Virtu Financial - Q1 2024

Transcript

Operator (participant)

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 speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone.

You would then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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 (SVP, Global Business Development, and Corporate Strategy)

Thank you, Michelle, and good morning, everyone. Thank you for joining us. Our Q1 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'll 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 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 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. With that, I'd like to turn the call over to Doug.

Douglas Cifu (CEO)

Good morning, and thank you, Andrew. This morning, we reported our Q1 results. For the quarter ended 31 March, 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 volumes 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 Q4 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 performers this quarter. In crypto, as I've just mentioned, we had a record quarter.

The principal catalyst was the launch of 11 spot Bitcoin ETFs in the US, which were approved by the SEC on 10 January. 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 paused around the collapse of FTX. Since then, and until January, our crypto initiatives were focused on market-making in top cryptocurrencies on a limited basis. The introduction of spot crypto ETFs has transformed Virtu's role in the crypto ecosystem. The introduction of the ETF has played to Virtu's strengths and enabled us to leverage our scaled 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 markets, 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 ETF for 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 Q2. 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 and 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 apace. 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 remains 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 yields 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 Q4, 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 VES 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-water mark in EMEA equity market share. An uptick in adoption of our EMS Triton has led to further cross-selling opportunities 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 encounter on a daily basis.

Our clients, 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 objectives.

Our new Alert block crossing client interface streamlines clients' ability to cross blocks of stock, saving time and money. Our data analytics platform, TCA, 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 VES, 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 continued to grow and demonstrated an impressive yield this quarter in a market environment that was mixed in terms of the opportunity set afforded by the market. Finally, you will note in our press release that effective 1 August, Cindy Lee, a long-time Virtuvian, 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 (Co-President and Co-COO)

Good morning. I will speak a bit about our growth levers from our new initiatives, as well as our buyback program. At 31 March, total trading capital on slide nine 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 Q1 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 two 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 ranges 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 are often asked about future non-organic 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. 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 six and seven 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 Q1. 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 we'll 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 five-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 (CFO)

Thank you, Joe. Good morning, everyone. On slide three of our supplemental materials, we provided a summary of our quarterly performance. For Q1 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 Q1 2024 normalized adjusted EPS was $0.76. Adjusted EBITDA was $203 million for Q1 of 2024, and our adjusted EBITDA margin was 55%. On slide 11, we provided a summary of our operating expense results.

For Q1 of 2024, we recorded $180 million of adjusted operating expenses. We continued 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 $23 million for Q1 of 2024.

With the benefit of the interest rate swap contracts that we entered into in prior years, our blended interest rate was around 7.6% for our long-term debt in aggregate. We've remained committed to our $0.24 per share quarterly dividend, and combined with our share repurchase program, this demonstrates our continued commitment to return capital to our shareholders. Now, I'd like to return the call over to our operator for the Q&A.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. We ask each of you to please limit to one question and one follow up. Please stand by while we compile the Q&A roster. The first question comes from Patrick Moley with Piper Sandler. Your line is open.

Patrick Moley (Analyst)

Yes, good morning. Thanks for taking the question. 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 ANTI? It seems like maybe it was $200,000 a day. Any color you can give us there would be great.

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, you know, the bulk of the revenues? Thanks.

Douglas Cifu (CEO)

No, thank you. Good question. Yeah, I think you are in the zip code. It has been a, you know, $200,000 a day contribution. In fact, I can say that, like, you know, the block ETF contribution in the quarter was actually greater than the crypto contribution in the quarter, which is kind of interesting, right? Kind of framing it.

It wasn't like we had, like, a day or two of extraordinary results. I mean, certainly on 11 or 12 January, when the ETFs were launched, there was a huge reshuffling between the closed-end fund into the ETFs, and so you had, you know, an uptick in performance those couple of days, but that was maybe like, you know, 10% of the overall crypto P&L for the quarter, if that.

It wasn't like, you know, we made, you know, $millions and millions on a day or two. It has been a nice, steady contributor. The way I would look at it is, if you look at, you know, the, 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 now it's meaningful, we have a separate line for digital assets or crypto. We think that, like, the success that the marketplace has seen with, you know, massive inflows and massive ETFs created, will just encourage any, you know, additional instruments to be created.

You've already seen that the UK and Hong Kong have announced that they have approved versions of spot Bitcoin ETFs. You're going to see leverage products. When the CFTC and the SEC can get their act together, you're going to see options on those ETF products. When the SEC, hopefully, can get its act together in the next month on Ethereum 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, you know, major pairs, and then you see options on FX, ETFs, you see, you know, smaller pairs and whatnot. So we're very excited that this is a, you know, a new asset class within our non-customer market making business.

