Virtu Financial, Inc. (NASDAQ:VIRT) Q4 2022 Earnings Call Transcript

Virtu Financial, Inc. (NASDAQ:VIRT) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Ladies and gentlemen, welcome to the Virtu Financial 2022 Fourth Quarter Results Call. My name is Glenn, and I’ll be the moderator for today’s call. I will now hand you over to your host, Andrew Smith, Head of Investor Relationship. Andrew, please go ahead.

Andrew Smith: Thank you, Glenn, 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 Cifu, our Chief Executive Officer; Mr. Joseph Molluso, 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 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 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 manage €“ as well as how we use these measures. With that, I’d like to turn the call over to Doug.

Douglas Cifu: 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 key 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 2. 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 $0.37 in the fourth quarter. Our Market Making segment, which earned an average of $4.2 million per day in adjusted net trading income for 2022 comprises our customer wholesale business where we received flow from 250-plus retail platforms, as well as our noncustomer 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 receive 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 noncustomer business, which provides liquidity across asset classes globally experienced a strong quarter, as well as a strong overall year, as our ongoing investments in our growth initiatives, particularly around options Market Making continued 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 noncustomer 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 historic – 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 noncustomer business include energy and natural gas, specifically as well as our continued growth in options globally. To give you some additional perspective, our noncustomer 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 ANTI. 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 wallet 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 VES’ 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 non-existent 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 remain 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 in 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 footing.

In the U.S., market-wide options volumes were – were up 5.5% in 2022, while ANTI 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 multiyear effort. In Block ETF, we continue to make progress in 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 in 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 manage the risk around the events of this quarter, as you would expect from Virtu. Although we had an approximate 8-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 cost and worse execution quality, the SEC’s proposals would also harm liquidity and increased costs for institutional investors and issuers. Further and importantly, the half Harrison rulemaking, lack of any real engagement with stakeholders an 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 scaled 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 options, we would be able to and in fact, we will be required to send flow, we do not internalize to an exchange retail auction.

Today, we incurred significant fees, including payment for order flow, price improvement and exchange, SEC and other transaction fees on orders we do not internalize. These costs would be dramatically reduced under the proposal. We also internalized 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 in 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?

Joseph Molluso: Thank you. Doug touched on options and ETF Block, in particular, as drivers of our growth initiatives. I’ll review some of the growth information we provide, as well as review where we stack up versus the grid of expected outcomes to Virtu and finally, discuss expenses and capital overall. On growth, growth initiatives constituted $602,000 per day on average in the fourth quarter and $665,000 per day overall in 2022. These numbers were 11% and 14% of our global ANTI, respectively. ANTI-from options grew dramatically as well, doubling its contribution. While we maintained our presence in the crypto markets in the fourth quarter, we did, like many others, significantly reduce our activity. We remain bullish on crypto as a growth area in the future and remain – and we remain excited about EDX, our joint venture.

I mean view many of the challenges facing the crypto space as validation of EDX’s best-in-class custody clearing and settlement model. On expenses, we ended the year with cash operating expenses that were flat year-over-year at $609 million. We consider this a significant accomplishment given the most inflationary environment in decades and the marketplace for talent, especially early in the year, becoming intense. Our cash compensation ratio is at 21.5% for 2022, right in the range of where we would expect it to be in a year such as this. Other expenses remain relatively constant. The outlook on expenses is more of the same. You can expect our compensation ratio to fluctuate within the ranges you see on Slide 8 in the supplemental materials and a continuation of the trend for our other major expense categories.

You will note a marked increase in operations and administrative expense in the fourth quarter. This is due to a foreign exchange valuation swing related to our foreign subsidiaries that increased its expense by $9 million this quarter. For the full year, however, the FX translation was an overall benefit to Virtu of $9 million. We generally don’t call these amounts out because they tend to be small. But given the strength of the dollar versus the euro and pound, sterling this year, it was a significant benefit overall. Additionally, we estimate the amount of revenue that was reduced – revenue we earned in pounds and euro and translated into dollars was approximately $10 million. So these amounts largely offset and so did not significantly impact earnings.

