Virtu Financial, Inc. Class A

Ladies and gentlemen, welcome to the Virtue Financial 2022 fourth quarter results call. My name is Glen, and I'll be the moderator for today's call. If you would like to ask a question during the presentation, you may do so by pressing star 1 on a telephone keypad. I will now hand it over to your host, Andrew Smith, head of investor relationship. Andrew, please go ahead.

Thank you, Glen, and good morning, everyone. Thank you for joining us. Our fourth 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 Ms. Cindy Lee, our Deputy Chief Financial Officer. We 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 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 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 investor portion of our website, where you'll find additional 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 exhibition of why this information, why management deems this information to be meaningful, as well as how we use these measures. With that, I'd like to turn the call over to Doug.

Thank you, Andrew, and good morning, everyone. Thank you for joining us today. In my remarks today, I will focus on Virtu's fourth quarter and full year 2022 financial and business performance, 2022 milestones, and the progress we've made toward our strategic initiatives and goals. Following my remarks, Joe and Cindy will provide additional details on our performance. Turning to our full year and fourth quarter results, which are summarized on slide two, we generated $5.8 million of adjusted net trading net income per day in 2022, including $4.4 million per day in the fourth quarter. Total adjusted EPS was $3 per share for the full year, including 37 cents in the fourth quarter. Our market-making segment, which earned an average of $4.2 million per day and adjusted net trading income for 2022, comprises our customer wholesale business, where we receive flow from 250-plus retail platforms, as well as our non-customer or proprietary market-making business. In the fourth quarter, our customer market-making business witnessed decreased opportunity as the overall spread opportunity and retail participation ebbed, and the quality of the flow we received from our retail customers was significantly less desirable. As we have noted before, parts of our market-making business can be more variable than our other businesses and, as a consequence, should be viewed over the long term in conjunction with the significant cash flow it generates. We remain extremely bullish on the long-term value of our customer business which has proven to be durable and profitable over the past 20 plus years. Our non-customer business, which provides liquidity across asset classes globally, experienced a strong quarter, as well as a strong overall year, as our ongoing investments and our growth initiatives, particularly around options market making, continue to perform well. While the integration of our businesses and increased internalization means that efforts to improve one market making business often generates benefits across our entire market making segment, this quarter's market making results were driven by improvements that we deployed to existing strategies in both our customer and non-customer market making businesses. For our customer market making business, although the opportunity was down in the fourth quarter, we performed in line or even better than our own internal metrics projected. We have historical capture rate metrics and these didn't deteriorate. but we continue to focus on ways to improve and capture more of every opportunity in every environment. And while market share alone is often not a helpful gauge of performance, it's worth noting that our market share in the wholesale business remains within historic ranges. A couple of significant bright spots in our thriving non-customer business include energy and natural gas, specifically as well as our continued growth in options globally. To give you some additional perspective, our non-customer market making business was flat year over year from 21 to 22, and up 11% from the third to the fourth quarter of 2022. Turning to our execution services segment, our adjusted net trading income was $1.4 million per day in the fourth quarter, essentially flat from the third quarter. For the full year, VES delivered $1.6 million per day, or 28% of our total ante. In general, VES results include revenue that is more recurring in nature compared to the inherently more variable market-making businesses. Given the contraction of the buy-side execution wall and declining institutional engagement, particularly in Europe, we believe our execution services segment performed in line with the opportunity this quarter and the full year. We are bullish as well about VES's progress and the opportunities ahead. We have built our global multi-asset execution business as part of the acquisitions of KCG and ITG, and we continue to onboard new clients to our highly scalable technology platform. We're excited about the growth opportunities the future holds from cross-selling across regions, products, and assets, as well as adding more subscription revenue to BES's platform. In the very early days of 2023, we are seeing some modest enhanced opportunity in our customer market-making business, and our efforts to improve our capture rates are beginning to bear fruit. Overall, we are pleased at how we performed against the