases for the foreseeable future. We aim to be in the market consistently, buying back shares as we work to accomplish our capital management goals. Importantly, in the second quarter, our more greenfield growth initiative continued to shine in both relative and absolute terms compared to historical results. On page six, you can see how these initiatives contributed meaningfully to our performance, generating $500,000 per day of adjusted net training income and representing 9% of our ante for the quarter. These initiatives are truly organic in that our ante from these revenue sources was nascent only a few years ago, and we've achieved these results by leveraging our skilled infrastructure and distribution channels supplemented with a handful of individual hires. While these results are impressive, we are especially excited about the continued growth potential of these truly organic opportunities. In options market making, for example, our daily adjusted net trading income grew quarter over quarter despite the 13 percent decline in options market volume. We continue to view options market making as a key long-term engine of growth that complements and enhances our existing market-making business, creating new revenue synergies across asset classes and regions. Other key initiatives include our ETF block desk and our deployment of legacy KCG quant-style strategies, continued their long-term growth trend in the quarter. Market volumes in U.S. ETFs declined about 13% in the quarter, while our ETF block volume was down less than 1%. illustrating the strength of our unique offering in various market conditions. Our expansion into cryptocurrency market making also continues to progress, with our ante from crypto market making doubling in Q2 versus Q1. To date, our focus has been on market making in Bitcoin and Ether in various forms, including spot instruments on a couple of the major venues, as well as ETFs and futures. As a leading market maker in ETFs around the globe, crypto ETFs fit naturally into our scaled market making operations, leveraging our growing ETF block desk. We're also in the early stages of developing our ability to stream cryptocurrencies over our direct-to-dealer streaming liquidity platform, VFX. Through this platform, we will provide liquidity and cryptocurrencies to select brokers and institutions around the globe. The key takeaway here is that the growth of liquid, tradable, crypto-related products is yet another way that the total addressable market is growing for Virtu's scaled liquidity provisioning and execution services. Taken together, our growth initiatives are making tremendous progress and help raise our baseline performance through the cycle. As Joe will detail in a few moments, we believe that this positive growth trajectory, combined with our stock buyback program, provides a compelling long-term story for our investors. We look forward to updating you in the future about the progress we're making on each of these opportunities and our contribution to our growth. Additionally, the steady growth of these initiatives, as well as the continued less volatile performance of our execution services segment, has led us to provide public guidance around where Virtu's results should be given various levels of ante in a given quarter. We believe our performance this quarter is consistent with that guidance. After several quarters of elevated market activity, realized volatility fell nearly 30 percent in the second quarter, dropping to 9 percent below the 2019 average. And as you know, 2019 was a historically low point for volatility. Further, U.S. equity volumes were down 28 percent overall, and retail equity volumes in the United States were down even more compared to Q1. Despite the steep drop in volatility, we highlight the sustained levels of retail engagement and general market volumes compared to historical levels. It is important to note that despite the changing operating conditions versus last quarter, our market-making business realized $232 million in adjusted net trading income, or $3.7 million per day. This quarter's performance is similar to the third quarter of 2020, where we generated $4 million of ANTI per day, albeit realized volatility was 34% lower this quarter than in Q3 2020. Our execution services business also performed in line with the market opportunity this quarter, realizing $110 million in adjusted net training income. We are now two full years past the acquisition of ITG, and looking at the bottom of page three, you can see the steady progression of this business. This continued growth reduces the quarter-to-quarter variability to our operations while still giving investors significant upside exposure from our global market-making operations. Before I turn it over to Joe, I'd like to take a few minutes to talk about the recent industry discussion around market structure, payment for order flow, and wholesale market-making. As I said in the first quarter earnings call, we at Virtue welcome the robust dialogue around the regulatory framework that governs our capital market. However, we and others are concerned that the calls for reform are based on false narratives and factually unsupportable conclusions. These misconceptions obscure the fact that we are participants in the most robust, transparent, and fair marketplace in the world. For retail investors, their experience in the United States has never been better and by comparison is markedly worse in Canada, the United Kingdom, and Europe. Developments in market structure, advances in technology, and the introduction of intense competition have resulted in vastly expanded product offerings, low or no cost trading, and importantly, superior execution quality. In summary, the benefits of today's market structure to retail investors are quantifiable, and the supporting factual evidence is striking. In the current high-profile debate about U.S. equity market structure, many folks, including regulators, politicians, and critics, are looking at the available data to draw a conclusion. However, the data being used to assess execution quality for retail investors comes from Rule 605, which most agree has significant shortcomings and provides an incomplete view of execution quality. Current Rule 605 significantly underestimates the benefits that regulation competition transparency and the current market structure have created for retail investors. We recently published a report, which we furnished to the SEC, that addresses many of 605's shortcomings and proposes updates to enhance the rules. The biggest hole in Rule 605 is that it measures price improvement by comparing an order's execution price to the prevailing NBBO without regard for the number of shares being executed. This means, for example, that when we fill a retail order for 9,000 shares of a stock, execution quality is measured based on the NBBO price level, no matter how many or how few shares are available at the NBBO price. When we fill an order for more size than is available at the NBBO, that provides the retail investor with size improvement, and it happens a lot. In fact, in 2020, 45 percent of the shares we filled were on orders that outsized the entire NBBO. That's 45 percent. If Rule 605 was updated to measure this benefit, as many folks have requested, including numerous retail brokers and exchanges like NASDAQ, Regulators and brokers would see that in 2020, Virtue provided over $3 billion in price and size improvement to retail investors. That's three times the amount reported under Rule 605 today. It defies logic to conclude that this price and size improvement retail investors receive today would exist if, as some critics suggest, retail orders were all sent to exchanges. Thankfully, in part due to the request from Virtu and many other brokers and exchanges, the SEC is now reviewing Rule 605. In addition to having a complete view of all available data, which means actual trade, not theoretical model, having an accurate understanding of our current market structure is imperative to conducting a thorough review and proposing changes that help not hurt retail investors. To this end, we have had multiple meetings with regulators and politicians to help correct various myths and misconceptions that cloud the existing debate. In our report that I just mentioned, which is included in the appendix of today's investor presentation, and in our discussions with the staff and commissioners at the SEC, as well as folks on Capitol Hill, we use data to address their concerns. And we will be releasing a follow-up paper to provide even further important detail. At Virtu, we serve as a trusted counterparty to nearly every retail broker and wealth manager in the United States, but also to all of the top broker-dealers and hundreds of institutional buy-side firms, including the top 10 asset managers in the United States. We are confident that in the end, that data and reason will win the day, and regulators, politicians, and critics will continue to see the massive benefits of the ecosystem which regulation, competition, and transparency have created for retail investors. With that, Joe will now provide more details on our quarter and our growth initiative. Joseph?