Virtu Financial, Inc. (NASDAQ:VIRT) Q1 2024 Earnings Call Transcript

Virtu Financial, Inc. (NASDAQ:VIRT) Q1 2024 Earnings Call Transcript April 24, 2024

Virtu Financial, Inc. beats earnings expectations. Reported EPS is $0.76, expectations were $0.59. VIRT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen thank you for standing by. Welcome to Virtu Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Andrew Smith, Head of Investor Relations. Please go ahead.

Andrew Smith: Thank you, Michel and good morning everyone. Thank you for joining us. Our first quarter results were released this morning and are available on our website. With us today on this morning’s call we have Mr. Douglas Cifu, our Chief Executive Officer; Mr. Joseph Molluso, our Co-President and Co-Chief Operating Officer; and Mr. Sean Galvin, our 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 Virtu’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 be comfortable. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual reports 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 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.

Douglas Cifu: Good morning and thank you Andrew. This morning we reported our first quarter results. For the quarter ended March 31st, Virtu earned $0.76 of adjusted EPS on $6 million per day of adjusted net trading income. We generated a 55% EBITDA margin and $203 million of EBITDA, both on an adjusted basis. We outperformed headline volume and volatility statistics in the quarter as a result of our organic growth initiatives as well as the solid performance in both our customer and non-customer market making businesses. In particular, we had record performance in both our crypto and ETF Block market making operations, which I will discuss further in a moment. Overall, the environment was mixed compared to the prior quarter.

Realized volatility was down about 10%, but volumes were elevated across global equities and commodities, while options volumes were flat and retail volumes were up modestly. Our core business generally performed well against this backdrop. Our customer market making operations saw a modest uptick in retail volume and an increase in the attractiveness of the flow we received, offset by reduced volatility. Our market share of Rule 605 volumes remained within historical ranges and we saw increases in executed shares and quoted spread values compared to the fourth quarter of 2023. Growth initiatives generated $1 million per day in adjusted net trading income, contributing 17% of our ANTI. I will highlight our performance in digital assets as well as ETF Block, which were the standout performer this quarter.

In crypto, as I just mentioned, we had a record quarter. The principal catalyst was the launch of 11 Spot Bitcoin ETFs in the United States, which were approved by the SEC on January 10th. If you recall, for several years, we have discussed how our disciplined approach to counterparty risk management and commitment to capital efficiency has intentionally limited our presence in crypto. In fact it was only a year ago when we announced that we had resumed limited market-making in crypto which we had pause around the collapse of FTX. Since then and until January, our crypto initiatives were focused on market making and top cryptocurrencies on a limited basis. The introduction of spot crypto ETF has transformed Virtu’s role in the crypto ecosystem.

The introduction of the ETF has played to Virtu’s strength and enabled us to leverage our scale capabilities to service clients and the markets. In advance of the ETF launch, Virtu was approved as an ETF authorized participant and we were there on day one of trading making market and facilitating flows. After normalizing for the appreciation of Bitcoin this year, the flows into these securities have been meaningful over $14 billion of net new inflows into spot Bitcoin ETFs and the gross flows have been over $56 billion. Our ability to create tight prices in like instruments in this case the ETFs our — spot Bitcoin. Bitcoin is very similar to how we make markets in a plethora of equity and multi-asset class ETF products across the globe. We are very encouraged by the persistent opportunities in these products which has continued into the second quarter.

Further, we remain confident that the inherent underlying volatility of crypto as an asset class will drive sustained elevated opportunities in crypto ETFs and contributes to heightened levels of broader investor engagement and awareness across equities and options. The market is anticipating the launch of new crypto products across ETFs options and futures both in the US and abroad which will further expand the addressable market for Virtu. We look forward to more products coming online and for the market’s continued evolution bringing greater transparency in the efficiency that comes with centralized clearing and settlement. Turning now to ETF block. Our global ETF block initiatives also contributed meaningfully to our results and had one of its best quarters since 2020.

While global ETF volumes were up across the board our robust performance was further enabled by our efforts to broaden our distribution and our increased competitive capabilities in both equity ETFs and fixed income ETFs combined with the depth and breadth of our global client franchises. Finally, our options market making expansion continues at pace. Despite total OCC volumes up only 2% compared to the prior quarter and muted volatility our performance was solid improving quarter-over-quarter. Over the last year our market share in index options has more than doubled and our share of ETF options remain strong despite fluctuations in market volumes. We expect our options business to continue to grow as we incrementally expand our symbol universe and look forward to another record year building on what we have achieved since beginning this business from scratch in 2019.