In terms of expense guidance for 2023, we would expect our cash operating expenses to remain relatively flat to up 1% to 2%. On capital and debt, we manage our capital as efficiently as our expenses, and you can see our trading capital remained relatively constant throughout the year. We maintained our public $0.96 annual dividend, which we have paid steadily now for 7 years. And you can see on Slide 6 that payout has remained steady despite the volatile results over the long term. In addition, we repurchased $45 million in our own stock in the fourth quarter. For the full year, we repurchased $460 million in stock, representing 16.2 million shares. Our period-end share count is now 171.8 million shares and we have repurchased net almost 13% of our company in the 2 years since beginning our share repurchase program.

We remain committed to both our public dividend payout as well as our share buyback program, consistent with the ranges we have provided in the past. We were very pleased to have refinanced our long-term debt in January before interest rates really took off. As of year-end, we have $1.8 billion of maturities turned out to 2029 and all but $275 million is subject to a rate cap. So our total debt at a blended rate of 4.95% pretax interest represents a favorable outcome to us. And with that, I’ll turn it over to Cindy to review the financial details before opening the call to your questions.

Cindy Lee: Thank you, Joe. Good morning, everyone. On Slide 3 of our supplemental materials, we provided a summary of our quarterly performance. For the fourth quarter 2022, our adjusted net trading income, which represents our trading gains, net of direct trading expenses, totaled $274 million or $4.4 million per day, which is a 43% decrease year-over-year. Market Making adjusted net trading income was $185 million or $2.9 million per day. Execution Services adjusted net trading income was $89 million or $1.4 million per day. Our fourth quarter 2022 normalized adjusted EPS was $0.37, and our full year 2022 normalized adjusted EPS was $3. Adjusted EBITDA was $125 million for the fourth quarter 2022 and $859 million for the full year, which was a decrease of 62% and 34% compared to prior year, respectively.

Our full year adjusted EBITDA margin was 59%, which is down from 68% in 2021. On Slide 8, we provided a summary of our operating expense results. For the fourth quarter of 2022, we recorded $185 million of adjusted operating – adjusted operating expenses, which was a 6% decrease year-over-year. The full year 2022 operating expenses were $675 million, which was $2 million lower compared to 2021. 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 $25 million for the fourth quarter of 2022 compared to $20 million in the prior year fourth quarter. With the benefit of the interest rate swap contracts we entered in prior years, we were able to keep a blended interest rate around 4.95% for the long-term debt in aggregate.

Our capitalization remains accurate. We repurchased 2.1 million shares or $45 million in Q4 2022 and 16.2 million shares or $460 million in full year 2022. Since the inception of our share repurchase program, we have bought back a total of 32.8 million shares, which is $910 million today. We remain committed to our $0.24 per quarter dividend. The combination of our dividend policy and share repurchase program demonstrate our continued commitment to return capital to our shareholders. Now I would like to turn the call over to the operator for Q&A.

Q&A Session

Q – Rich Repetto: Yes. Good morning, Doug and Joe and Cindy. I guess, first, the question is on the retail flow. I know you do a lot of analytics, Doug, and you mentioned that you performed in line with the opportunity. And I guess just to understand the opportunity a little bit better, if there’s any one or two things that you could have changed about the nature of the retail flow, you know, your peers also in channel checks reported much of the same. But if there was this one or two things the change about the order flow that would help – that would improve profitability. What might they be?

Douglas Cifu: Yes. Thank you. It’s a great question, Rich, and I appreciate it very much. I think as we’ve been very upfront about, and obviously, a lot of these metrics are public in terms of the aggregate number of shares that we receive and then obviously, our 605 metric. So what we do here is we measure within that sub-segment of our business, basically the spread of the bid offer in all of the orders that we received at the time that we receive them. And think of that, if you will, is the opportunity €“ the opportunity set. And historically, and it started to break down over the last couple of quarters, that spreads some or that opportunity correlated very linearly with volatility. So the higher the volatility, higher spread some was in the retail customer flow that you received.

For reasons that you know, I would just be speculating that, that correlation has broken down over the last quarter, quarter and half, and it was particularly egregious, if you will, in the fourth quarter. And so the opportunity was vastly different than the volatility would otherwise – the opportunity within customer market making was vastly different than the volatility would otherwise have projected. So we measure that. We obviously measure our market share and how we’re being competitive against the other seven or eight wholesalers. And all of those metrics check out. We obviously have invested and continue to invest tens and tens of millions of dollars in technology to improve and to capture more flow and to increase our ability to monetize flow.