The other thing I'll point out is that it, it's a perfect Virtu style business because it incorporates, you know, Bitcoin and these other digital assets in the form of spot and ETF 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 the spot Bitcoin ETF. That's water under the bridge.

We're very excited that this asset class will continue to grow, and we will continue to be, you know, in the middle of helping, you know, grow it. And I think the important thing is that it's not a niche product. You know, $14 billion of inflows didn't just come from, you know, 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, RIAs, other money, and I think a number of RIAs are now looking at the asset class and saying, "Okay, should there be a sliver allocated to that?" I think the answer in some in some for some advisors is certainly yes. You've seen the result of that in terms of the inflows into the product.

Again, this is kind of Virtu one-on-one. We want to be in the middle of that ecosystem, providing really, really tight prices and efficiency to a market maker, to the markets, 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 (Analyst)

Okay, great. Then just as a follow-up, as we think about that, you know, a 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 (CEO)

It's all... We look at it as all, you know, 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 and the spot market, and it's like what we do in gold.

You know, we look at GLD, we look at spot gold, we look at gold futures on the COMEX, and all of those strategies are sort of integrated, Patrick. I'm not trying to be a punk and not answer your question, but it's certainly a universe, if you will, of products that all integrate and work together, and frankly, we don't break it down in that regard.

As I said, in answer to the, your first part of your question, you know, 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, you know, provide com- competitive prices, whether it's in, you know, as an ETF, a spot, or a future, and frankly, whether it's cross-border. Y

You can throw currency products on top of that, right? There's going to be, products that'll be, you know, 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 (Analyst)

Okay, great. That's it for me. Thanks.

Douglas Cifu (CEO)

Thank you.

Operator (participant)

Please stand by for the next question... The next question comes from Kenneth Worthington with JPMorgan Securities. Your line is open.

Kenneth Worthington (Analyst)

Hey, good morning. Thanks for taking the questions. 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.

If you look at Q1 2023, you spent roughly double on buybacks last year, despite Q1 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 chewing up relative to ANTI or something else philosophical?

Douglas Cifu (CEO)

No, it's nothing philosophical. You know, we have these ranges that we've posted that, you know, at different levels of net trading income. You know, this is what you should expect in terms of the ranges. You know, the amount of kind of free cash flow we have doesn't, you know, necessarily line up precisely with those ranges every quarter, so there's ebbs and flows.

You know, when we embarked on our share repurchase program, we made a decision that, you know, we're just going to use the proceeds and apply them to the stock price, you know, as it is. You know, look, I think looking back over, you know, 3+ years that we've done this, I think we're satisfied with where it came out, and you should expect fully that we would.

You know, we're gonna be at, you know, within those ranges that we publish. Q1, you know, is even if you just annualize it, it's right there in the range that we've posted for six-a-day. I wouldn't read anything into that.

Kenneth Worthington (Analyst)

Cool, thanks. And then, just as a follow-up on the Bitcoin ETFs. Bitcoin ETFs have moved from strong inflows in Q1 2024 to closer to breakeven so far in Q2 2024. If flat Bitcoin ETF flows were to persist, does that impact the revenue opportunity for you in Bitcoin or crypto broadly?

Douglas Cifu (CEO)

That'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, you know, portfolio reallocations and opportunities can. I mean, certainly, look, I mean, when the Spot Bitcoin ETFs were approved, as I said earlier, there was, you know, massive, and you follow it, and I track your, your, your metrics that you put out every day.

There was massive rejiggering from the closed-end fund to the, you know, a handful of the ETFs. Certainly that, that was episodic, and that's not gonna happen again. But there has been a consistent, nice pattern. Again, I think the best analogy is really looking at, like, another commodities market, and the most analogous one would be gold.

In that marketplace, every day, there are people that are getting in and out of ETF positions and getting in and out of spot or reallocating from a different asset class. If you look at digital assets and Bitcoin specifically as just a slice of a pie that wealth managers are now looking at and institutions are now looking at as an investable asset over some time period, that's the thing that is compelling. It's no longer, in my view, like a novelty asset that people are sort of trading.

It has like this, you know, 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. That means that there's going to be volume.

You'll have spikes when Ethereum 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, you know, large investable, asset class. There'll be, you know, volatility opportunities, and it... The underlying asset class, for better or worse, has a certain amount of volatility to it.