To summarize our market-making performance, we believe that our established businesses executed well against our internal benchmarks yet we remain focused on our efforts to improve our yield on every opportunity and to address more of the significant opportunities available in both new and existing markets including the ones I just mentioned. We are very excited about the continued real progress in these areas which we had no presence in only a few years ago. Execution Services was up 3% over the fourth quarter delivering $93 million of anti or $1.53 million per day. While institutional activity remains muted there were pockets of increased activity as clients adjusted their portfolios in light of evolving global monetary policy expectations.

Our ongoing efforts globally and across the BES products have continued to bear fruit. We saw outsized trading volumes in Japan and in Asia overall this quarter as we invested resources in those regions and we reached a high watermark in EMEA equity market share an uptick in adoption of our EMS Triton has led to further cross-selling opportunity in our brokerage and analytics businesses as well. We are nearing the end of a multi-year technological transformation to create a platform focused on providing clients seamless automation of their multi-asset workflows through the life cycle of a trade in all regions globally making us a one-stop shop for all clients market activity. We believe these investments focused on technology and infrastructure are producing a uniquely valuable platform, which reduces many of the frictions traders encountered on a daily basis.

Our client in search of efficiencies have asked for multi-asset class full life cycle capabilities. And because of our extensive technology replatform, we will be able to deliver new products quickly. In addition, we continue to enhance our existing flagship equity products. Our new algo of algos provides smart automation where based on current market conditions for a given stock we help the client choose the best algorithm to execute its objective. Our new alert block crossing client interface streamlines client’s ability to cross blocks of stock saving time and money. Our data analytics platform API provides clients more choices with pre-trade decision-making and post-trade review of those decisions. In addition to adding multi-asset class capabilities to existing products, we’re expanding our potential client base by offering our products to new client segments through redistribution partnerships or what we call Virtu Technology Services, offering our technology via new additional strategic channels, allows us to accelerate the distribution of our global multi-asset class offerings in a scalable manner to help us realize these important opportunities in BES, we have made a number of senior hires who are attracted to Virtu by our broad suite of cutting-edge projects.

We are excited about the future of this business as ever. As always, our offerings are based on client demand and built around long-term partnerships. Overall, our businesses continue to grow and demonstrated an impressive yield this quarter in a market environment that was mixed in terms of the opportunity, of course the opportunity set afforded by the market. Finally, you will note in our press release that effective August 1, Cindy Lee, a long time Virtuian will become the Chief Financial Officer of Virtu, succeeding my friend Sean Galvin in that position. Cindy joined Virtu in 2011 and she will be an extraordinary CFO given her knowledge of Virtu and has been instrumental in our success over the years. I am very happy and pleased to report that Sean is remaining with Virtu in a senior capacity.

Sean’s contributions to Virtu and Knight KCG over his 22 years here have been very meaningful and we expect to continue to benefit from Sean’s professionalism and experience. Thank you, Sean and Cindy. Now, I’ll turn the call over to Joe Molluso.

Joseph Molluso: Good morning. I’ll speak a bit about our growth levers from our new initiatives, as well as our buyback program. At March 31, total trading capital on slide 9 in the supplement was $1.7 billion. Our scaled business is not limited by our capital base as evidenced by the impressive results generated in the first quarter without the need for material incremental trading capital. Our capital base remains more than adequate to support our ongoing and growing businesses. In Q1, we used a portion of our free cash flow to repurchase 2 million shares at an average price of $18.31 per share. To date, we have repurchased 45.9 million shares at an average price of $25.10 per share. Quarter end share count was 163 million shares outstanding, bringing our buybacks on target to fit the range as we have set forth publicly.

Since we initiated our share repurchase program, we have repurchased over 17% of the fully diluted shares of Virtu, net after new issuances. Consistent with our continued commitment to returning capital to shareholders, our Board of Directors has authorized an additional $500 million in share repurchases. We often asked about future nonorganic growth opportunities including acquisitions. The answer to this is that we evaluate any opportunity presented versus the relative attractiveness of buying back our shares and investing in our businesses, including our growth initiatives. So, it is a high bar in our opinion. You can see the demonstrated earnings leverage in our business from both capital management and our growth initiatives. While we understand our business is volatile, we believe slides 6 and 7 illustrate our long-term earnings power, as a result of both organic growth initiatives and the cumulative impact of share repurchases.

On the expense side, adjusted cash operating expenses were $164 million in the first quarter. Our quarterly cash OpEx for the last five quarters has remained essentially flat, despite the external environment of the past few years, which has placed significant pressure on costs. Our cash compensation ratio was 23% and our total compensation ratio was 27% for the quarter, compared to 26% and 32% respectively for the full year 2023. We expect cash operating expenses to remain within the recent historical range and will provide more clarity on compensation ratios as the year unfolds, although we also expect the ratio to remain within historical norms. If you look at the 5-year period from 2019, ending in 2023 our total cash operating expenses grew only 3.4% on a compound annual basis, which we consider a strong performance.