But at the end of the day, we are somewhat beholden particularly in that business to the orders that we’re receiving. And so as we have said – and obviously, there’s been quarters where spread sum has widened you know, significantly we’ve had outsized quarter. So that business, which is a sub-segment, obviously, of our Market Making segment, by definition, will be much more volatile. This is, unfortunately, a quarter where we see decreased opportunity. And therefore, we’re disappointing, if you will, you guys when we get that, but there are other quarters where we’ve surprised to the upside. So what we have always said and what we will continue to say is we love that business. We think it’s a great business. We provide terrific service to 250 retail brokers over the long haul.

It’s been incredibly profitable when Knight ran it for the last 20 years, and we continue to run it. So we love the business. It’s just a business that can be a bit challenging in the context of a public company that needs to report quarter-by-quarter.

Rich Repetto: Okay. That’s very helpful, Doug. I appreciate it. Thank you.

Douglas Cifu: Thank you.

Operator: Thank you, Rich. We have our next question comes from Chris Allen from Citi. Chris, your line is now open.

Chris Allen: Morning, everyone. Just a kind of follow-up on Rich’s question. I know you don’t speculate on the reasons, but maybe you could give us some speculation or the reason for the opportunity set diminishing, maybe is increasing sophistication of retail investors? Or is it a flow mix between the retail brokers. And also, you mentioned enhanced opportunity in customer Market Making in January with efforts to improve the capture rate that’s bearing some fruit. Maybe you could give us some color just on what efforts those are?

Douglas Cifu: Yes, sure. Look, I mean, the easiest and most I think on point answer is that you know, in the retail business, the whole idea behind the retail business, which smarter guys than me created 30-odd years ago was that you’re going to have smaller orders, Chris, that are typically not correlated with the wider market. So as a market maker, you can absorb those markets – those orders, excuse me, internalize them, price improve them and give a retail investor as compared to an institutional investor that will have much larger desires and enhanced experience, better service, et cetera, you kind of get that. In the quarter, and it might be the mix of – as you say, the mix of the business, maybe more institutional investors were sliding into €œretail brokers€, et cetera.

In the quarter, you have more flow that tended to be more correlated with the larger marketplace, and that makes it more of a challenge for a market maker. We don’t have some magic Elixir in terms of – if the stock continues to go up during the day, as I’ve said many times, that is the yin and the yang of being a market maker. Under the current ecosystem construction, we don’t have a choice. We need to take all the flow that comes our way, small, medium and large, regardless of what the stock is doing and many times, that results in negative selection and a negative P&L with regard to that stock for a day, a week, a month, whatever it is. And so that’s probably the best answer I can give you. What I can tell you, since 2017, when we first acquired the Knight customer business, we’ve seen quarters like this when we’ve seen quarters where the opposite is true, where the flow is a lot softer, the spread sum is significantly larger than we’ve had outsized quarters.

So again, I repeat the mantra, which is, we look at this business over an incredibly long period of time, and we contended to be very bullish about it. In terms of enhancements and investments we’ve made to increase our monetization of the flow, it’s what we’ve talked about historically. Obviously, we’ve done a lot of the re-platforming and migrating all of this flow to the legacy. Virtu infrastructure, which is lower latent and more performance. But in as well, we’ve enhanced significantly the internalization opportunities for that flow, right? So internalizing it against both our own non-customer Market Making flow, but also making it available to our institutional investors who are very, very keen to get access to it. So all of those things, we’ve made significant progress.

And frankly, it has borne considerable fruit in this quarter and prior quarters. But again, we are somewhat beholden to the outside world and the opportunities presented.

Chris Allen: Got it. Just a quick one. Just on the FX, the $9 million in the quarter, offset by the $10 million in revenues. The $10 million revenue that spread over the year does that occur this quarter?

Joseph Molluso: No. That – so the way it’s working, Chris, is that the ops and admin 29 this quarter was $9 million higher than it would have otherwise been if not for this FX re-val. But that’s because the pound and the sterling started the year at – the pound started the year at 135. It ended at 119. And then in the second and third quarter, I think it went all the way down to like 110 or below, and then – and they came all the way back up. So year the full year, the FX re-val was a $10 million benefit, which was offset by revenue, okay? So it’s a wash in terms of impact to earnings.

