Virtu Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2024

There are 10 speakers on the call.

Operator

Hello, and welcome to the Virtu Financial 2023 4th Quarter Results. My name is Alex, and I'll be coordinating the call today. I'll now hand it over to your host, Andrew Smith of Investor Relations. Please go ahead.

Speaker 1

Thank you, Alex, and good morning, everyone. Thank you for joining us. Our 4th quarter results were released this morning and are available on our website. With us today on this morning's call, we have Mr. Douglas Ciepoo, our Chief Executive Officer Mr.

Speaker 1

Joseph Maluso, 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 are therefore subject to risks, assumptions and uncertainties, which may be outside the company's control.

Speaker 1

Please note that our actual results and financial conditions may differ materially from what is 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, 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 A description of risk factors contained in our Annual Report, Form 10 ks and other public filings. During today's call, in addition to GAAP measures, 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.

Speaker 1

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 the equivalent GAAP terms in the earnings materials with an explanation of why we

Speaker 2

deem this information to be

Speaker 1

meaningful as well as how management uses these metrics. And with that, I'd like to turn the call over to Doug.

Speaker 3

Thank you, Andrew, and good morning, everyone. Thank you for joining us this morning. In my remarks today, I will focus on Virtu's 4th quarter 2023 financial and business performance and strategic initiatives. Following my remarks, Jones, Cindy will provide additional details on our results. Looking at our full year and 4th quarter 2023 results, which are summarized on Slide 2 of the supplemental material, we generated $4,800,000 and $4,140,000 of net trading income per day for the full year 2023 and the Q4 of 2023, respectively.

Speaker 3

We reported normalized adjusted EPS of $0.27 for the 4th quarter and $1.84 for the full year of 2023. Slide 3 highlights that our Market Making segment earned an average of $2,700,000 per day of adjusted net trading income in the quarter, While our Execution Services business delivered $1,500,000 per day, an increase of 4% per day over the prior quarter. This quarter's performance reflects a significant reduction in opportunity, particularly for our customer Market Making business compared to the prior quarter, driven by a combination of reduced addressable volumes and spreads as evidenced by especially weak 2 month stretch of volatility to the end of the year. We have seen episodic periods of softer volumes and volatility in passed most recently in the Q4 of 2022 and today we are better positioned than ever from an expense capital structure and trading capabilities perspective to convert opportunity into ANSI in any environment. As we have said before, our disciplined focus on expense management and Building operating leverage means Virtu remains uniquely ready to deliver results in any environment.

Speaker 3

While we remain very early in 2024, We have seen improvement in the overall market conditions and market making opportunities so far in January, particularly around crypto products as I will address later in my remarks. As we said previously, while market share alone is limited as a gauge of performance, We would like to note that our market share in the wholesale market making business remains within historic ranges. We are confident that our growth initiatives combined with our efforts to enhance our spread capture rate through greater internalization, thanks to our global scale and diversity will yield benefits in any environment. Our non customer Market Making business, which provides liquidity across asset classes globally performed well in the quarter relative to the opportunity. Our organic growth initiatives including our expansion to options, market making continue to expand and perform well, making meaningful progress every quarter.

Speaker 3

In the 4th quarter, We generated $423,000 per day from organic growth, which represents 10% of ANTI in the period. We remain very optimistic about the opportunities across all our growth initiatives, but we are excited for these initiatives to reach new heights in 2024. On the Execution Services side, our adjusted net trading income averaged $1,500,000 per day in the 4th quarter, which was up by about 4% from the 3rd quarter. We continue to see incremental and impressive results despite the general softening in the market opportunity for VES. In addition to general log compression, institutional activity remained slow as investors reacted and adjusted to the sustained higher rate environment.

Speaker 3

Despite these challenges, VES performed in line with its opportunity quarter over quarter as well for the full year 2023. We have incremental growth plans outside the United States which are materializing as we transition resources from a multi year integration of technology across the long tail of clients towards expanding our footprint. To this end, in 2023, BES leveraged our investments and enhancements to accomplish key growth milestones including winning the rebate to beat a fixed income EMS for a world class Apple Manager in Europe as well as successfully deploying Virtu's Triton Valor Execution Management System, training analytics, positive alert and Global Equity Execution offers us one of the largest asset managers in Asia. Most important, overall productivity and profitability within the VES segment has grown significantly since we began the technology rebuild and modernization and streamlining the business. We are very excited about the growth in 2024 for VES.

