Virtu Financial - Q2 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Virtu Financial 2024 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Smith, Head of Investor Relations. Please go ahead.

Andrew Smith (Head of Investor Relations)

Thank you, Kevin, and good morning, everyone. Thank you for joining us. Our second quarter results were released this morning and are available on our website. With us today and 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 that 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 vary 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 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)

Thank you, and good morning, everybody. This morning, we reported our second quarter results. For the quarter ended 30 June, Virtu earned $0.83 adjusted EPS on $6.1 million per day of adjusted net trading income. We generated a 56.5% EBITDA margin and $218 million of EBITDA, both on an adjusted basis. We performed well this quarter compared to headline volume and volatility statistics, thanks to strong performances from our market-making businesses, our growing Virtu Execution Services franchise, and meaningful contributions from our organic growth initiatives. Beginning this quarter with Virtu Execution Services, our business performed very well.

Adjusted net trading income was up 3% over the first quarter, delivering $100 million of adjusted net trading income, or $1.6 million per day, the highest since the second quarter of 2022, when volumes were 5% higher and volatility was 63% higher. These results are especially impressive, considering that U.S. notional turnover was down almost 6%, Pan-European notional turnover was down about 2% per day, and in Asia, Tokyo Stock Exchange notional turnover was down about 10%. Virtu's scaled operations afford us the unique ability to continually invest in our global multi-asset class platform to meet clients' needs and maintain our position as a valuable partner. We believe these investments in technology and infrastructure are essential for providing the efficiencies clients need to thrive in a fast-paced and competitive landscape.

It's clear that our multi-year investments are paying off, as evidenced by third-party validation and increased client adoption. Major contributors to this are our multi-asset class capability, which makes us eligible to win more RFPs, and our white label offerings, or what we call Virtu Technology Services, which allows us to distribute our scalable technology efficiently and strategically to other sell-side institutions, helping them better serve their local clients. These non-exclusive strategic partnerships create recurring and reoccurring revenue opportunities for us and allow regional and boutique brokers to benefit from Virtu's global access to markets, advanced trading automation, risk management, and rich data analytics platform. Partnerships like these allow us to accelerate the efficient distribution of our offerings and to expand our addressable market by serving new clients and additional verticals.

To help us realize this important opportunity, we've made several senior hires in the U.S. and abroad, industry veterans with impressive track records of building successful B2B franchises in Tier One global banks and exchanges. Recruiting and retaining human capital has been crucial to making enhancements to our product suite and creating the right distribution network. Our disciplined approach to staffing means we've kept a constant level while adding key talent to support important initiatives. We've also seen interest in our new IRS CDS analytics offering, as well as our fixed-income pre- and post-trade analytics and cost curve offerings. These are examples of how, as a result of the scaled global platform we built, we can collaborate with clients, understand their needs, and rapidly develop practical solutions to their problems. We are as excited about the future of this business as ever.

As always, our offerings are driven by client demand and built around long-term, sustainable partnerships. Turning to market making. Despite the muted background, our business performed very well, including in the United States, where both our customer and non-customer market-making businesses delivered an exceptional quarter, thanks in part to the continuous cross-desk internalization improvements made by the team and an increase in the attractiveness of the flow we received, offset by reduced volatility across many drivers. While we saw softer results in certain commodity segments in the second quarter, we recognized meaningful benefits from enhancements to our global equity market-making operations that drove outstanding results in single stock and ETFs across the United States, Canada, Europe, and Asia. These enhancements, combined with our focus on optimizing internalization opportunities, helped us achieve greater results this quarter despite the reduced opportunity compared to last quarter.

This is a great example of how we're focused on investing to enhance our yield from every opportunity in any market condition. We are proud of the continued real progress in our core market-making businesses, as well as our success in the new areas, which we had no presence in only a few short years ago. Growth initiatives generated $670,000 per day in adjusted net trading income, contributing 11% of our overall adjusted net trading income. I will highlight results from the standout performers this quarter. In ETF block, our continued growth is the result of the team's efforts to onboard new clients, broadening our distribution, develop new pricing models to win RFQs, and build streamlined processes to create operational leverage as we expand our services to more clients in more asset classes and geographies.

In addition, our growing symbol and underlying coverage capabilities has opened the door for broader relationships with ETF issuers and fund managers, including facilitating their regular rebalance execution needs. Our growing options business delivered stronger performance than the prior quarter, despite lower addressable opportunities. Building our global options capabilities continues to be a top priority of the firm, and we expect this to be a significant part of Virtu's future as our global footprint grows. Similarly, we remain optimistic about the growth potential for us in the fixed income markets, given the rapid growth rate of the accessible market opportunity moving in our, in our direction and the pace at which we are developing technology and deploying the talent to increase our footprint in the space. The opportunity in fixed income is especially exciting when combined with the synergistic benefits from our growing ETF block desk.