Chris Allen: Got it. Thanks, guys…

Joseph Molluso: And each quarter, obviously, for it to be a benefit for the full year of 10 coming into the fourth quarter, it was a benefit a lot higher than – because than 10 – because a negative 9 brought it down to 10 this quarter. So for the full year, it’s a wash and the quarterly ups and downs basically offsetting revenue. So on a full year basis, it’s a wash.

Chris Allen: Thanks, guys.

Joseph Molluso: Yeah.

Douglas Cifu: Thank you.

Operator: Thank you, Chris. Our next question comes from Alex Kramm from UBS. Alex, your line is now open.

Alex Kramm: Yes, hey. Good morning. Thanks, everyone. I think you made a comment very briefly at the end of your prepared remarks about what you’re seeing so far this year. I think I heard that, but maybe you can flesh it out a little bit. It sounds like on the institutional side and also if you look at the public volumes, things have started surprisingly slow. But obviously, that never really speaks to your opportunity set. So maybe you can talk a little bit about what you’re seeing and how that compares, obviously, to the fourth quarter? Thanks.

Douglas Cifu: Yes. You’d never cease to miss the little kernel one I give a little update. So thank you, Alex for noticing that. And kudos to you. Yes, obviously, since we had a challenged quarter in the fourth quarter for customer Market Making, I wanted to give some color. And look, it’s obviously – I don’t think today is January or whatever. So it’s obviously early in the quarter. But we have seen an improvement in the opportunity set within our customer work and Making business. It’s not been dramatic, but it certainly is meaningfully better than what we saw in the fourth quarter, which is terrific. As you say, the rest of the business in terms of you can then look at kind of what institutional and overall marketplace volumes are.

I’m very happy with the way that we’ve started the year. I will say, and obviously caution everybody, right? It’s early in the quarter, and that’s really based on, I guess, 15 or so trading days. But I wanted to give some indication, obviously, that we see some improvement in the customer Market Making business. And as well, we’re seeing improvements in our Commodities and Energies business and in Asian equities where we’ve had some nice wins early in the quarter. So again, we’ve seen some improvements in our internalization opportunities on our execution with regard to internalizing flows. So very, very – continue to be very bullish and excited about 2023. And the early indications are that we’re going to see a little – see some improvements so far.

Alex Kramm: Excellent. Maybe just one very quick one for Joe, if that’s okay. On the debt, I think the trailing EBITDA – debt to EBITDA is, I think, 2.1 times. But obviously, if I annualize the fourth quarter, I think you’re somewhere in the mid to high 3s. Can you just remind us in terms of any sort of covenants, again, hopefully, things improve here, but I know people are going to ask again if we stay in this environment, if there is any issues we should be aware of?

Joseph Molluso: No, we have no – we are covenant light to the max. We are…

Douglas Cifu: There is zero maintenance covenants in our long-term debt…

Joseph Molluso: And we got rid of the cash sweep as well, right? So when we have an outsized quarter, the next time we have an outsized quarter, we’re going to obviously dedicate all of it to compounding value by buying back our stock. The maturities are termed out to 2029 you know, that 3 times plus is not an issue.

Alex Kramm: All right. Fantastic. Thanks for verifying.

Douglas Cifu: Thank you.

Operator: Thank you, Alex. We have our next question comes from Dan Fannon from Jefferies. Dan, your line is now open.

Dan Fannon: Thanks. Good morning. Doug, I wanted to follow up on the comments about the core or I should say, legacy Market Making business. If you could repeat the numbers of what you said, I think, flat year-over-year. But that also includes some of these new initiatives. So I wanted to think about what – how that business has trended maybe over a longer period. And I guess, maybe thinking about it prospectively, what is – how does that – you just gave some context around the start of the year for the customer Market Making business, but also maybe talk about that business and how the prospects of that loan from here?