Going forward, we will assume this type of low single-digit overall increases in non-compensation expenses. Now, I’ll turn it over to our CFO Sean.

Sean Galvin: Thank you, Joe. Good morning, everyone. On Slide 3 of our supplemental materials, we provided a summary of our quarterly performance. For the first quarter of 2024, our adjusted net trading income or anti, which represents our trading gains net of direct trading expenses totaled $367 million or $6 million per day. Market Making adjusted net trading income was $274 million or $4.5 million per day. Execution Services adjusted net trading income was $93 million or $1.5 million per day. Our first quarter 2024 normalized adjusted EPS was $0.76. Adjusted EBITDA was $203 million for the first quarter of 2024 and our adjusted EBITDA margin was 55%. On Slide 11, we provide a summary of our operating expense results. For the first quarter of 2024, we recorded $180 million of adjusted operating expenses.

We continue to maintain an efficient cost structure and disciplined expense management just helped us to control our operating expenses during the inflationary environment. Financing interest expense was $23 million for the first quarter of 2024. With the benefit of the interest rate swap contracts that we introduced it in prior years, our blended interest rate was around 7.6% for our long-term debt in aggregate. We remain committed to our $0.24 per share quarterly dividend and combined with our share repurchase program, this demonstrates our commitment to return capital to our shareholders. Now, I would like to return the call over to our operator for the Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Patrick Moley with Piper Sandler. Your line is open.

Patrick Moley: Yes. Good morning. Thanks for taking question. So I was hoping we could just dig a little deeper into the impact crypto Market Making had in the quarter. Doug, is there any chance you could quantify like what the overall contribution was to anti judging by the organic growth initiatives? And it seems like maybe it was a couple of hundred thousand dollars a day. So any color you can give us there would be great. And then second, could you speak to just kind of the distribution of revenues you’re seeing in that business? Is it fairly steady day-to-day? Or are there any outlier days where you’re seeing the bulk of the revenues? Thanks.

Douglas Cifu: Yeah. Thank you. Good question. Yeah, I think you are in the ZIP code, it has been a couple of hundred thousand dollar a day contribution. In fact, I can say that like the block ETF contribution in the quarter was greater than the crypto contribution in the quarter which is kind of interesting right kind of framing it. So it wasn’t like we had like a day or two of extraordinary results. I mean, certainly on January 11 or 12, when the ETFs were launched, there was a huge reshuffling between the closed-end fund into the ETFs. And so you had an uptick in performance those couple of days, but that was maybe like 10% of the overall crypto P&L for the quarter if that. So it wasn’t like we made millions and millions of dollars on a day or two.

So it has been a nice steady contributor. The way I would look at it is if you look at the VPMM business our non-customer market making business. It’s now like a new asset class within VPMM. It really has established itself as a consistent asset class in the same way that we look at like FX and we look at commodities. We now in all of our internal reports and we’ve had this for a while, but that was meaningful. We have a separate line for digital assets or crypto. And we think that like the success that the marketplace has seen with massive inflows and massive ETFs created will just encourage any additional instruments to be free. You’ve already seen that the United Kingdom and Hong Kong have announced that they have approved versions of Spot Bitcoin point ETFs. You’re going to see leveraged products.

When the CFTC and the SEC can get their act together you’re going to see options on those ETF products and when the SEC, hopefully can get it’s act together in the next month on the same products, you’ll see a suite of those launch. It’s not at all dissimilar from what you see in the world of FX where you have major payers and then you see options on FX ETFs you see smaller payers and whatnot. So we’re very excited that this is a new asset class within our non-customer market making business. The other thing I’d point out is that it’s a perfect Virtu-style business because it incorporates Bitcoin and these other digital assets in the form of Spot and ETFs and futures it’s cross-border. So it’s kind of Virtu 101 in terms of market making and our operational discipline and then we’re very good at partnering with the issuers and becoming an authorized participant.

All the things that we have talked about for the last 16 years around the Virtu non-customer market making business. This asset class fits quite well into. I’m happy that we got engaged in this asset class three or four years ago. Obviously, it took longer than we had thought in terms of regulation and approval of this Spot Bitcoin ETF that’s water under the bridge. But we’re very excited that this asset class will continue to grow and we will continue to be in the middle of helping grow it. And I think the important thing is that it’s not a niche product. $14 billion of inflows didn’t just come from retail investors that are interested in trading in and out of Bitcoin. There has to have been real I don’t want to say institutional but high net worth RIA other money.