The other interesting thing is it's a 24/7 market in the form of spot. 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, you know, manage, the intricacies, if you will, from the various forms that Bitcoin and these other coins will take, be it spot, ETF, or future.

Kenneth Worthington (Analyst)

Great. Thank you, and go Panthers.

Douglas Cifu (CEO)

Thanks, Ken.

Operator (participant)

Please stand by for the next question. The next question comes from Chris Allen with Citi. Your line is now open.

Chris Allen (Analyst)

Morning, everyone. Nice quarter, and again, a nice win by the Panthers last night. Maybe just on the block ETFs. You noticed a greater contribution in crypto this quarter. Can you help us think about how that business breaks down between equities and FIC? 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. Any color, that'd be great.

Douglas Cifu (CEO)

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, you know, 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. Certainly, you know, we're very proficient, obviously, in equities. That's kind of the etymology, if you will, of the firm, and so, that's very good.

You know, 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 then indeed in crypto, as we've indicated.

The fact that we are a full-service firm that, you know, 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. You know, we're not nearly as scaled as 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.

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.

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. If you add up A plus B plus C, we have a scaled, credible global offering that allows us to be competitive.

You know, certainly in the quarter, there was more portfolio shifting, and there were, you know, people were moving out of from fixed income to here. Some people were, you know, wanted to get two-way prices in large block Bitcoin ETFs. There were definitely some episodic, you know, transitions, if you will, that were very helpful to the results.

That's kind of 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. 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, you know, 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, you know, the non-customer market-making desks around the firm. There's one P&L in this firm, so we're very, very efficient in doing that.

We made a conscious decision three to four years ago to dip our toes, and now we've got both feet in the fixed income waters, which gives us true scale and global capabilities. As I said, we've made significant investments and hires in Europe and in Asia to give us a global presence.

We're a long ways away from, you know, being one of the larger name players, like Flow Traders or Citadel and some of these other firms that have much larger infrastructure. They're great firms, and they're great competitors. We think there's a value that we can add. We think we have attractive two-way prices. We think we have operational excellence.

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. All of those accoutrements lead to our ability to have a truly scaled global block business in a Virtu style, which means, you know, 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 risks than some of our competitors. 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. Indeed, I've been very happy with the results we've had over the last three years. This quarter, in particular, was a standout one for that group.

Chris Allen (Analyst)

Appreciate all the color there. 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 income ETF equity perspective? Is it ETF trading activity, or is it because of the block nature, something that we'll just have to attempt to kind of triangulate off of different things?

Douglas Cifu (CEO)

Overall, ETF volumes are a good thing to look at globally. I mean, it is a little bit lumpy, right? Because, you know, within that, you'll see. You know, 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.

You know, certainly, we have clients that are sending in smaller clips, and that'll be done through the RFQ. If it's a larger block of a transition of an RIA, you know, we may be put in competition with two or three other market makers, and we try to price that as tightly as we possibly can. You know, a lot of folks will do that once a year, sometimes they'll do that four times a year.

The key is to provide really great customer service so that you're in the wheel, and you can be competitive. I mean, no one's coming to us because, you know, 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.

Not only that, we, we can provide, because of our analytics business, a real, pre- and post-trade analysis so that they can satisfy themselves and 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 (Analyst)

Thanks, Chris.

Douglas Cifu (CEO)

Thank you. Thank you.

Operator (participant)

Please stand by for the next question. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Craig Siegenthaler (Analyst)

Hey, good morning, Doug. It's hard for me to congratulate you on the Panthers win last night because I'm sadly a Flyers fan.

Douglas Cifu (CEO)

Well, we all have our crosses to bear.

Craig Siegenthaler (Analyst)

Well, back to business here. We're hoping you could spend a little more time on the effect of spreads. You could see this developing in the 605 data in January and February, but I was hoping you could walk us through the underlying factors that drove this, especially with realized volatility lower.

Douglas Cifu (CEO)

It's actually, it's a great question because, you know, for years, people have looked at realized volatility overall at Virtu, and they've drawn, you know, appropriate correlations between what our P&L should and shouldn't be. I think those are 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 that.

The fact, excuse me, that we had a mixed environment in volume slightly up and realized volatility, you know, materially down. It's, you know, 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 got some global conflicts going on and central banks scratching their heads, trying to figure out.We got inflation, and we got a presidential election on the horizon, and the VIX is still at, you know, 12, 13, 14, 15, and hasn't really shot up."But that's neither here nor there.

I think with regard to our VCMM 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, you know, a sub-business, if you will, within our customer market making business, because we are, you know, dependent, if you will, one, on the flows that we get from our retail clients, and there's hundreds of them.