Speaker 3

Taking a step back, I look at our 2023 results and despite the recent softness, We believe our strategic focus in areas of growth aligns us for long term success as we expand our addressable market by adding more asset classes and offerings to our suite of products. Our focus on enhancing our core businesses and the continued success of our growth initiatives positions us well for any macro environment, including significant spikes in volatility and volume that typically a company increasing global tension and economic uncertainty, change in monetary policy and elections. We continue to hire and make investments in our business. It is worth noting that of our current employees, only 36% of them We're at Virtu prior to 2019. This means that we have made significant multiyear investment in new traders, developers and clients, which we expect to continue to bear fruit in the near to medium term.

Speaker 3

And as you would expect, we remain disciplined as ever around cost throughout the year, which enabled us to realize a 47% adjusted EBITDA margin. Touching briefly on our growth initiatives and options 2023 was another impressive year for us as we continue to expand our capabilities despite the declining opportunities set in general. In 2023, the occupancy team exceeded expectations as its capability and capacity to address opportunities in Greece globally. As I mentioned on our last call, we saw a meaningful uptick in our crypto market making business at the end of the 3rd quarter, which persisted into the Q4. It's probably no surprise that our crypto market making is off to a record start in 2024 as a result of the elevated interest in new opportunities related to the recently approved spot Bitcoin ETF in the United States.

Speaker 3

As I'm sure you well know on January 10, the SEC approved 11 spot Bitcoin ETFs for trading and as a global 20 fourseven market maker, Virtu was among the 1st trades in these products when they began trading at 4 am on the 1st day. We proudly act as an authorized participant for all of the live issuers. While it's only been a few weeks since the spot Bitcoin ETFs were approved, the ETFs have presented significant market making opportunities. It's worth noting that these initial 11 Bitcoin ETFs are just the first wave of crypto ETFs that the market expects to be approved, So we expect there will be many more coming. Issuers have already filed applications with the SEC to list spot Ethereum ETFs as well as a number of novel crypto related ETFs.

Speaker 3

At this point, while crypto ETFs may not interest all investors, we're also seeing an uptick in general retail trading activity across all NMS securities, coinciding with the launch of spot midpoint ETFs, which suggests that retail investors are curious. To bring it full circle and highlight how these ETFs benefit several of our organic growth initiatives, we've already seen significant opportunities for our ETF block business As new and existing clients approach us to transact in Bitcoin ETFs and we are optimistic about the options market making opportunities that await when options are listed on these ETFs. Our ETF Block business had a respectable year as well and we continue to expand our offerings to cover more products more recent, including crypto ETFs, as I just mentioned, and fixed income ETFs, which is especially helpful for our rate trading where we continue to make key hires as well as a corporate credit. And last but certainly not least, our Virtu Capital Markets business saw increased activity in the 4th quarter As financing activity began to return to the market and a number of issuers used our asset money service to raise primary capital. I'll now turn it over to Joe and Cindy, who will provide additional details about the quarter.

Speaker 3

Joe?

Speaker 2

Thank you, Doug. Just briefly turning to capital and expenses. On expenses, we ended the year with cash operating expenses $643,000,000 that's 5.4% ahead of last year. We think this is a solid performance in this environment and given the investments we're making to grow the business. Our cash compensation ratio is 26% for 2023.

Speaker 2

This is at the upper end of our historical range. Consistent with Virtu's history, we will manage discretionary compensation and account to drive profitability while retaining and recruiting world class talent. We believe we have achieved this outcome on expenses, particularly on compensation by being prudently aggressive in hiring and maintaining compensation at levels that are best in class while overall headcount relatively flat. Other non compensation expenses were up slightly in line with our expectations. So on Communications and Data Processing, we were up 5% in 2023 owing to investment in building out new businesses and price increases for infrastructure and market data.