Douglas Cifu: Yes. It’s a great question. Obviously, we get that question a lot, given the fact that we only report a single segment. So I thought it was important in the context of this quarter, Dan, to give just a little more of a hint of, if you will, how that business is. So yes, what I said in the script, whether it was flat from ’21 to ’22 and up 11% in the third to fourth quarter, which I thought was significant, right, because we’ve been doing a lot of work during the year to improve. Look, that is – the beauty of that business is truly scaled and global, and it’s multi-asset class. So it’s a little bit – the analogy I always use is it’s a little bit of like a water balloon or a waterbed. You sit on – I don’t know if you remember the water bed I don’t know if you’re old enough, I remember them from the ’70s and the ’80s, right?

You sit on one side of it, and it feels great, and then all of a sudden, there’s – especially because some of a heavier guy there’s a bull where it were to move to the other side and you push that and it kind of goes back and forth, right? You kind of get it. So there’s always going to be ebbs and flows in that business. And we have weeks, months, quarters where our energy business is doing quite well and then natural gas will go through a period like it did over the last couple of years, where there’s frankly no volatility and the price is pretty consistent and the opportunity set within natural gas and energy declines significantly. And then it comes back, which it has done more recently. And so overall, obviously, we look at that business on the individual asset classes and geographies and we’ve fully integrated it with some of the intelligence and the quant expertise of the Knight business, and we now internalize options into equities and commodities and you get how we work.

Over the last – we track it, obviously, from when we acquired Knight in 2017 from 2018 through 2022, we’ve seen significant overall improvement overall in that business. Have there been challenges in various sub-asset classes? Of course, have we introduced options and help grow the business? Yes. The important thing is that capture rates overall in most of those segments have improved. Our – we’ve maintained our market share, and we continue to be very, very excited about the “legacy businesses”. It’s not easy to continue to be relevant and highly profitable in those businesses. There is a conga line of firms that used to be in these businesses that are no longer there, but it’s really about disciplined execution of improving technology of hiring wonderful people and maintaining an expense base that makes a lot of sense because, as Vinnie Viola said, everything goes into the bid and offer, right?

So if you manage your firm in a scaled efficient way, you can continue to be profitable and successful even as bib offer spreads widen and then narrow and widen and narrow. And we’ve always said that we’ve built this highly scaled firm to do incredibly well in times of feast, but when there is famines, we still do very well as well. So I’m very, very happy with the progress of that business. And I wanted to give a little more color just in the context of this quarter.

Dan Fannon: Understood. That’s helpful. And I guess just thinking about the comments around expenses and knowing that comp can fluctuate, but the more fixed costs being flat, is that – what does that say about your – I guess, your prospects or how you’re thinking about the revenue environment for 2023? Do we think about it similarly to kind of what it’s been in the more recent periods? Is that how we should think about that expense relationship with the revenue backdrop?

Douglas Cifu: No, that’s a good question. It doesn’t imply that. It does not imply that. It implies that if we had a similar year, I would expect expenses to be flat. I don’t – I provide that guidance to just simplify things just because we are in multiple years now where we’ve kind of met or exceeded expense guidance. So I kind of feel like we can provide that number, if the environment is markedly better, the cash compensation figure is the one that fluctuates a little bit. And there’s enough history now you can see the cash compensation ratios for 4 years in a year where we’re up in the 2020 and 2021 ranges. I would expect comp ratios at those levels and then this year, the comp ratio, cash comp is 21.5%. So there’s flexibility in the compensation ratio. A great portion of our compensation is discretionary. So that’s just a guidance based on the current environment, but it does not assume that the environment is going to continue.

Dan Fannon: Understood. Thank you.

Douglas Cifu: Thanks.

Operator: Thank you, Dan. We have our next question comes from Ken Worthington from JPMorgan. Ken, your line is now open.

Ken Worthington: Hi, good morning. I wanted to flush out crypto and options a bit more. In terms of your build-out road map for those two asset classes, where are you in the build-out? And at what point do you think you’ll be fully built out? And then at what point are you going to be in a position, if you’re not already, to kind of win the same sort of 606 contracts you have with retail brokers in equities today?