Certainly, retail volumes are important because if you're not getting the widgets, you can't make money on each of the widgets. Secondly, within that, you know, what's the spread at time of arrival, if you will, within the orders that we received?

You know, some of that, Craig, is the best explanation I can 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-priced names that trade an awful lot, you're gonna have a greater opportunity.

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 pipes, so it's not just, you know, day traders, if you will. And we sort that, you know, by each of our clients. I mean, some of the flows will be more high net worth RIA type of flows.

There, similar to the answer I gave Chris around the ETF block desk, you know, you have clients that are doing their own portfolio rebalancing, or they're, you know, coming off the sidelines from fixed income, and they're deciding they want to go buy a bunch of Tesla and Amazon and a bunch of technology products, whatever it may be.

That flow will tend to be a little less correlated to the market and maybe, you know, will present a better opportunity to Virtu. 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 Spread at Time of Arrival, if you will, as measured by our 605 reports, was significantly higher in Q1 as compared to Q4.

That does help, you know, drive results. That's offset, I guess, as I indicated earlier, by the significant decrease quarter-over-quarter in realized volatility. I hope that gives you some explanation. And again, at the Panthers, we're always open to new fans, so you are welcome.

Craig Siegenthaler (Analyst)

After our eight-game losing streak at the end of the season, I might have to switch. 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 (CEO)

I'm always hesitant to, like, every time I do this, then, you know, one of you guys jumps on it. I would say they've been consistent. Our March report is due out on 1 May, I think, Andrew, is that about right?

Craig Siegenthaler (Analyst)

Yeah.

Douglas Cifu (CEO)

You'll see it on 1 May, and it is consistent with what we saw in January and February. 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.

You know, 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 gonna revert back. These are we just do our best to try to monetize the flow as it comes to us.

Craig Siegenthaler (Analyst)

Thank you for taking my questions.

Douglas Cifu (CEO)

Thank you very much.

Operator (participant)

Please stand by for the next question. The next question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon (Analyst)

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

Douglas Cifu (CEO)

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, you know. Again, we are not directly taking flow from clients, and that is a, you know, strategic decision that we have made.

I'm not saying that we won't at some point, but you know, there's 1,000 names, if you, if you will, that you need to be active in. You know, today, not every day, but we are, you know, up and capable of quoting in, you know, 10% to 20% of the overall universe. 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 a name that we'll always be up and active in. We, we'll be market making there. We had a really good quarter in options. We have launched and, and, are profitable in India already, which is exciting. I mean, it's a small business, and it's growing.

I don't want to get into India options because there's been a lot of news around that, and that does not involve Virtu, and that's not our style. Certainly we think that there's a significant opportunity there in Japan, where we're up and running. Again, I am very pleased with the progress. Our market share in the index family has continued to grow and is meaningful.

We have, we're active on all of the 17 or 18 options venues that are out there. You know, we're focused on capturing, you know, the significant opportunity that's, like, at our feet and in our wheelhouse. If you look at, like, the mix of business, again, I don't want to pat ourselves on the back and say, "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. 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, you know, take direct flow. We are competitive there. We do take some of it through other, you know, through other means. There's other ATS.

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 yet in that business, but we will at some point.

Dan Fannon (Analyst)

Understood. Just thinking about the regulatory calendar over the next couple of months, can you, you know, help us know, like, if what you're focused on in terms of rulings, you know, kind of where your processes that are in, you know, 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 (CEO)

Great question. I was really trying to get through an earnings call without disparaging Gary Gensler, and I guess you're not going to let me. I'm joking, but not really. As you have seen, I think we're up to 10 or 12 litigations now against the SEC by, you know, business groups, industry participants, everything from the proxy advisor rule to the climate rule, which they have stayed.

It's really become, I don't want to say comical, I would say actually kind of sad, if you will, that there's been such a lack of engagement with, you know, American participants, if you will, and the SEC has just gone full steam ahead with a lot of these rules.

Frankly, they're going to just continue to rack up losses, you know, based on the briefs and some of the analysis that I have read. In terms of the proposals that more directly impact Virtu, and obviously, the climate thing impacts us because we're a public company, and I don't think that's really even worth talking about because I don't think that'll see the light of the day because it was so broad and overreaching, and the economic analysis was so putrid that I think the court will reject it.

In terms of the proposals that impact Virtu, Rule 605 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'll, you know, there's been an avalanche of comments from just about anybody who's credible in the industry that says this is just silly and not workable, and it's a solution chasing a problem that doesn't exist.