Touching briefly on crypto. Our crypto market-making business was also a meaningful contributor, albeit the opportunity this quarter was muted as spot Bitcoin ETF volumes were down over 30% compared to Q1. We are strategically expanding our crypto venue footprint in a Virtu manner that is consistent with our historical appetite for risk. Our expansion in the spot crypto markets enhances our liquidity distribution and access to desirable, diverse order flow. As part of this development, we are building out cross-product internalization capabilities, which allow us to keep more of the spread we earn and reduce trading fees, similar to what we have developed in other asset classes across the firm.

Looking forward, we're working with ETF issuers to prepare to support spot Ethereum ETFs, and with exchanges and regulators to be ready to make markets in options on spot crypto ETFs when they are approved. As we mentioned last quarter, the introduction of spot crypto ETF products has transformed Virtu's role in the crypto ecosystem and plays to Virtu's strengths by enabling us to leverage our scale capabilities to service clients and the markets. The recent success of the crypto ecosystem has rapidly accelerated since the launch of Spot ETFs, and we are seeing more adoption from traditional investors than ever. We continue to see client demand for our unique abilities, as well as demand for our liquidity from new platforms and products coming to market. Suffice to say, we are still in the early innings of tapping the growth opportunity in crypto.

Now I'll turn it over for Joe for more commentary. Joe?

Joseph Molluso (co-President and co-COO)

All right. Thank you, Doug. Overall, the market environment was mixed to down compared to the prior quarter. Realized volatility of the S&P 500 were down about 6%. U.S. equity volumes, excluding sub-dollar shares, were down 4%. U.S. option volumes were up about 1%. Indicators of retail activity in the U.S. were also mixed. Rule 605 volumes through May were down 5%, but IBKR's equity share volume was up 17% for the quarter. In FICC markets, FX volumes were up about 5%-10%. Energy volumes were up 1%, while high-grade credit volumes were down over 11% versus the prior quarter. I'll speak briefly about the debt refinance we did, as well as our buyback program, before turning it over to Sean to review the financial results.

At June 30, 2024, our total invested capital sit at over $1.8 billion. Our incremental returns on capital remain superior on a long-term basis. Our ability to generate significant returns is evidence of our broad and diverse service offerings, and as Doug explained, our growth initiatives have begun to pay dividends. Our ability to generate superior returns would be even greater as our new initiatives, particularly fixed income, are the more capital-intensive businesses on a relative basis. In quarter two, we used a portion of our free cash flow to repurchase 1.4 million shares at an average price of $22.34. To date, we have repurchased 47.3 million shares at an average price of $25. Quarter-end share count was 161.4 million outstanding, bringing our buybacks on target to fit within the ranges we have announced publicly.

Since we initiated our share repurchase program, we have repurchased over 18% of the fully diluted shares of Virtu, net after new issuances. Our share repurchase program year-to-date is within the guidelines we have published. This quarter, we saw an opportunity to refinance and diversify our long-term debt outstanding. We refinanced our $1.7 billion of existing debt with a $1.25 billion term loan priced at SOFR + 275, which was tighter, down from the 3% spread we had prior to this, and a $500 million bond at 7.5%. All but $170 million of the floating portion of the loan is hedged through the end of 2025.

Together with this refinancing, we renewed our holding company liquidity facilities and extended the maturities on our long-term debt by nearly 3 years, so we were very happy with this outcome. While results from market-related businesses like ours will always vary with volumes and volatility and market environment, slides 5 and 6 in the supplemental materials illustrate the sustained earnings power of our business and the positive leverage we enjoy from capital management, as well as our growth initiatives and the cumulative impact of our share repurchases. On the expense side, adjusted cash operating expenses were $168 million in the second quarter. Our run rate cash operating expense is up about 3% year-over-year, also consistent with prior guidance.

Our cash compensation ratio was 22%, 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 as we have done in the past, we'll provide more clarity on compensation and other expense numbers as the year unfolds. Although, we also expect the ratio to remain within historical norms. Regarding our total cash operating expenses going forward, we will continue to assume low single-digit overall increases in operating expenses. So we're going to turn it over to Sean to just go through the financials.

Sean Galvin (CFO)

Thank you, Joe, and good morning, everyone. On slide three of our supplemental materials, we provided a summary of our quarterly performance. The second quarter of 2024, our adjusted net trading income, which represents our trading gain, net of direct trading expenses, totaled $385 million or $6.1 million per day. Market making adjusted net trading income was $286 million or $4.5 million per day, and execution services adjusted net trading income was $100 million or $1.6 million per day. Our second quarter 2024 normalized adjusted EPS was $0.83. Adjusted EBITDA was $218 million for the second quarter 2024, and our adjusted EBITDA margin was 56.5%. On slide nine, we provided a summary of our operating expense results.