Speaker 2

Our other expenses in 2023 were up a bit due to favorable FX adjustments in the prior year and a little bit of increase in professional fees. On the capital management slide, in the supplement on Slide 12, you can see that our trading capital has remained within a range $1,700,000,000 to $2,000,000,000 for this year. We remain very well capitalized from a trading capital and long term debt standpoint as well as from a liquidity standpoint, meaning we possess adequate resources necessary to capitalize on upside revenue opportunities from increased volumes and volatility as and when they appear. In fact, we're able to enter the crypto ETF market in early 2024 without a material increase to our overall capital base because of our operational efficiency and available liquidity. We maintain our public $0.96 annual dividend, which we have paid steadily now for 8 years despite variable results over the long term.

Speaker 2

We believe overall that our dividend is quite sustainable over the long term as it has been for the past 8 years and we do not anticipate changes to the status quo, including our continued buyback program. In addition, we repurchased 2,400,000 shares in the 4th quarter for approximately $44,000,000 Our period end share count is now down to 162,700,000 shares. And at this point, we have repurchased net of new issuances 17.7% of our company in the 3 plus years of beginning our program. And with that, I will turn it over to Cindy to review the financial details briefly before we open up the call to your questions.

Speaker 4

Thank you, Joe. Good morning, everyone. On Slide 3 of our supplemental material, we provide a summary of our quarterly performance. For the Q4 of 2023, our adjusted net trading income or ENT, which represents our trading gains net of direct trading expenses, totaled $261,000,000 or $4,100,000 per day. Market Making adjusted net $8,000,000 or $2,700,000 per day.

Speaker 4

Execution Services adjusted net trading income was $93,000,000 or $1,500,000 per day. Our 4th quarter 2023 normalized adjusted EPS was $0.27 Adjusted EBITDA was $99,000,000 for the Q4 of 2023 and our adjusted EBITDA margin was 38%. On Slide 8, we provided a summary of our operating expenses results. For the Q4 2023, We reported $178,000,000 of adjusted operating expenses. 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.

Speaker 4

We remain committed to our $0.24 per quarter dividend and combined with our share repurchase program demonstrates our continued commitment to return capital to our shareholders. Now I would like to turn the call over to the operator for the Q and A.

Operator

Thank you. Our first

Speaker 5

Hi, good morning. Thanks for taking the question. I guess I want to kick off the call with more questions around the cryptocurrency opportunity. So first, the cryptocurrency market has rebounded, rebounded in 4Q significantly, a bit more in 1Q. At the same time, the role has expanded with the AP on the Bitcoin ETFs.

Speaker 5

So how did the economics change for Virtu As the number of activities you participate in expands. So you started with like being a market maker in crypto spot and a market maker in crypto companies and miners. And now you're both the market maker in Bitcoin ETFs as well as the AP on the same crypto ETFs. So does your position in one area make the other areas more profitable? And I guess the ultimate punch line here is how much bigger is the crypto revenue opportunity for Virtu today versus other initiatives like Options ETF Block and Fixed Income in the near term growth in crypto broadly?

Speaker 3

Yes. Thank you. Good morning. It's a great question. And to give you credit, you've been asking about for 2 years.

Speaker 3

So I probably have a great answer for you. And thanks in large message of some of these forced regulatory changes in the United States. I mean, this has become, I don't want to be too dramatic, but a bit of a transformational moment for Virtu with regard to this asset class certainly and we've seen the results already In the Q1, we're generating meaningful 6 figure daily P and L from this asset class. And I think you kind of really hit the nail on the head. It really is the perfect type of asset class and the perfect storm, if you will, for VirtuVix It combines a lot of our skills around being a multi asset class regardless of

Speaker 1

form of

Speaker 3

product and a multi geographic market maker. So what I mean by that is, we have been, as you noted historically, a market maker, spot Bitcoin and futures Bitcoin, but throwing in ETFs and creating all of the volume and all the transactions and transformation, if you The people are making moving from the great sale ETF over to the other 10 products, etcetera, means that somebody needs to price and take the risk with regard to that transfer. And so that provided a significant market making opportunity for us. But as you know, because we are a spot Bitcoin market maker, not only are we acting as an AP with regard to the cash creation and redemption of ETFs, but we can also act As a dealer, if you will, through one of our affiliates in Singapore, where we can provide the points directly to the issuers to the extent they need satisfy their obligations to have points in their trust. We're also excited, Kent, because there's going to be, as I mentioned in my prepared remarks, There's going to be a theory means yes.