And I think a number of RIAs are now looking at the asset class and saying okay should there be a slimmer allocated to that? And I think the answer in some — for some advisers is certainly yes. And so that’s — you’ve seen the result of that in terms of the inflows into the product. And again, this is kind of Virtu 101. We want to be in the middle of that ecosystem providing really, really tight prices and efficiency to make — to the market, excuse me, because efficiency then just begets more liquidity, which begets more interest and begets more growth of the asset class and we want to be part of that.

Patrick Moley : Okay. Great. And then just as a follow-up as we think about that few hundred thousand of ANTI a day can you help us understand like what amount of that is coming from trading in the ETFs versus the money that you’re making trading the Spot Bitcoin and kind of like selling that back to the ETF issuers?

Douglas Cifu: Yes. I mean it’s all — we look at it as all one big integrated pot. I mean, obviously the strategies that we run market making in the ETFs work in concert with what we do in the futures in the Spot market. And it’s like what we do in gold. We look at GLD we look at Spot gold. We look at gold futures on — and all of those strategies are sort of integrated Patrick. So I’m not trying to be a punk and not answer your question, but it certainly — it’s a universe if you will of products that all integrate and work together. And frankly, we don’t break it down in that regard. And so as I said in the answer to your first part of your question as that universe continues to grow and expand we’re very confident that we’ll be at the middle of it.

And the market maker will continue to provide competitive prices whether it’s in an ETF a Spot or a future. And frankly whether it’s cross-border I mean you can throw currency on top of that right? There’s going to be products that will be you’ll have a yen-denominated Bitcoin ETF at some point that people will be interested into and that’s right in our wheelhouse.

Patrick Moley : Okay. Great. That’s it for me. Thanks.

Douglas Cifu: Thank you.

Operator: Please standby for the next question. The next question comes from Kenneth Worthington with JPMorgan Securities. Your line is open.

Kenneth Worthington: Hi. Good morning. Thanks for taking the question. Maybe first for Joe. In terms of capital management you purchased I think $36 million of stock this quarter. That was lower than the level of repurchases we’ve seen over the last year. And if you look at 1Q 2023, you spent roughly double on buybacks last year despite 1Q 2024 having a lower stock price and a lower average stock price. Any reasons for the more modest buybacks this quarter? Was it just sort of truing up relative to ANTI or something else philosophical?

Joseph Molluso: No, it’s nothing philosophical. We have these ranges that we posted that at different levels of net trading income. This is what you should expect in terms of the ranges. The amount of kind of free cash flow, we have doesn’t, necessarily line up precisely with those ranges every quarter. So there’s ebbs and flows. When we embarked on our share repurchase program, we made a decision that we’re just going to use the proceeds and apply them to the stock price, as it is. And I think looking back over three-plus years that we’ve done this, I think we’re satisfied with where it came out. And you should expect fully that we would — we’re going to be within those ranges that we published. And the first quarter, is even if you just annualize it, it’s right there in the range that we’ve — that we posted for six a day. So I wouldn’t read anything into that.

Kenneth Worthington: Cool. Thanks. And then just a follow-up on the Bitcoin ETFs. Bitcoin ETFs have moved from strong inflows in 1Q 2024 to closer to breakeven so far in 2Q 2024. If flat Bitcoin ETF flows were to persist, does that impact the revenue opportunity for you in Bitcoin or crypto broadly?

Douglas Cifu: It’s a good question. I think we really more look at kind of like gross flows, as opposed to net because that means there’s a portfolio reallocations and opportunities Ken. I mean, certainly look I mean when the Spot Bitcoin ETFs were approved as I said earlier, that was massive and you follow and I track your metrics that you put out every day there were massive rejiggering from the closed-end fund to the handful of the ETFs. And certainly, that was episodic and that’s not going to happen again. But there has been a consistent nice pattern. And again, I think the best analogy is really looking at like another commodities market, and the most analogous one would be gold. And so in that marketplace every day, there are people that are getting in and out of ETF positions and getting it in and out Spot or reallocating from a different asset class.

So if you look at digital assets and Bitcoin specifically, as just a slice of a pie that wealth managers are now looking at in, institutions that are looking at as an investable asset over some time period. That’s the thing that is compelling. It’s no longer, in my view, a novelty asset that people are sort of trading and has like this somewhat nefarious tinge to it. It is now an investable asset that is on a meaningful number of platforms and is certainly being, advocated for lack of a better word or allocated by gatekeepers. And so that means, that there’s going to be volume. You’ll have spikes when hearing [ph] is approved and when options come on and when the UK and Hong Kong and blah blah blah, but the theme here is that you now have a large investable asset class, there’ll be volatility opportunities.