The second quarter of 2024, we recorded $184 million 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. Financing interest expense was $23 million for the second quarter of 2024. With the benefit of our recent refinance and the interest rate swap contracts that we entered in the prior years, our blended interest rate was approximately 7.3% for our long-term debt in aggregate. We remain committed to our 24-cent per quarter dividend, and combined with our share repurchase program, this 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&A.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star one one again. We also ask that you limit yourself to one question and one follow-up. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Patrick Moley with Piper Sandler. Your line is open.

Patrick Moley (Analyst)

Yeah, good morning, and thanks for taking the question. Congrats on the strong quarter, and Doug, congrats on the Panthers victory. It was pretty cool to see you and Vinny get your names immortalized on the Stanley Cup. It's fun to watch. So, you know, if we back out organic initiatives, A&T was up 9% sequentially this quarter. I know we only have two months of 605 data, but those reports implied that the opportunity or quoted spreads had contracted 11% quarter to date. So could you just help us understand and maybe elaborate on, you know, what drove that disconnect this quarter? And then just maybe looking at first quarter versus second quarter, what were some of the notable changes in the overall environment that drove a sequential strengthening? Thanks.

Douglas Cifu (CEO)

Yes, and thank you very much for the kind words. It's greatly appreciated. Yeah, we—as I said in my prepared remarks, I was very, very pleased with our performance during the quarter. As you note, you know, a lot of the metrics that we look at, and frankly, that we point you guys to around quoted spread and realized volatility were down quarter over quarter. I think, you know, there was some increase in the S&P intraday volatility, which definitely helps when there's price level changes in the S&P during the day, as opposed to realized volatility, measuring volatility at the end of the day. But put that to the side. I do think...

Look, I mean, as I've indicated on these calls before, you know, we are very much always investing and working on our models on the customer market making side to make sure that we are providing the best service, the best execution quality to our clients, while at the same time, monetizing the flow as best that we possibly can. We've made a number of, you know, model adjustments, for lack of a better word, and enhancements, that were meaning, you know, that, that contributed during the quarter. As I indicated in my prepared remarks, one of the things that I'm most proud about this firm is that it really is a single unitary firm.

We don't have trading pods, and we don't have trading desks, which means that our opportunities to internalize within our market making businesses, you know, certainly easily on the non-customer side, but even within the customer and the non-customer market making business, are tremendous. And so that does a couple things. Obviously, it minimizes external costs, both exchange costs, SEC fees, and et cetera. But it also enables you to be more confident about your market making and to tighten your spread, which therefore, thereby attracts more flow. So, better pricing begets more flow, more flow begets more opportunity, and this firm has historically been very good at that. I should also point out, and there's a reason I started our remarks, my remarks rather, with Virtu Execution Services. It had a really, really good quarter.

We have, and I give Stephen Cavoli and the folks in the Virtu Execution Services part of our business, a great deal of credit. They have spent the last 4+ years since the amalgamation, I'll call it, of Knight and ITG into the Virtu world, essentially changing the tires on a car as it was going down the highway at 70 miles an hour. We don't stop here at Virtu, and re-platforming and reconstituting a broad suite of financial products, and then rolling that out to clients in an embedded client base that was comfortable with a lot of ITG and Knight products. But now looks at what we've accomplished and says, "Man, this is really, really impressive." So we've always competed on execution quality and customer service. The execution quality has demonstrably improved.

You know, we have a product that we rolled out, you know, using machine learning techniques called Switcher, which essentially is the guys internally, and I'm a golfer, I love this analogy. It's kind of like the Uber caddy that you wish you had when you played golf. You get to, you know, a shot, and it tells you, this is exactly the club you should hit, and here's what it's gonna do, and this is what we strongly suggest that you do. And so our Switcher product does that for our buy-side and our sell-side clients. And in that, it says, you know, "Here's the current market condition. Here's what we think the right set of tools you should use in order to have superior execution quality." And clients...

That resonates with clients, and that's really the value proposition of Virtu. The last piece on Virtu Execution Services, which I mentioned in my prepared remarks, is just, you know, Virtu Technology Services, or think of it as kind of broker in a box. As the world has gotten a lot more competitive and as commission rates have skinnied and how commission dollars are more scarce, you know, smaller scale players and even scale players are taking advantage of our ability to produce superior technology and execution. And we are more than happy, more than happy to white label that to firms that otherwise people would view as competitors. They're not. There is a great symbiosis on the sell side, and we're there to provide technology services, and that really has resonated with folks on the sell side.