Speaker 3

There's going to be short and long and leveraged in other products and there's going to be all kinds of different manifestations around people's interest. And we're really in the early innings here because you have a marketplace where you have Some of our large clients who seem to know very well, who are saying we're not going to actually allow clients to trade these NIM securities. And then we have other of our clients that are at the forefront of it. And I'm not going to name names, but you can kind of figure out who they are. And then we have other institutions like the one you work for, Where the CEO is saying very negative things, but then on the other hand, you're acting as an authorized participant, right?

Speaker 3

So there's all kinds of Confusion in the marketplace as to what this asset class means. To bring it full circle, I think what we really need It's a coherent regulatory framework in the United States. We have not had that because this current SEC And the legislative bodies have not been able to get their act together. Once that happens, we will have a regularized system where you have Global platforms that provide access to spot, you'll have ETFs around the world, you'll have futures exchanges, you'll have custody, you'll have clearing, you'll have analytics and it will look and feel an awful lot like a great, you'll have prime brokers, the point bases of the world and Hidden Road and others. And then you'll have great platforms like EX, the one that we started with Citadel and Fidelity and Schwab, which is recently announced that it's going to go international and whatnot.

Speaker 3

So you'll have this large regularized asset class that fits very, very well into our model of being a cross border and multi asset class, if you will, market making firm. So we're very, very excited about where we are. In terms of the scope of the opportunity in the addressable market, I think we'll just continue to grow as this asset class becomes more Regularize and more institutionalize and you see more institutional money flow into it. And again, I'm very, very excited that we made the investments we did a couple of years ago, to be prepared for this moment in time. So, I hope that answers your question.

Speaker 3

But The first couple of weeks have been very exciting within the firm.

Speaker 5

Excellent. Thank you so much.

Speaker 3

Thank you, Ken.

Operator

Thank you. Our next question comes from Patrick Moly of Piper Sandler. Your line is now open. Please go ahead.

Speaker 6

Yes, good morning. Thanks for taking the question. So I think this quarter there was obviously a disconnect between what the industry volume and volatility metrics showed in your results. But I think at least in the Q4, if we looked at the 605 reports, it did show that the opportunity in the Q4 with the lowest that have been in a while. So I appreciate the comments on the crypto opportunity.

Speaker 6

But I guess just as we sit here today, I guess my question is how do you think analysts and investors can do a better job of tracking your overall opportunity quarter to quarter? Thanks.

Speaker 3

Yes. It's a great question. Obviously, we have continued to frustrate you all and investors for the last 8 years and it's really a challenge to try to explain the various parts of our business. I mean, really the best way to do it is to look at the 605 reports and the 605 metrics. As a footnote, we have been on the forefront of asking for we actually submitted a request, I think it was 4 years ago for the SEC to update and modernize the 605 reporting to permit exactly this type of granular review and granular understanding of what exactly We see within the sub segment, if you will, of the U.

Speaker 3

S. Equities market. But if you track our 605 report and look at like what quoted spread was during the period, you'll see that there was meaningful contraction in quoted spread. And quoted spread Effectively is that the theoretical, if you will, maximum opportunity we have to collect bid offer spread that order for 605 orders that come through to Virtu Financial. And you can look at it by broker and you can look at it by wholesalers.

Speaker 3

So during the quarter, It was meaningful contraction. So this quarter's results, as I made it very clear in my remarks, are really attributable to that performance by our customer Market Making business during the quarter. The non customer Market Making business and Virtu Execution Services outperformed metrics and certainly performed in line with your expectations. That is the yin and the yang of that business. It tends to be less predictable and certainly not always correlated with marketplace volumes and volatility.