And the underlying asset class for better or worse has a certain amount of volatility to it. And the other interesting thing is, it’s a 24/7 market in the form of spot. So I think there’s a lot of attributes to it that are compelling, from a market-making standpoint and provide a lot of opportunity for a firm like ours that is scaled, global and can manage the intricacies if you will from the various forms that Bitcoin and these other points will take be it Spot ETF or future.

Kenneth Worthington: Great. Thank you. And Go Panthers.

Operator: Please standby for the next question. The next question comes from Chris Allen with Citi. Your line is now open.

Q – Chris Allen: Good morning, everyone. Nice quarter and again a nice one by the Panthers last night. Maybe just on block ETFs. You noticed a greater contribution than crypto this quarter. Can you help us think about, how that business breaks down between equities and FICC? What the drivers have been? I think you talked about efforts to broaden distribution. Maybe give us some color on that front. Because that to me, seems like a more sustainable business from a longer term relative to maybe a crypto where we are seeing a little bit lower flows in the near term. So, any color there would be great.

Joseph Molluso: Yes. Great. I mean I think, I mean just from a metric standpoint, what we saw in the quarter was roughly double what we saw in 2021 in terms of ANTI performance. So, that’s a significant result. In terms of like what the breakdown is what we have ascertained and what we’ve built over the last couple of years is you have to kind of be in everything Chris and you have to be global. And so certainly we’re very proficient obviously in equities. That’s the entomology if you will of the firm. And so that’s very good. But there you have to be competitive in fixed income and commodity products. And certainly there’s more margin and there’s more risk and there’s more challenges associated with being in fixed income and indeed in crypto as we’ve indicated.

So the fact that we are a full-service firm that provides two-sided prices in all of those products. The fact that we now have a global offering with a credible desk in Europe for the first time is important. The fact that we have the same thing in Asia is important. We’re not nearly as scale to some of our competitors. We don’t have dozens and dozens of salespeople on the street. We don’t have 20 years of relationships in Europe but we do have thanks to the ITG and the old legacy Knight franchises. We do have a significant amount of customer relationships. We are obviously leveraging the old ITG infrastructure in terms of customer relationships in Europe and in Asia in particular which has been incredibly helpful. So we do have a built-in sales force.

And we do have great partners in Bloomberg and MarketAxess and others that provide RFQ capability so that we can be competitive. And just about every counterparty will enable Virtu and give us a shot, because we have a pretty good brand name in terms of customer service and whatnot. So if you add up A plus B plus C, we have a scaled credible global offering that allow us to be competitive. Certainly in the quarter there was more portfolio shifting and the people were moving out from fixed income to hear some people wanting to get two-way prices in large block. Bitcoin, ETFs. So there were definitely some episodic transitions if you will that were very helpful to the results. But that’s what the business is for. And hopefully you get a couple or three of those or 10 of those a quarter and that repeats itself.

So again it’s one of these businesses and our growth initiatives where we have spent a lot of time, a lot of money and a lot of resources to build the technological infrastructure to be responsive. We understand the products very well. We’re a fully integrated firm so we’re able to provide tight prices because the ETF desk is not an island unto itself. It’s working with the entire firm. We’re internalizing the flows that we get with the non-customer market making depths around the firm. There’s one P&L in this firm. So we’re very, very efficient in doing that. And we made a conscious decision three or four years ago to dip our toes and now we’ve got both feet in the fixed income waters, which gives us we’ve got true scale and global capabilities.

And then as I said we’ve made significant investments and hires in Europe and in Asia to give us a global presence. So we’re a long ways away from being one of the larger name players like Flow Traders or Citadel some of these other firms that have much larger infrastructure and they’re great firms and they’re great competitors. We think we there’s a value that we can add. We think we have attractive two-way prices. We think we have operational excellence. And most importantly thanks to the legacy ITG and the Knight businesses we have a very, very credible brand name and a very credible global network of clients that will do business with us. So all of those accrue among lead to our ability to have a truly scaled global block business in a Virtu style, which means our headcount is going to be a fraction of what the competitors are going to be.

Our capital base is going to be smaller than some of our competitors. We’re going to take less fresh than some of our competitors. But at the end of the day there is a role for us in that marketplace and I’m very, very happy with the results we had this quarter. And indeed I’ve been very happy with the results we’ve had over the last three years. This quarter in particular was a standout ones for that group.

Chris Allen: Appreciate all the color there. And just a follow-up on that business. Is there a good indicator for us to look at here? Is it ETF flows from a fixed equity perspective ETF trading activity? Or is it because of the block nature is it something that will just have to attempt to triangulate off of different things?