I think, Patrick, to answer your question, it really is a combination of all of the aforementioned. A lot, a lot, a lot of singles, and you can score runs.

Patrick Moley (Analyst)

Okay, great. And as a follow-up on the organic growth angle, it was up, you know, almost 70% year-over-year, so I don't wanna, you know, throw any shade on it, but it did contract 33% sequentially. Can you help us just parse out how much of that was driven by, you know, a contraction in the crypto environment versus, you know, something like ETF block, which you called out? And then, you know, as we think about the crypto business going forward, how do you expect to drive revenues there in the absence of new ETF approvals, which it appears can drive outsize results in the quarter in which they're issued and launched, given kind of the contraction that it appears like occurred in that industry this quarter?

Douglas Cifu (CEO)

Yeah, a great question. And as we've said on prior calls, the organic growth initiatives are not immune to market forces. And so, like, for example, SPY option volumes were down 9% quarter-over-quarter. You know, obviously, the crypto I mentioned in my prepared remarks, you know, spot Bitcoin ETF volumes were down roughly 30% quarter-over-quarter after the exuberance of the launch. Same thing with opportunities in global block ETF, as volumes were down compared to, you know, quarter-over-quarter. So, look, you know, I'm very, very pleased with our continued efforts in those areas.

You know, we continue to expand and to grow and to get better, but we're obviously, you know, subject, for lack of a better word, to, you know, what the marketplace and what the overall macro volumes are. So we're sitting here today, if you had said to me three years ago, like, "Hey, you're gonna have $600,000 plus of Adjusted Net Trading Income, nearly $700,000 from these three categories," which effectively provided zero P&L three years ago, I would have been, like, ecstatic and accepted right away. In crypto, in particular, look, we're onboarding new venues and creating a liquidity distribution network similar to what we have in FX. I think there's gonna be a growing demand from counterparties. You haven't yet seen full institutional adoption, obviously.

You know, there's been some very notable firms that have not embraced crypto or digital assets, but there's been a, you know, a ton of RIAs and other institutions that are now allocating a portion of their investable assets, if you will, to digital assets and to crypto. So we will continue to do that. There's a, you know, a plethora of new venues that want our liquidity provisioning services, including, obviously, as I always do, and my public service announcement for EDX Markets, which we own a piece of with our friends at Citadel and Fidelity and Schwab and others. And so we think there's gonna continue to be an evolution of both the distribution channels in digital, but also the products.

As you alluded to, it appears like there will be a puff of white smoke from the SEC on July 23rd, and Ethereum products, Gensler will open up the pearly gates and allow them to be traded on July 23rd, which we're very excited about because it's a whole new class of products. Then, as I mentioned in my prepared remarks, there'll, you know, there'll be options and leverage products and this, that, and the other thing as market participants, you know, generate new ideas and market investors want new ideas, and we'll be there in the midst of that ecosystem, providing the market-making services.

Joseph Molluso (co-President and co-COO)

You know, Patrick, the other way to look at it as well is, you know, as Doug said, the growth initiatives are not immune to market forces. But in the second quarter, 670,000 a day, if you look at that slide in the supplement, in 2020 and 2021, we were 641,000 a day and 540,000 a day in much more robust markets, right? So there's real growth there, on an apples-to-apples basis. And, you know, fixed income hasn't even really taken off yet. So we're, we're, we're really happy with that.

Patrick Moley (Analyst)

All right, very helpful. Thanks, guys.

Operator (participant)

One moment before our next question. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Craig Siegenthaler (Analyst)

Thanks. Good morning, everyone. We know it's early days, but how should we size up the tailwind from Ether ETF approvals? Because I think you mentioned last quarter, you were seeing $200,000 a day around the Bitcoin ETF approvals. So if Ether ETFs gather about half the assets that Bitcoin did, does this mean about $100,000 a day? Just curious on how we should size up this opportunity.

Douglas Cifu (CEO)

Yeah, it's a great question. I'm, you know, always somewhat reluctant to prognosticate, like, you know, what the take-up's gonna be, you know, from, from these new products. I mean, I think there have been... I mean, I think the key takeaways have been, there have been significant ETF inflows as a result of, the spot Bitcoin ETF approval. So I would imagine, that there will be a similar circumstance here. There's gonna be folks that are obviously transition from Ethereum to Bitcoin. So I think there'll be the initial, surge of activity, for lack of a better word. I don't know how many issuers ultimately will get approved on July 23rd and subsequently, you know, there's 11-ish or so, I think, spot Bitcoin ETFs. So I think the, the ETF... I'm sorry, the spot Ethereum market has been growing.