Speaker 3

The other comment I will make is that you did see within this quarter, if you Look up on a more granular level at the marketplace TCV, there was a significant increase in sub dollar Stock trading in the quarter, I think it was roughly about 18%. In December, for example, And it was a sub dollar name that on a particular day traded over 1,000,000,000 shares just anecdotally. That tends to distort overall market volumes. Clearly, those stocks tend to be less opportunity for spreads dramatically smaller and they tend to be A lot more toxic than the way that they're trained. As a footnote, a lot of those companies in our view shouldn't be listed public companies.

Speaker 3

We've talked to FINRA and the see about it. Frankly, I think NASDAQ could do a better job in policing some of those companies that shouldn't be listed companies and frankly should be trading OTC. So I do think that that distorts some of the marketplace funds. I'm not using that as an excuse to try to provide a little more granularity, but it really does come back down to within our 605 business, what would be opportunity expressed as quoted spread at the moment in time when we receive those words. And so that's probably a good way for you guys kind of slice and dice it.

Speaker 3

I think it will get better when the 605 reform happens, which should be the first proposal that comes out of the SEC. And for what it's worth, quoted spread is up over 10% in January thus far the 605 blocks and some of that I think is correlated to, as I mentioned in my prepared remarks, some of the excitement and enthusiasm around these Bitcoin ETFs. So rambling answer, I hope I gave you enough clarity around, what you all can look at in the future.

Speaker 6

Yes, that was great. Thank you.

Speaker 3

Thanks, guys.

Operator

Thank you. Our next question for today comes from Chris Allen of Citi. Your line is now open. Please go ahead.

Speaker 7

Good morning, guys. Thanks for taking the question. I wanted to dig in a little bit on the organic growth initiatives. A little surprised to see a sequential decline in the 4th quarter. Crypto activity was much better in 4Q relative to 3Q.

Speaker 7

Index options activity was up sequentially and you noted the capital markets activity was stronger after I think you had a decent 3Q as well. So maybe you can just give us some color just in terms of the different moving parts, where you're seeing, I mean, obviously, you're seeing tailwinds in crypto, maybe the outlook for options and capital markets activity from here?

Speaker 3

Yes. Very fair question. And obviously, We track the internal metrics with regard to options and ETF block, which was a major and which are And we're during the Q4 certainly the major components of our growth initiative. Crypto contributed, but we haven't seen the explosion, which we've seen, as I mentioned, with the launch of the Bitcoin ETFs as of January 11, I think it was in this quarter. The short answer is that with regard particularly to options market making the opportunity in terms of like Excuse me, what the spread was for contract declined significantly in the 4th quarter.

Speaker 3

And so that really explains a lot of what you're seeing in terms of the sequential decline. Internally, we track all these metrics. As I said in my prepared remarks, we were very, very happy with the performance of the options desk and the block ETF desk during the quarter. One of the highlights of the year was our expansion into Asia, where we are now actively and profitable as an options market maker in both the Japanese and the Indian markets and we think there's only an opportunity to grow there. So I get your frustration which we share around The absolute dollar value, if you will, but in terms of like what our market share was in the addressable index products For the options business, it continues to grow and continue to be competitive.

Speaker 3

It's just again, those organic growth initiatives are subject to the same Market forces, if you will, around volumes, but more much more importantly, volatility and effectively quoting Brad with regards to the options contracts as all of our other asset classes.

Speaker 5

Thanks

Speaker 1

guys.

Operator

Thank you. Our next question for today comes from Dan

Speaker 8

Thanks. Good morning. My question is on kind of expenses and leverage in the model. I think, Joe, you've talked about managing to comp ratio and then to the dollar amount as the year progressed starting out with the ratio and then to a dollar amount for the full year. And if I look at the full year, Top is modestly up and revenues were down.

Speaker 8

And so just want to understand the thing going forward in an environment, this kind of the floor if revenues don't get better? We can see this as kind of a floor for cash compensation and Just also just any outlook for expenses as we think about next year more broadly?

Speaker 2

Yes, sure, Dan. It's I don't know if I call it 4. I'd say, I kind of go back to Doug's remarks around the overhaul of our employee base in terms of upgrading the talent, in terms of something Like 60% of the people who are here today were not here when we acquired ITG. So we've Upgrading and investing and we're always asked, what are you investing in, in terms of the growth initiatives? I mean, this is our investment.