Joseph Molluso: Yeah. I mean, obviously, overall ETF volumes are a good thing to look at globally. I mean, it is a little bit lumpy, because within that you’ll see, there’ll be huge blocks that come through periodically. And obviously, there’s risk associated with those but there’s more reward associated with those. So, certainly we have clients that are sending in smaller clips and that will be done through the RFQ. If it’s a larger block of a transition of an RIA, we may be putting competition with two or three other market makers and we try to price that as tightly as we possibly can. A lot of folks will do that once a year, sometimes they’ll do that four times a year. And the key is to provide really good customer service, so that you’re in the wheel and you could be competitive.

I mean no one is coming to us, because we’re Virtu and they happen to think we’re good guys, they’re coming to us because we provide really, really good tight pricing with immediacy if need be and good customer service. And not only that we can provide, because of our analytics business a real pre and post-trade analysis, so that they can satisfy themselves in their own best execution committees that they’ve done the right thing by their investors in terms of allocating assets from asset class A to asset class B, both expressed as ETFs if that makes sense.

Chris Allen: Yes. Thanks guys.

Joseph Molluso: Thank you.

Douglas Cifu: Thanks.

Operator: [Operator Instructions] Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Craig Siegenthaler: Hey. Good morning, Doug. So, it’s hard for me to congratulate you on the Panthers win last night, because I’m sadly a Flyers fan.

Douglas Cifu: Well, we all have our crosses to bear.

Craig Siegenthaler: Well, back to business here. We’re hoping you could spend a little more time on the effective spreads. So you could see this developing in the 605 data in Jan and Feb. I was hoping you could walk us through the underlying factors that drove this especially with realized volatility lower?

Douglas Cifu: Yes. It’s actually — it’s a great question because for years people have looked at realized volatility overall at Virtu and the strong appropriate correlations between what our P&L should and shouldn’t be. And I think we’re still true. And so as I said in my prepared remarks, I’m very pleased with the overall performance particularly in VPMM, given the fact — excuse me that we had a mixed environment in volumes slightly up and realized volatility materially down. I mean it’s — as a side note, it is surprising to me and I’m not an expert in this to look at the VIX and say, okay, well we’ve got some global conflicts going on in Central Bank scratching ahead trying to figure out. We got inflation and we got a presidential election on the horizon and the VIX is still at 12, 13, 14, 15 and hasn’t really shut off but that’s neither here nor there.

I think with regard to our VPMM business, we have always tried to indicate and I do think that some of the information as you indicated in the 605 reports are important and that you have to look at that and we certainly look at that internally here at Virtu as sort of a sub business if you will within our customer market making business, because we are dependent if you will one on the flows that we get from our retail clients and there’s hundreds of them. So, certainly retail volumes are important, because if you’re not getting the widgets you can’t make money on each of the widgets. And then secondly, within that what’s the spread at time of arrival if you will within the orders that we received. Some of that Craig is the best explanation.

I give you some of that is the mix of the flows that we get. I mean if you’re getting higher priced names as opposed to some of these smaller penny names if you will or low price names that trade an awful lot. You’re going to have a greater opportunity. So, some of it is mix of business. And some of it frankly is the environment where again, retail is a slight misnomer, because a lot of it is also high net worth and RIA flow that comes through the pipe. So, it’s not just day traders if you will. And we sort that by each of our clients. I mean some of the flows will be more high net worth RIA type of flows. And there similar to the answer I gave Chris around the ETF block desk, you have clients that are doing their own portfolio rebalancing or they’re coming off the sideline from fixed income and they’re deciding they want to go by a bunch of Tesla and Amazon and a bunch of technology from, whatever it may be and that flow will tend to be a little less correlated to the market and maybe we’ll present a better opportunity to Virtu, so more engagement and more allocation into equities.

And the mix of the business is probably the best explanation I can give you as to why we spread at time of arrival as measured by our 605 reports was significantly higher in the first quarter as compared to the fourth quarter. Obviously, that does help drive results. And that’s offset I guess as I indicated earlier by the significant decrease quarter-over-quarter in realized volatility. I hope that give you some explanation. And again at the Panthers, we’re always open to new fans, so you are welcome.

Craig Siegenthaler: After our 18 losing streak at the end of the season I might have to switch. But Doug one follow-up here. So, how are spreads trending in March or April just given we haven’t seen the 605 data yet for those two months and in April volatility has actually spiked up?

Douglas Cifu: Yes, I’m always hesitant to like every time I do this then one of you guys jumps on it. I would say that they’ve been consistent. I mean our March report is due out on May 1st, I think Andrew is that about, right? Yes. So, you’ll see it on May 1st. And it is consistent with what we saw in January and February. So, again I’m not smart enough to give you all of the macro reasons I’ve given you the best explanation that I can in terms of what we’re seeing. Obviously, it’s a positive for the customer Market Making business. We’ve seen ebbs and flows over the last since we bought Knight in 2017 in terms of that. And so we try not to get too high and not too low because every time that the spread numbers come in we know that they’re going to revert back. And so these are — we just do our best to try to monetize the flow that comes to us.