opportunities the market has given us in 2022 and how we have deployed new businesses that are in the infancy or nonexistent only a few years ago. Our performance in the fourth quarter, full year 2022, and in the start of 2023 is the result of the ongoing investments we are making in people, technology, integration, deploying strategies to new products, and ongoing innovation to expand our abilities to address more opportunities, become more efficient, and capture incremental revenue from each existing opportunity. As always, we remained relentlessly focused on cost and realized a 59% adjusted EBITDA margin for the full year and a 46% adjusted EBITDA margin in the fourth quarter. Reviewing some of our growth initiatives and options, our business had a record year in 2022 as we've expanded across venues as well as across asset classes and geographies. We remain very pleased with our decision to focus our early efforts and options in the most liquid issues as we build our footings. In the U.S., market-wide options volumes were up 5.5% in 2022, while ante from our growing options business was up over 100% for the second consecutive year. However, given the size of this growing global cross-asset opportunity, we consider ourselves in the early innings of a multi-year effort. In block ETF, we continue to make progress and our adjusted net trading income in 2022 was up despite lower opportunity overall. Closely related to our ETF block desk is our growing investment to build our fixed income business. In the same way that our growing options business complements our global equities market making activities, success in our fixed income business enhances our ETF block desk. In addition to our growing investments and resource allocation, we continue to actively hire and develop talent to help us realize these and other opportunities. Crypto. I previously talked about Crypto as a growth initiative, and notwithstanding the industry turmoil kicked off by the FTX bankruptcy and continuing today, we continue to view crypto as a long-term growth opportunity. In the aftermath of recent events, I'm proud to say that we managed the risk around the events of this quarter as you would expect from Virtu. Although we had an approximate eight-figure fiat and coin balances deployed across several venues, when the FTX news broke, we acted quickly and did not realize any material losses. Finally, I know you will have some questions on the SEC's latest proposals. In short, the proposals did not include anything new as compared to the rhetoric which preceded, and our position remains the same and is consistent with the broader industry as well as numerous academics and commentators. Today's retail investor receives immediate, competitive, and commission-free executions on over 10,000 securities. Main Street investors enjoy this level of service thanks to a myriad of offerings from hundreds of retail brokers who leverage an intensely competitive landscape of wholesale execution service providers like Virtu and many, many others. It is more clear than ever that the SEC's proposal would directly hurt individual investors and reduce their engagement in our capital markets. In addition to a less transparent and less fair landscape for the average retail investor, on top of increased costs and worse execution quality, the SEC's proposals would also harm liquidity and increase costs for institutional investors and issuers. Further and importantly, the haphazard rulemaking, lack of any real engagement with stakeholders, and abbreviated comment period has resulted in a proposal that is internally inconsistent, theoretical analysis that ignores empirical evidence, and an experimental approach that disregards the likely cost everyday investors. It is extremely unlikely to withstand any degree of scrutiny in the upcoming process, which could take several years. Sadly, as we have noted before, we believe the proposal is a politically motivated solution in search of a problem. Lastly, as I have mentioned several times, these proposed rules, while they would be terrible for the average retail investor, would not necessarily be terrible for scale wholesalers like Virtu. Remember, today's wholesalers like Virtu are service providers that compete for business by immediately filling all orders we accept and by providing price improvement as part of our commitment to our retail broker customers. Under the SEC proposal to mandate auctions, we would be able to, and in fact, we would be required to send flow we do not internalize to an exchange retail auction. Today, we incur significant fees, including payment for order flow, price improvement in exchange, SEC, and other transaction fees on orders we do not internalize. These costs would be dramatically reduced under the proposal. We also internalize tens of thousands of orders daily in small and mid-cap listed companies as part of the overall wholesale service we offer to our clients, which we could now simply route to exchanges at a substantial savings to ourselves, but this savings would come at the expense of retail investors. So, the preliminary analysis of the trade-off suggests that the exchanges and wholesalers may stand to benefit under key aspects of this plan, and at worst, we will be in a neutral position. I'm sure we will discuss these issues further in the Q&A to follow. For now, Joe will provide some additional details about the quarter. Joseph?