Douglas Cifu: Yes. It’s a great question. So we began this journey in options, I’ll say 2 years ago. But really 18 months ago, it took a lot of building and the building continues, but we had to basically reconstitute the way we approach the market, as I described before, quote-based market as opposed to an options – and order-based market, excuse me. And as you know, there is a plus or of options venues in the United States. I’m embarrassed to say, I think there’s 17 options exchanges, but I’m not sure in every day that seems to be adding one. So just having connectivity to each of those and understanding the market structure of each of those, some are price times, some are pro rata, as you know, is – has been a bit of a challenge.

So to use the baseball analogy, everybody seems to use on these calls, we’re in the very early innings of that process. We have the infrastructure built. We have hired and moved some legacy Virtu people. And so we have a very, very talented team, both in the United States and around the world. But I think there’s a lot of runway left. I think to throw out a number, just kind of looking at where we are and the opportunity, I think we could increase that business Ken by somewhere by 3 to 4 to even 5 times what we did in 2022. I think really what we’ve done here Q4 in ’21 and ’22 is, I’ll just say, just although it’s a significant opportunity, but just the Index family. We are dabbling in single name options and the beauty, if you will, of the options market is that you can participate in “retail auctions€ without having to take all the retail flows.

So we are now doing that. We have the functionality for auctions, which leads to the last part of your question as to when do we roll out into being more of a wholesale market maker and options. And the answer is, I’m not sure sitting here today. We know that it’s on the horizon. I’m not going to rush it because we had a fantastic year in 2022 in options. I’m very happy. There is a lot of opportunities in Asia. We’re now Market Making the Nikkei and the Nifty50 options family in India. And if you look at the volumes in India, for example, they’re extraordinarily large. So there’s a lot of opportunity there. And as we built the legacy Virtu firm Vinnie a bunch of great people from 2008, call it to 2011, ’12, ’13, we’ll use that as a playbook for how we build out this global business.

So I continue to be very, very bullish with the opportunity, and we’ll prioritize the 605 business relative to other opportunities that we have not lacked for opportunity and work thus far. And so I continue to be very optimistic about our ability to be a meaningful participant in that marketplace.

Ken Worthington: Thank you for that. And does it look like – is there a possibility or a likelihood that 2023 can be the year that you’re ready to kind of roll this out? Or is it much more likely that the options business getting to where you wanted to be in terms of that wholesaling business is more of a 2024, 2025 time line?

Douglas Cifu: Yes. I mean I would never say never. I’m not sure sitting here today where we’re going to have our priorities. I will point out that in looking at the opportunity data in 2022, if you look at like the dramatic increase in options, it really wasn’t the Index family, not to denigrate the other business or single name, but that’s really where the opportunity is. And as you go where the opportunity takes you, and as I said, there’s plenty of opportunity there. So it’s something that’s on the horizon. Is it within our plans in the next couple, three quarters? No. But I would never say definitively one way or the other, which where we’re going to head.

Ken Worthington: And then maybe lastly, is crypto further ahead or further behind the options business, it feels like crypto is a bit more simple. Maybe that’s not the least…

Douglas Cifu: No, no, it’s a great observation, actually. I mean crypto, I want to say it’s simple, right? Because obviously, there’s – it’s – there’s a lot of coins and there’s a lot of venues. And obviously, there’s a lot of fraud and criminality, right? So there is a lot of complications there that you don’t see in a highly regulated environment like options. But yes, it’s obviously more order-based. It feels a lot more like the FX world where you have you have spot FX, you have forwards and futures, and then you have ETFs or at least in the United States, you don’t have ETFs, thanks to the chair of the SEC, but in other jurisdictions you do. So that infrastructure we have set up, obviously, to state the obvious, the criminality at FTX and the shutdown of that venue means that we’re not making markets there.

And indeed, we pulled back from most, if not all, of the spot venues. And so we continue to be a market maker in futures and in ETFs. And I’ll put a plug-in for Jamil and the guys at EDX because we think that, that is the great – will be a great solution, particularly to the Wild West unregulated marketplace, having execution quality that feels and acts like equities with best execution and then ultimately with disclosed custodial and if you will, centralized clearing, that’s really going to be the key to exploding or having investors have real confidence in digital assets. So I think EDX, Jamil and the team there really have the right solution, and we’re very proud and honored to be an investor in that platform.

Ken Worthington: Great. Thank you very much.

Operator: Thank you, Ken. We have our next question comes from Michael Cyprys from Morgan Stanley. Michael, your line is now open.