Craig Siegenthaler: Thank you for taking my questions.

Douglas Cifu: Thank you very much.

Operator: The next question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon: Thanks. Good morning. I was hoping to get an update on options market making where you are in terms of number of single names as well as kind of index? Trying to get a sense of what percentage of the market you are interacting with at this point?

Douglas Cifu: Yes, it’s a great question. And I guess I get it every quarter. So, — as I should. We continue to chug along. We have expanded the single names that we are trading if there are — again — we are not directly taking flow from clients and that is a strategic decision that we have made. I’m not saying that we won’t at some point, but that — there’s 1,000 names if you would need to be active in. And today — not every day but we are up and capable of quoting in 10% to 20% of the overall universe. And so we pick and choose our Spots obviously when there is excitement Dan around a particular name like Tesla earnings or this and that and that’s the name that will always be up and active in, we will be market making there.

We had a really good quarter in options. We have launched and are profitable in India already which is exciting. I mean it’s a small business and its growing. I want to get into them the options because there’s been a lot of news around that. And that does not involve Virtu that’s not our style. But certainly we think that there’s a significant opportunity there in Japan where we’re up and running. So, again, I’m very pleased with the progress. Our market share in the index family has continued to grow and is meaningful. And we have — we’re active on all of the 17 or 18 options venues that are out there. And we’re focused on capturing the significant opportunity that like at our feet and in our wheelhouse. And if you look at like the mix of business again I don’t want to pat ourselves on the back if I told you so, but a lot of the — I would say there’s been a shift more towards these index products as opposed to the single names.

So, I think there’s plenty of opportunity there. There’s plenty of opportunity overseas and we will continue to grow. I’m not saying we’re not going to ultimately take direct flow. We are competitive there. We do take some of it through other through other means. There’s other ATF. There’s routers that send us retail flow you can be competitive in the options. And so we’re in the business. We’re just not fully scaled and competing with Citadel and Susquehanna get in that business. But we will at some point.

Dan Fannon: Understood. And then just thinking about the regulatory calendar over the next couple of months can you help us know what you’re focused on in terms of rulings kind of where your processes that are kind of working down that you’re still waiting to hear back from as we think about I don’t know not the full year, but maybe in the more shorter time period?

Douglas Cifu: Yes. Great question. I was really trying to get through an earnings call without disparage and Gary Gensler. And I guess you’re not going to let me. I’m joking, but not really. As you have seen there has been a — I think, we’re up to 10 or 12 litigations now, against the SEC by business groups, industry participants everything from the proxy adviser rule to the climate rule which they have stayed. It’s really become — I don’t say comical, I would say actually kind of sad, if you will, that there’s been such a lack of engagement with American participants if you will, and the SEC has just gone full steam ahead with a lot of these rules. And frankly, they’re going to just continue to rack up losses, based on the briefs and some of the analysis that I have read.

In terms of the proposals that more directly impact Virtu, the climate thing impacts us because we’re a public company. And I don’t think that’s really even worth talking back of that. I think that will see the light of the day, because it was so broad in overreaching and the economic analysis was, so future in that I think the court will reject it. But in terms of the proposals that impact Virtu, the 605 rule was adopted and that’s favorable it’s something that we had advocated for. I think the other three proposals I hear will come out of the SEC at some point this year. I think there’s going to be significant changes to the auction proposal. I think that will — I think there’s been an avalanche of comments from just anybody who’s credible in the industry that says this is just silly and not workable and its solution chasing a problem that doesn’t exist.

So if that even sees the light of the day, I think it will be very different than the proposal that came out and it will have no real impact on Virtu or the marketplace at all. I think the best execution rule will come out. It will be vague overreaching and we will not have a significant economic analysis underlying it. So there’ll be litigation that somebody will bring, in one of the Knight fifth or eight-circuits and the SEC will lose that one as well because the economic analysis will again not satisfy the standard in The Administrative Procedures Act. And then finally the Reg NMS in terms of like what they’re going to do with your ability to quote at midpoint or some smaller increments that’s kind of a TBD. If it’s not too overreaching and kind of makes sense, I think the industry will say, okay, we’re happy to allow this one to come through without litigation.

Maybe the exchanges will sue on that, because I think it’s not, it doesn’t allow them to be as competitive. I don’t know. I mean that one we’ll see. But I think you’ll see final rule late beyond all this stuff in the next three to six months. And obviously November fourth or fifth there’s an election. If there’s a change of administration traditionally the Chairman would resign. And so I think our long national nightmare will be over. And we can get back to doing business.