If that even sees the light of the day, I think it'll 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'll be vague, overreaching, and will not have a significant economic analysis underlying it.

There'll be litigation that somebody will bring in one of the Ninth, Fifth or Eighth Circuits, and the SEC will lose that one as well because the economic analysis will, again, not satisfy the standard in the Administrative Procedure Act. Finally, the Reg NMS, in terms of, like, what they're going to do with quoted, you know, your ability to quote at midpoint or some smaller increment.

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." You know, maybe the exchanges will sue on that because they think it's not, you know, it doesn't allow them to be as competitive. I don't know. I mean, that one, we'll see.

I think, you know, you'll see final rulemaking on all this stuff in the next three to six months. You know, four or five November , there's an election. If there's a change of administration, you know, traditionally the chairman would resign. I think our long national nightmare will be over, and we can get back to doing business.

Dan Fannon (Analyst)

Great. That's helpful. Thank you.

Douglas Cifu (CEO)

That was a Gerald Ford quote, by the way, for everybody who's interested here. 1975.

Operator (participant)

Please stand by for our next question. Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys (Analyst)

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 over time and what that timeframe could look like?

Douglas Cifu (CEO)

It's a great question. Again, it's, it's balancing the opportunities, Michael. I think, you know, 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 puts out all this great data, but in terms of and someone's done a really good analysis of, like, opportunities.

There's been, like, a seismic shift towards, you know, SPX, SPY, and, and like the broader index families in terms of volume. We kind of, you know, we go where the opportunities are. The guys in the desk are obviously, very keenly aware of kind of, you know, where they should focus their energies.

I'm really letting them lead, as opposed to me, saying from on top, "Oh, we need to be in 122 symbols by X date," because that would be foolish. Really, all I care about is the bottom line, how much money are we making, and we're doing very well there. 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, you know, and that'll 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.

We're very capable of pouncing on those opportunities and being two-sided in those names. Whether it's a you know 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. 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 groove.

You can kind of say, "All right, I'm going to, you know, 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, and people, frankly, of having to be two-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. It gives us real operational flexibility, and you know, I'm kind of very comfortable where we are at right now.

Michael Cyprys (Analyst)

Okay, great. And just a follow-up question. I wanted to circle back on slide seven, where you show your pro forma EPS viewpoint of $3.50 to 4 a share. Just curious 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. 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 (Co-President and Co-COO)

Michael, it's Joe. I'd make two points. One is that in some respects, we've already achieved this in that we, you know, we looked at this as taking all the growth initiatives away from a five-year look back on ITG, KCG, and Virtu together, and what's kind of an average through the cycle earnings base, because, you know, the feedback we've gotten from you all and shareholders is that what is, you know, what, what do you think it is?

We looked at the data, stripped out the growth initiatives and came up with a number. You know, when you look at those two slides together, slides six and seven, you know, at each level, at each level of net trading income, you know, we generate significant buybacks each year.

When we originally put this information together, the point we were trying to make was, look, we're emerging from, you know, multiple acquisitions and long-term integrations, and our cost base kind of, you know, fluctuating, and, and our, you know, debt levels fluctuating.

You know, and now that we're in a steady state, you know, how do you look at our company, over, you know, a multi-year period? I think, you know, the direct answer to your question is, we build most of this analysis around a three-year time frame. You know, three to five years is fair. I think, you know, it's both corporate finance and it's real growth, right? The corporate finance is, you know, look at that net trading income per day chart on slide six.

I would, you know, venture that in the next five years, we're going to be at, you know, towards the top end, one or two years towards, you know, the lower end, one or two years, and, you know, maybe one year in the middle. But when you look at the impact on. You know, we generate a lot of cash flow, we keep our expenses low, and we're prudent in managing capital.

When you put all those three things together, you know, the you know, just the earnings impact and the reduction of the share count, you know, each year, you know, you add up whatever, you know, percentage is there on the right, you think we're gonna, we're gonna achieve, you know, over those, those numbers are over a three-year period. You kind of start with that as a baseline growth.

You know, we, you know, we range the growth initiatives from, you know, the low to the high in the, in the history that's on that chart. The high being this recent quarter, and, you know, and then some average. I think, you know, what we, you know. The point here is the three points I made, right?

We generate a lot of cash, we keep the expenses low, we're good at managing capital, and, you know, we think we've got some built-in growth if you're willing to kind of look at it on a, you know, on at least a three-year time frame.

Michael Cyprys (Analyst)

Great. Thank you.

Douglas Cifu (CEO)

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 (participant)

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