Michael Cyprys: Great, thanks. Good morning. Maybe just sticking with the options topic. If we look across the industry, volumes continue to remain very robust for options. Just curious your views on that. Why has that held up so well, particularly compared to cash equities? And how durable do you think that is? Do you see any prospects for volumes on the option side to compress meaningfully from here? If we look out 3, 5 years from now, do you think – how meaningfully higher or lower do you think options could be across the industry?

Douglas Cifu: Yes. It’s actually a great question. It’s very perceptive. I think like in a way, actually, you’ve seen somewhat of a shift of retail or day trading, if you will, from cash equities to options. That’s always been the case, but there has been a lot of innovation by my friends at the CBOE, excuse me. There’s been good education by brokers. There’s now daily contracts, right, as opposed to weekly expirations, and that innovation, I think, has driven some of the volume and you get more leverage and there’s more opportunity, if you will, if you’re a day trader, a retail investor in options. So again, it’s hard to prognosticate. It’s more of a macroeconomic question as to where that goes, right? If the economy rebounds, and we don’t have record inflation, and there continues to be job growth and people are optimistic, et cetera, then I think you’ll see a continued increase in volumes and opportunity there.

The thing that was interesting to me, and I said it in response to Ken’s last question, was that you saw an explosion of interest in the Index family. And that’s really where the opportunity was in 2022. So we kind of got lucky, if you will, Michael, in that we had targeted that as our first place to go as opposed to a single name. And so I think that was up like 40-ish percent in 2022. The volumes there were while single names were actually down pretty dramatically. So I think investors that want to get exposure to broader indices and are making shorter-term investment decisions on those, look at that family of options. Now as I said, that offers even daily exposure weekly or monthly and say, oh, that’s a good place to go. And that’s kind of really right in our wheelhouse because it’s a complicated trading dynamic.

Obviously, you have to have a volatility curve that makes sense. You have to have low latency. You have to be – you have to understand the setups in Chicago and New York and all of that, and you have to have the ability to provide a delta hedge that makes sense and it is acute and priced well and whatnot. So that kind of plays very well into the multi-object Market Making firm that we built at Virtu and our investments in the options infrastructure and our ability to be a participant in a quote environment as opposed to an order-based environment, have really, really bore fruit in 2022. So if you’re sensing enthusiasm in my voice, you are very perceptive because I continue to be very enthused about that business longer term.

Michael Cyprys: Great. Well, given that enthusiasm, maybe just a follow-up question on the same topic here of options, maybe a little bit more drilling in on the single name side. How many tickers are you making markets in today on the single name side? How does that compare to a year ago? And what hurdles do you face in expanding that to more tickers? How do you think about overcoming that? And what are some of the actions you guys might be able to take?

Douglas Cifu: Yes, it’s a great question. I mean so the answer is dozens today. And so it’s – we clearly have the capability to do it. Look, to be blunt, there’s a lot more risk in that side of the business as opposed to an Index side. I mean obviously, Index Options is volatility. You could screw up your curve, you could have an operational issue so you can lose money. But corporate actions and things along those lines make it much more challenging to be a single object market maker in options, particularly if you’re going to be – it goes back to my much earlier comments on the service nature of the wholesaling business. As an options wholesaler, you don’t get to pick and choose. So hats off to the incumbent, Citadel, Susquehanna, and a handful of others that have built the risk infrastructure to be a two-sided market maker in 1,000 different single object names with a multitude of strikes, a lot of which won’t trade a lot, but there’s still a lot of – you don’t have the ability to pick and choose.

And so there’s still a lot of risk in that business. So we’re going to – this is an obvious answer, but we’re focused on the most valuable opportunity and the most addressable opportunity first, and that’s what we’ve done. I don’t mean to not give an answer, but it’s hard for me to sit here today and say, okay, well, we’re going to be 98% complete with that, and therefore, we can shift our focus. We’re going to do everything at once the way we’ve always kind of built Virtu. But the opportunities there are so meaningful and so significant as they are overseas in the Asian markets, I mentioned before that we see – and there’s a – 3, 4, 5 times the opportunity in the Index family that there is a single name. So while I think that’s a business that we will get into, and obviously, our broker partners would like us to be in that business.