Dan Fannon: Yeah. That’s helpful. Thank you.

Douglas Cifu: That was a general quote by the way for everybody who’s interested, yes. Thank you, Dan.

Operator: [Operator Instructions] Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys: Great. Thank you. Good morning. I wanted to come back to Options Market Making. Doug, I think you mentioned that you’re quoting in 10% to 20% of the universe today. Just curious what takes you to 50% or higher overtime? And what that time frame could look like?

Douglas Cifu: Yeah. It’s a great question. Again, it’s balancing the opportunities, Michael. And I think if you had asked me this question three years ago, I might have given you a different answer. I think, I don’t know which one of you guys put that all this great data. But in terms of — and someone has done a really good analysis of like opportunities. I mean there’s been like a seismic shift towards an SPX line and like the broader index families in terms of volumes. So we kind of — we go where the opportunities are. The guys in the desk are obviously very keenly aware kind of where they should focus their energies. And so I’m really letting them lead as opposed to me saying from on top of we need to be in 122 symbols by X, because that would be foolish.

Really all I care about is the bottom-line how much money we’re making. And we’re doing very well there. So it’s really the index family. And then obviously as I’ve said we’ve pushed internationally in Asia, because I think that’s the next significant growth area in terms of prioritization. That’s not to say that there aren’t a significant number of individual names and that will vary day-by-day, week-by-week where there is activity, whether it’s earnings, whether it’s just — it’s the flavor of the month or whether it’s this or that. And we’re very capable of pouncing on those opportunities and being too sided in those names. So whether it’s a name that happens to be in the news or whether it’s a name that has earnings or whether it’s like a large cap tech company that has significant options activities in it, we’ll go with those opportunities.

And so there’s a benefit to that which is to say, when you’re not in a customer relationship with retail brokers where you have to take all the various names, you can move and route. And you can kind of say, all right I’m going to focus my energy on XYZ large cap and on the index this week, because that’s where the money is at as opposed to the overhead of technology risk and people frankly of having to be too sided in 800 names that may trade by appointment and have strikes that go a year or two out and impose significant risk on the firm. So it gives us real operational flexibility. And I’m kind of very comfortable with where we are at right now.

Michael Cyprys: Okay. Great. And just a follow-up question. I wanted to circle back on slide 7 where you show your pro forma EPS viewpoint of $3.50 to $4 a share. Just curious, what — how you’re thinking about the time frame to hit that any sort of steps you may need to take in order to get there? And then, what sort of market backdrop do you need to be in, in order to kind of get within that range and grow from there?

Joseph Molluso: Yes, Michael, it’s Joe. I mean I’d make two points. One is that, in some respects, we’ve already achieved this in that and we look at this is taking all the growth initiatives away from a 5-year look back on ITG, KCG and Virtu together and what’s kind of an average through the cycle earnings base because the feedback we’ve gotten from you all and shareholders is that, what is — what do you think it is? So we looked at the data stripped out the growth initiatives and came up with the number. And then, when you look at those two slides together, slide 6 and 7 at each level of net trading income, we generate significant buyback each year. And I think part of the — when we originally put this information together, the point we were trying to make was look we’re emerging from multiple acquisitions and long-term integrations.

And our cost base kind of fluctuating and our debt levels fluctuating. And now that we’re in a steady state, how do you look at our company over a multiyear period. I think direct answer to your question is we build most of this analysis around a 3-year timeframe. But three to five years is fair. And I think, it’s both corporate finance and it’s real growth, right? So the corporate finance is, look at that net trading income per day chart on Slide 6. And I would venture that in the next five years, we’re going to be towards the top end one or two years, towards the lower end one or two years and maybe one year in the middle. But when you look at the impact on we generate a lot of cash flow. We keep our expenses low and we’re prudent in managing capital.

So, when you put all those three things together, just the earnings impact and the reduction of the share count each year, you add up whatever percentages there on the right, you think we’re going to achieve, those numbers are over a 3-year period. So you kind of start with that as a baseline growth and then we arrange the growth initiatives from the low to the high in the history that’s on that chart, so obviously the high being this recent quarter and then on average. So I think, what we — the point here is the three points I made, right? We generate a lot of cash. We keep expenses low. We’re great at managing capital and we think we’ve got some built-in growth if you’re willing to kind of look at it on at least a 3-year time frame.

Michael Cyprys: Great. Thank you.

Douglas Cifu: I think that was the last question. So I want to just thank everybody for participating in this call and for all the great questions and we look forward to speaking with you all in July. Thank you.

Operator: This does conclude the conference call for today. We would like to thank you for your participation. You now disconnect.