So whether it's half in size or, you know, a third in size, you know, I think it's probably closer to a third than a half, is how I would kind of scope it out. So look, it's, you know. And the marginal dollars on that effectively flowing to the bottom line of Virtu after we pay, you know, exchange fees and the SEC fees and all that other kind of stuff, is essentially 100% because it's not like we're adding, you know, new, you know, servers and personnel to monetize that opportunity. And again, I'm excited as more products are sort of regularized as ETFs, I think you'll continue to see more...

Certainly, there's been a significant amount of retail interest, but I think you'll have more institutional adoption, and that's really the exciting part for us, right? Because that's where we can play a key role as a liquidity provider.

Craig Siegenthaler (Analyst)

Thanks, Doug. Then, our follow-up is on the fixed income build-out. Based on your organic growth revenue, it looks like ETF block revenues were probably down overall, but how did the fixed income ETF component trend relative to the rest of that number? Then on the VES side, what are you seeing in fixed income?

Douglas Cifu (CEO)

Yeah, it's a great question. So let me handle the second part, first, because it's very exciting. I mean, I think one of the key thoughts we had when we decided that ITG would be a good partner for us to amalgamate with was we saw their global distribution. We saw that the standing that they frankly had with global asset managers and pension funds, which was really outstanding, 30 years of goodwill. But what they really lacked, because they didn't have the DNA of a Virtu as a multi-asset class market maker, was they were fabulous in global equities, and I would say they were struggling in other asset classes.

As the world and the functionality that is required by, certainly by the buy side, and also by the sell side, but really by the buy side, has screamed out for multi-asset class capability, that's where the combination of Virtu and ITG has been incredibly powerful. Let me give you a specific example, like our EMS product, Triton, which has, you know, had a great brand in global equities and had struggled candidly in FX and other asset classes. Now, today, sitting here today, we are a legitimate multi-asset class EMS solution for the global buy side. We can credibly respond to requests for proposals, from significant global asset managers, pension plans, sell side firms, and so we're a real competitor to be reckoned with.

We have an ability to harmonize the fire hoses of information, i.e., market data, that I believe is superior to our competitors because that's what we do on the market-making side. We have robust and scalable technology that we can offer to clients because candidly, that's what we do on the market-making side. So that value proposition as a fully scaled multi-asset class technology, broker-neutral provider, I mentioned also some of the new analytics products that the folks in our analytics group have rolled out, has, for the first time, really given this firm credibility as a multi-asset class technology provider. And that's what I'm most excited about on the execution side. To answer your question on the market-making side, certainly, as I've indicated, you know, we're a broad ETF block market maker. We obviously do all the equities products. We're great in commodities.

But in order to be credible, as I've said on prior calls, we needed to be in the fixed income space as well. And because that's more opaque and more bespoke, the baskets aren't as precise as they would be in equities, there's both an art and science to being an ETF market maker, and certainly our competitors at the great firms that you know, Jane Street, Citadel, et cetera, are expert in that. Now, we are as well, and there's certainly more opportunity with those instruments than there are with more kind of plain vanilla, a global ETF. That's not to say that there's not P&L opportunities there, and there's not risk you take, and there aren't large transitions, where clients need services. But certainly, in the fixed income subpart of block ETF, there's more opportunity.

And your intuition is correct, that, that continues to be a meaningful contributor. I think, you know, the growth drivers there in terms of... And you all know this very well, the continued electronification of credit and obviously rates, is gonna be very important. The adoption of TCA tools, both from Virtu and from other firms, will allow, buy side traders to trade with more alacrity around, and to make better decisions around how they transition. And then, obviously, mandated clearing of U.S. Treasuries is another tailwind. So all of these tailwinds are sort of circling around us, and I think ultimately, you know, we're, we're patient business builders, and we're excited about building those businesses.

Joseph Molluso (co-President and co-COO)

Just to add, specifically on the quarter, I mean, we don't break out the growth initiatives, as you know, let alone the subcomponents of ETF block. But, you know, fixed income volumes, high-grade fixed income volumes in the first quarter, were down 11%. TRACE volumes were down that much.

Craig Siegenthaler (Analyst)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Ken Worthington with J.P. Morgan. Your line is open.

Kenneth Worthington (Analyst)

Hi, good morning. Thanks for taking the question. You know, really to follow up on fixed income, FMX is expected to launch in the not-so-distant future. You're not a partner, but is there still an opportunity to grow with them and rates, and are you planning on participating on that new platform? And then as we think about sizing the rates opportunity, so clearly the fixed income markets are, you know, big and amongst the biggest, but volatility is generally much lower. How does that opportunity set look over time for Virtu, in the fixed income asset classes versus something like ETF block or even options, which are much smaller markets, but much more volatile markets?