Right now, we’re focused on the blocking and tackling. And thankfully, it was highly profitable for us in 2022.

Michael Cyprys: Great. Thanks for taking my questions.

Douglas Cifu: Thank you very much.

Operator: Thank you, Michael. We have a follow-up question from Rich Repetto from Piper Sandler. Rich, your line is now open.

Rich Repetto: Yes. Thank you. With all this talk on back and ask a question about. So with the SEC proposal, I took a hard look at the options market structure. And one of the things that sort of popped out was it’s different, like these Citadel and the Susquehanna that you mentioned that are big in options also besides getting flow, but also are market makers on the exchanges and then this whole thing about directed order flow. So I guess the question is, do you think that, that is important to progress an options to be a primary market maker, a designated market make whatever each exchange calls it. Certainly the model at Citadel and Susquehanna has and how easy or hard could it be if you went that route, could you get those same sort of designations if you decide to go that route?

Douglas Cifu: Yes. Look, it’s a great question. And obviously, we’ve studied it, and we know we have a lot of friends at the CBOE. We do a lot of business with them and other exchanges where being, as you say, a designated market maker is important. Wholesalers in the options world, will always be the main responders to auctions. Others are invited in. And certainly, if, not if, when we become part of that marketplace, we will need to acquire bins if you will, become a designated market maker. I have every degree of confidence that we will be able to do that. We’ve got a pretty good brand name. We’ve been really good business partners with global exchanges for now for 15 years, and we’ve always lived up to our obligations. So I don’t have a concern that we will be able to do the business development part of this business, and we already have done that, right?

And these exchanges and other counterparties want a participant and want a firm like Virtu to be an active participant in it. That being said, you don’t wave a magic wand to become a meaningful Market Maker. Citadel and Susquehanna are amazingly competitive, excellent firms that have been doing this for 20 to 30 years. I’m not arrogant enough to suggest that we’re going to come in there like guns blazing and take away the market share. We’re not going to, right? We’re going to be a complement to those firms. We’re going to hopefully add value to the ecosystem as we are today in the Index family. And I think that there is room for competition as there is in cash equities wholesaling. I mean one of the complete falsehoods that the chair of the SEC has propagated is that somehow that this is a duopoly between Virtu and Citadel.

It’s just factually inaccurate. There’s a great firm called Jane Street that started in the wholesale cash equities market 2 years ago and now has 13%, 14% of the market order of the marketplace. So Genstar is just, again, exaggerated, I’ll be nice and not said lie but exaggerated that part of the marketplace. And so these markets are extremely competitive. And the important thing is that we are providing a service to retail brokers. You saw it this week, Rich, with the New York Stock Exchange, right? When the phone rang, based on the news reports I’ve seen and based on our experience, there really wasn’t somebody on the other end of the line picking up saying, you know what, we’re going to make this right for you and we’re going to make sure that your clients orders were priced and executed at a price that made sense.

That’s the big lie about our business. He describes it as rents in the industry. These aren’t rents. We’re providing a service, a very meaningful service, in fact, a bundle of services and being compensated for that service through our own efforts with a portion of the bid offer spread, right? And he either doesn’t understand that or doesn’t want to understand that. And that’s what the data and the narrative will prove. So ultimately, that’s not going to change. And that’s why it’s so important that that firms like Virtu, Citadel, Susquehanna, continue to provide that service in cash equities. And as I’ve indicated, we intend to do that in options as well. But if I can leave you with one thought, that’s the most important distinction, I think, that the chair of the SEC has either intentionally or otherwise limited in all of his political narrative around this marketplace.

Rich Repetto: Got it, Doug. And thank you for the water bedding analogy earlier. I get it and left good image in my mind. Thanks.

Douglas Cifu: Yes, Rich, I probably shouldn’t comment if this is a public call, but we can talk about that later.

Rich Repetto: Thanks.

Douglas Cifu: Thank you.

Operator: Thank you, Richard.

Douglas Cifu: Okay. It looks like we have no other questions in the queue, operator. So I appreciate everybody joining us for the fourth quarter call, and we will be back sometime in April, I would imagine with our first quarter results, and I look forward to engaging with everybody then. Thank you very much. Have a great day.

Operator: Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.