Speaker 2

And I think if you look at Comp going from $315,000,000 to $320,000,000 in a year like 2023 overall with a significant upgrade in Talend, we're happy with that outcome. We don't worry about the ratio of being 26% on a cash basis. So there's no religion around that. I wouldn't expect it to get too high Too much higher than that over the long term, but I think we are happy where it came out in terms of What it means about the talent that's available, we find it's a much better recruiting environment In the past 6 months to a year than it has been in the past few years.

Speaker 8

And prospectively, just thinking about the other expenses?

Speaker 2

Yes, sure. On other expenses, I mean, on communications and data processing, Again, we've had some build outs that we've had to do. We have experienced price increases On market data and infrastructure, and it's up I've always guided low to mid single digit fixed cost decreases, I think we're right there. So on Communications and Data Processing, again, When you think about the global infrastructure that we manage and the market data plant that we are subject to, Again, I think we're really pleased with this outcome. We actively we realized the point of the price increases of investments we need to make, so we actively manage market data, especially to make sure we prune where we can.

Speaker 2

And then operations and administrative stuff, I think 2022 was low because we had Some favorable foreign exchange adjustments in terms of euro, in terms of pound sterling, in terms of the expenses in our non U. S. Subsidiary. So I think that kind of reverting on us in 2023, But I would expect that number to be the run rate going forward for ops and admin.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from Alex Blostein of Goldman Sachs. Your line is now open. Please go ahead.

Speaker 2

Hey guys, good morning.

Speaker 9

Thank you for the question. I wanted to just dig into the capital structure a little bit and similar to the question I had for you last quarter I think, but The debt to EBITDA continues to creep up a little bit and it's a function obviously some challenges on the EBITDA front. But it also looks like The debt costs have increased this quarter, I guess, with a new swap. So I guess, A, maybe just confirm that and kind of talk through the impact on P and L from that. But also, As you think about the uses of cash flow, if interest expense is higher going forward, what are the thoughts about deleveraging and paying down debt versus buybacks?

Speaker 2

Yes. Dan, just to take those in order, The new swap that we put on will be from a P and L standpoint accretive, right? So we did not do that Yes, from a GAAP P and L standpoint, we'll be accretive. All we did was kind of pull forward some of the built in gain that we had in a very attractive swap instrument that was put on several years ago. That was an enormous benefit to Virtu and that was you're going to unwind in a few months.

Speaker 2

So what we did is we just pulled that forward, use that to reduce debt And the cash interest expense run rate was going to go up anyway, right? So we kind of were able to You have to do an accretive deal, reduce debt by a little bit, and then also kind of cap the interest expense going forward. The instrument, the underlying instrument that we have is our outstanding loan is sulfur plus 300. We expect in a Fed easing environment and we expect With the loan market coming back that we will have opportunity to reduce costs on that over the next couple of years. So we're really happy with that.

Speaker 2

We priced this in a way that we anticipate some Fed easing And we anticipate being able to tighten the spread as well. So yes, the run rate looks like a little bit higher. That was going to happen anyway. We're going to be able to reduce it. And we were able to kind of monetize the swap to trim the debt.

Speaker 2

So we're very comfortable with the 1,750,000,000 And we're happy with the deal we did.

Speaker 9

Got you. So no change in terms of the pay down of loan versus buybacks kind of same trajectory?

Speaker 2

No, that's right. We used we traded a little bit here with the monetization of the swap. We felt that was appropriate. But in terms of the cash flow we generate at different levels of net trading income, We've got that chart here as we do almost every quarter, so you should expect that to continue.

Speaker 9

Got you. All right. Thank you.

Speaker 2

Sure.

Operator

Thank you. Our next question comes from Michael Cyprys of Morgan Stanley.