Douglas Cifu (CEO)

Yeah. Thanks, Ken. Those are great questions. Look, on FMX, I would be very careful what I say. I think the world of Cantor, and I think they have really done some amazing things. We partner with them, and we're, you know, trading on Fenics today, and we're gonna be incredibly supportive of FMX as a market maker. We're the Switzerland, as I've always said, of liquidity provisioning. We don't pick winners and losers. Certainly, we've made key strategic investments in various platforms where it felt like, hey, having Virtu in the mix, you know, might move the dial, you know, the Members Exchange, certainly, we were driving force behind that. EDX, as I mentioned, and there are unbelievably credible partners behind FMX.

And, you know, I, I wish them nothing but success, and it's a great thing for Virtu, right? We encourage competition. It tends to drive down prices and make exchanges better. Certainly, if there was one exchange in the U.S., I think, you know, costs would be significantly higher, and spreads would be larger and all that kind of stuff, and we know the history of the last 30 years. So we wish them, we wish them well, and we're going to be a, you know, a day one liquidity provider and excited about the opportunities there. You know, fixed income is, as we've said, largely a greenfield space for us.

And as markets continue to move in our direction, and there tends to be more efficiency and centralized clearing, that's just more opportunity for us. What we have done, as I've said on previous calls, is partner with our great friends at Tradeweb and MarketAxess. Again, we're Switzerland. I love Billy, I love Chris. They're both terrific world-class CEOs. I wish them nothing but success. And they are great distribution partners for us. I mean, candidly, to use the auspices of Tradeweb and MarketAxess to reach rates and credit end users Ken, is seminal for Virtu, right? We don't have the distribution network. We don't have 20-30 years of credibility with a lot of firms. And so having them effectively stamp the good housekeeping seal of market-making approval on top of Virtu means the world to us.

And so we are lit up now with hundreds of counterparties, hundreds of counterparties in both credit and rates. As I've said in prior calls, we've cracked the top 10 in MarketAxess for investment-grade bonds, which is exciting. On Tradeweb, I would screw it up, and you should probably ask Billy, but we're, like, top five in, like, you know, in small tickets for treasuries and things that are kind of more Virtuian in the rates world. So we're getting there. We're getting there. It's very, very early innings for us, and we see it as a huge opportunity, much like global options, where heretofore it has not been... Forget about a key Virtu strength, it's essentially been nonexistent in the firm. So as, you know, and that asset class is very different than equities, and it's very different from options and whatnot.

So we've learned a great deal. We've partnered with great firms, including now Trumid and some of these other firms as well. I don't want to leave anybody out. We're Switzerland. We love everybody. Sometimes not the regulators, but all the market participants we try to get along with. And so, you know, I'm excited about that as a, you know, medium to long-term growth initiative for the firm.

Kenneth Worthington (Analyst)

Great. Thank you.

Douglas Cifu (CEO)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Chris Allen of Citi. Your line is open.

Christopher Allen (Analyst)

Yeah, morning, everyone. Thanks for taking the question. I wanted to dig in a little bit more on execution services. Doug, you mentioned that you're seeing growth in kind of recurring or recurring revenues. I wonder if you'd give any framework in terms of what level of revenues are generally recurring as a percentage of the overall base. And then on the sell side opportunity, how penetrated are you there? What's the opportunity set moving forward?

Douglas Cifu (CEO)

Yeah, it's a great two great questions. I'm going to be a little snarky on the first one and say, not enough that you guys would increase our multiple in terms of recurring revenue. And that was one of the thesis behind... I'm joking a little bit, Chris. That was one of the thesis behind buying ITG, which was like more of a stable sort of revenue base and a significant portion of the old ITG revenues were subscription-like, and we certainly have encouraged clients to move more to that model with regard to our Triton products and our analytics products. So we don't separately break it out. You know, it's not material in the overall Virtu world, but it's certainly within the VES segment.

It's not an insignificant amount, and we are making every effort with our existing and new clients to move them to more subscription models with an upside for more transactional revenue. So that's an exciting part of what we're doing there. And what was the second question? I'm blanking because I get so into the subscription question.

Operator (participant)

VES overall.

Douglas Cifu (CEO)

Oh, VES overall in terms of, like,

Operator (participant)

Penetrating the sell side.

Douglas Cifu (CEO)

Oh, yeah, on the sell side. Thank you. So Virtu Technology Services. Look, there are, I don't want to say the United States is overbrokered, but, there's 3,000 or so broker-dealers in this country that are really chasing. You know, if you exclude the big boys that have prime and research and calendar, all the large money center banks, I guess we used to call them, you know, the Citis, the J.P. Morgans, the Barclays, the UBSs, the Goldman Sachses, the Morgan Stanleys of the world, fabulous institutions, very different value proposition. If you carve out all of their commission dollars, you know, there's a pool of commission dollars left that has certainly shrunk in the last, you know, 10 years and 5 years, and it, you know, it goes up and down and fluctuates.

So there's a lot of people chasing those dollars, including the Virtu firm. And there's firms that are just frankly subscale and don't have the resources to invest in technology. And so what we offer them is what I loosely refer to as, you know, broker in a box. You know, Cavoli is a better marketer than me. I guess he calls it Virtu Technology Services. And essentially, what we're saying to broker-dealer firms is, listen. We don't need the market share. We're agnostic as to using our own pit. You face the client, and you, and you have the full interaction with them. What we wanna provide to you is we're gonna give you our full algo suite. We're gonna give you Switcher, which is like this machine learning protocol.

We're gonna give you, if you want, an EMS system that can even have your name on it. We're gonna give you the ITG Net connections to the world, and we're gonna give you a price for that. So that enables you to focus on what you think you're good at, which is research, relationship management, and all the other things that these, you know, 2,998 other brokers are specialized in and are really good. Let us deal with the hassle, if you will, of interconnecting the U.S. equities market and doing it with such clarity and with such precision that you can proudly say to your clients: "Listen, here's the fills you got. This is great execution quality.

You more than satisfied your best execution capabilities." And we're gonna charge you a very, very fair commercial rate for that because, frankly, we have the scale, and we've already invested in the network in that suite of products. So essentially, every one of those sales that the guys are doing is, you know, 100% margin dollars, right? Because we've already invested in that. We have the personnel here. So that's a key initiative and driver for us. And I think as the world continues to get more competitive, technology is getting more expensive and not cheaper, and, you know, the cost of human capital certainly has increased because of inflationary trends in this country and around the world. I think more sell-side firms will recognize the value proposition that we provide.

Christopher Allen (Analyst)

Thanks, guys. Let's go back to the queue.

Operator (participant)

One moment before our next question. Our next question comes from Alex Kramm with UBS. Your line is open.

Alexander Kramm (Analyst)

Yes. Good morning, everyone. First off, maybe just a little bit of a follow-up in terms of the second quarter and what drove the strength. And a lot, and a lot has been said, and I know there's always a lot of micro stories every quarter, but two things I think that stood out, too, were, I think there was a short period of, you know, the meme stock phenomenon coming back. And then I think the other, the other thing we noticed was, there was a higher percentage of sub-dollar trading in the quarter. So can you just remind us, as specific as you want to, how these things impacted you in the quarter, and how should we be thinking about them in general? Thanks.

Douglas Cifu (CEO)

Yeah, no, it's a very good question. Look, I mean, the meme stock thing was, I think, overblown and sort of, I don't wanna say, like, over-reported, but at the end of the day, it was fairly ephemeral and didn't have any material effect on what we do. In fact, it's, you know, if, if I could live my life without any- without Hello Kitty, whatever his name is, and, and the meme stock explosion again, I'd be a very happy guy. Because all it does is it create more, you know, questions about how the market works and, and chatter, and it's, you know, it's a risk management issue for us. And at the end of the day, if that kind of went the way of the dodo bird, I wouldn't be an unhappy guy.

So no, it was short-lived and narrow and didn't have any material impact. You know, same thing with the sub-dollar symbols. In fact, we submitted, today's Thursday, on Tuesday, a rulemaking proposal to the SEC, where we've asked the exchanges, NASDAQ in particular, to tighten up their listing standards to eliminate some of these sub-dollar names that just kind of... I'll be nice and say, do securities offerings, go below a dollar and then do reverse splits, wash, rinse, repeat, and do it over and over again. Frankly, they shouldn't be public companies, and it's really a distraction, and frankly, it's an operational risk to the ecosystem, not just us, but to our retail broker-dealer partners.

And so that's why we think we can make the markets better, and we, you know, affirmatively ask the SEC to take action in this regard, to kind of push the exchanges, more Nasdaq than New York. New York does a really good job of policing, but more Nasdaq, to make the markets better. So you can tell I wouldn't have done that if it was a significant opportunity for us. If anything, it's a risk management challenge for us.

Alexander Kramm (Analyst)

Okay, and then secondarily, this may be a minor thing, but just wanna get an update on this. Section 31 fees went up a ton in the quarter. I think May 22nd, I think 3.5x or something like that. Is that—can you just remind us how that impacts your business and profitability? I mean, obviously, it happened during the quarter, and it didn't look like it had a bad impact. But just wondering, given the big increase, how that actually impacts the different businesses and profitability.