Speaker 1

I was hoping you could maybe update us on your fixed income market making initiatives, maybe elaborate on how much that's contributing today. How would you sort of size your Participation and presence in fixed income markets today, maybe you could talk about some of the steps that you're taking in corporate credit and treasuries for that to become more meaningful over time

Speaker 3

Yes, great question. The analogy I would make is The trajectory I hope is going to be somewhat to what we experienced in options. So as I said on prior calls, we've done a lot of loosely just call it groundwork around technology and integration with various RFQ Vendors, TradeWeb, MarketAxess, Bloomberg, etcetera, TruMed, we've developed the internal ability to quote extensively and we have the an ongoing salesdistribution efforts in order to give us branches counter for it. I think the thing in terms of like priorities and kind of where I see Virtu would be able to add value where I'd be able to see growth in the same way we did in options where we spent a year or to developing the infrastructure and technology, we use internal people, we hire folks from the outside, we're in the process of doing that. And in options, we went to the big index family.

Speaker 3

If I look at the marketplace and I say to myself, okay, where can Virtu add value, what looks and feels more like what we The obvious answer is rate particularly with what the SEC has done with regard to centralized clearing of treasuries which is going to come online In 2025, you already see significant interest across margin between treasury futures and etcetera. And so that will look more like a Virtu style business plus CUSIPs and certainly the further Electrification and fixed income in general. So I think we're going to focus more on rates initially, While at the same time, we continue to put emphasis into our credit business where we have categories and we have we are actively quoting mostly investment grade products and whatnot that tie very nicely into Our fixed income ETF desk and the custom creation redemptions that one needs to do on that desk. So very, very early stage in terms of contribution It's a minimum at this point, but in the same way that was sort of 2019 in options where we started to develop the Wherewithal hired folks built the technology infrastructure, that's kind of where we're at right now.

Speaker 3

And I'm optimistic as I always am that we'll see that business take off. I'm particularly enthused about some of the market structure issues or considerations that we've seen in rates again with regard to centralized clearing and prime brokers being more willing to deal with firms of our type to provides leverage and allow us access. So I think that's just going to become a much more competitive marketplace, where the domination, if you will, by the big dealers continue to wane non traditional liquidity providers like the James Street and The Citadel and hopefully Flowtraders and us can garner significant market share. So again, it's a growth initiative for us, de minimis contribution in 2020 3, will it be meaningful in 2024? Probably not really meaningful given kind of the competitive nature of the market and the size of the rest of the firm, it's certainly an investment that we're very focused on, Michael.

Speaker 3

So thank you for the question.

Speaker 1

Great. Thanks so much.

Operator

Thank you. We have another question from Craig Siegenthaler of Bank of America. Your line is now open. Please go ahead.

Speaker 4

Craig.

Operator

Sorry, Craig, you might be on mute. Your line is now open.

Speaker 3

I don't hear from operators. Maybe we the FAB dropped off.

Operator

My apologies.

Speaker 3

Okay. Well, it Sounds like we have no further questions. Obviously, Craig, if you do have a question, you can follow-up with me, Joe or Andrew after the call. I want to thank everybody for joining us And we look forward to speaking with you in some point in mid April. Thank you, everybody.

Speaker 3

Have a great day.

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Key Takeaways

  • Virtu delivered Q4 ANTI of $4.14M/day and normalized adjusted EPS of $0.27, with its Market Making segment earning $2.7M/day and its Execution Services business rising 4% to $1.5M/day.
  • Lower addressable volumes and compressed spreads amid historically soft volatility weighed on customer market making in Q4, but non‐customer market making and VES performed in line with opportunity, supporting a 38% adjusted EBITDA margin for the quarter (47% for the full year).
  • Organic growth initiatives generated $0.42M/day in Q4 (10% of ANTI) as Virtu expanded its options market making business into Japan and India and saw its crypto market making momentum accelerate in early 2024.
  • Virtu was among the first to trade all 11 approved spot Bitcoin ETFs as an authorized participant, generating meaningful six‐figure daily P&L in January and positioning for further growth from upcoming spot Ethereum ETFs and other crypto products.
  • The firm maintained trading capital of $1.7–2.0B, sustained a $0.24 quarterly dividend for an eighth consecutive year, repurchased $44M of shares in Q4 (17.7% of shares outstanding repurchased), and ended 2023 with a 26% cash compensation ratio amid disciplined cost management.
AI Generated. May Contain Errors.
Earnings Conference Call
Virtu Financial Q4 2023
00:00 / 00:00