Douglas Cifu (CEO)

Yeah. No, it's actually a great question, and I'm glad you brought it up. We don't talk about it because, you know, the ebbs and flows of Section 31 fees, and it's very dramatic swings. It's statutory. It's kind of idiotic the way that... And I'm not blaming the SEC because it's statutory, but it's kind of idiotic. You think they could smooth it out a little more? And you're right. You know, we're a very significant payer of Section 31 fees because we sell a lot of securities, and that's how it's calculated. So it certainly had an impact from May, I think it was 23rd, when it changed from May 23rd through June 30th. And so we had a, you know, effectively, it's a transaction tax.

So when the, you know, left-wing crazies talk about the markets and we need a more, you know, we need an FTT, I nicely try to remind people that we have a very meaningful FTT, about $1 billion. And so it affects everybody. That gets passed along as best as we can pass it along. It widens spreads.

It gets passed along to institutional investors. And so, yeah, it's an unfortunate part of the marketplace. I wish the SEC ran their business more efficiently like we did and didn't have to jack it up as high. You know, we've been in conversations with the SEC to see how it affects spreads in some of the very popular instruments, like SPY, for example, right? It has an impact on bid-offer spreads, and investors end up paying it from wider bid-offer spreads. We do the best we can, Alex, to absorb it, but then where appropriate, to pass it along. I mean, we've had some startling conversations with regulators about how Section 31 fees impact, you know, very popular instruments like the SPY family.

And so at the end of the day, it's, I'll very intellectually say it sucks. Nothing we can do. It's statutory, and it's kind of part of the table stakes of being a market maker.

Alexander Kramm (Analyst)

Fair enough. So nothing we should be thinking about as we think about profitability going forward, the recent change?

Joseph Molluso (co-President and co-COO)

Well, it shows up in gross-to-net. But just to take your question back to the original, you know, point, like, these are good detailed questions, and they all have some impact. None of them, this quarter, you know, would explain sort of outperformance. But, you know, as we said earlier, it is a lot of little things, right? We have a diversified market-making business that we get better at. We get better at monetizing the flow. We have an execution services business poised to grow with a revamped product set, and we have growth metrics that, you know, have kicked in and, you know, done, you know, measurably better. So it is just a lot of little things kind of coming together.

Alexander Kramm (Analyst)

Very good. Thanks, guys.

Operator (participant)

One moment for our next question. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Aditya Sharma (Analyst)

Hi, good morning. This is actually Aditya filling in for Alex. Thank you for taking our question. So question on capital return and management. The pace of buybacks was a little lower than what's implied by the strong EPS this quarter. So how are you thinking about it for the rest of the year? And lastly, where does M&A fit in your capital management thought process, and what's the outlook from here? Thank you.

Joseph Molluso (co-President and co-COO)

Yeah, sure. Look, we actually changed the presentation of our slide because we thought, you know, based on some feedback, we thought we were being a little hard on ourselves in terms of slide 7, where we just showed kind of an EBITDA return. You know, so this is a cash-on-cash return, and you can see it's sort of, you know, even in a more muted environment, you know, we're earning, you know, 65% plus this quarter, 71% on average, on our invested capital. And we do generate a lot of cash. You know, the buybacks will ebb and flow, you know, depending on market opportunity, capital deployment, and just some other things that are difficult to predict.

We did have, you know, we published, and I think we republished this quarter, you know, on slide six, you know, here's the target for buybacks at different levels of, of net trading income. So, you know, in the first two quarters, we're at, $67 million, you know, which would, if you annualize that, you know, would be right in the middle of the range that we put for $6 million a day. I'll give you the number through July seventeenth. There's been another $6.8 million, so we're, you know, we've continued and maybe picked up the pace a little bit. So I don't read anything into that. It's just the ebbs and flows, and we are going to be squarely within the range that we indicated.

You know, just in terms of M&A, you know, we look at ourselves as we are shareholders. We look at value creation, and we look at the incremental dollar and where we can best deploy it. You know, we see everything. You know, we're presented with a lot of opportunities, but I think as we've said, you know, there's nothing that competes with buying back our own stock, and that's how we look at things. We like our leverage. We like our capitalization right now. You know, we just refinanced our debt stack. You know, hopefully, that's kind of set it and forget it. But we do look at everything in terms of value creation. If there were an opportunity out there, you know, that created more value in our minds than buying back stock, we would do it.

But right now, you know, we've been, we've been able to get a lot of these growth initiatives off the ground, all of them, in fact, without, you know, without, you know, a third-party transaction. So, that's kind of how we look at it.

Operator (participant)

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Doug for any closing remarks.

Douglas Cifu (CEO)

I'd like to thank everybody for their attention and for their participation today. We look forward to speaking with you in November, when we announce our third quarter results. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.