VIRT Q3 2024: Global options growth offsets 11% Bitcoin ETF slump
- Global options and index expansion: The executives highlighted robust growth in their options business, particularly in APAC markets and with index options offerings. They emphasized building capabilities across regions while leveraging long-standing relationships, positioning the firm to capture increased trading volumes and enhanced margins.
- Retail derivatives and futures opportunities: The management noted that retail futures represent a complementary market to cash equities. By partnering with established retail broker-dealers and capitalizing on the active trading segment, Virtu is well positioned to diversify its revenue streams without cannibalizing its core business.
- Strong client relationships and technological edge: The firm’s decades-long partnerships with retail brokers, coupled with its advanced trading infrastructure, support efficient liquidity provision and pricing improvements. This robust platform reinforces the firm’s ability to maintain high net trading income even in challenging environments.
- Fee and Cost Uncertainty: The introduction of lumpy transaction fees, like the Section 31 fees and recent initiation of cash fees, could lead to unexpected cost spikes, potentially pressuring margins.
- Regulatory Risk Impacting Market Structure: The uncertainty around the final SEC equity market structure proposal and Reg NMS amendments may narrow spreads and reduce the value of exchange rebates, which could adversely affect net trading income.
- Weakening Trading Opportunities in Key Segments: A notable 11% sequential decline in Bitcoin ETF activity and a narrowing of index options spreads have already reduced adjusted net trading income, suggesting that further softening in these areas could hurt revenue growth.
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Market Structure
Q: How will SEC rule affect on-exchange rebates income?
A: Management noted that while the final SEC amendments might narrow spreads, Virtu is not a rebate trading firm and remains a net payer of exchange fees, so the overall impact on adjusted net trading income should be minor despite some unintended market effects. -
Organic Growth
Q: What drove the sequential decline in ANTI?
A: Management explained that a significant 11% drop in Bitcoin ETF activity and narrowing index options spreads led to the decline, although organic growth opportunities, especially in Asia, remain promising. -
Options Expansion
Q: How are U.S. vs. international options markets progressing?
A: Management highlighted strong investment in the U.S. options market paired with robust growth in international markets like India, Korea, and Japan, underscoring a balanced long-term global strategy. -
Retail Futures Opportunity
Q: Is there a wholesale market-making opportunity in retail futures?
A: Management described retail futures trading as targeting active day traders, with a differentiated approach that complements traditional cash equities, and noted growing opportunities with partners like Robinhood. -
Futures Payment Process
Q: Do futures products develop the same payment process as equities?
A: Management confirmed that while futures trading has its nuances, it effectively complements the cash equities business by leveraging long-standing retail broker relationships to provide efficient two-sided liquidity. -
Brokerage Costs
Q: What drove higher brokerage costs this quarter?
A: Management attributed the cost increase primarily to Section 31 fees—a lumpy, transaction-based tax—and some additional cash fees initiated recently, with the overall effect remaining limited. -
Margin Rule Impact
Q: Will the new OCC margin rule affect trading volumes?
A: Management indicated that the OCC intraday margin changes are essentially a timing adjustment with minimal impact on overall trading volumes or capital adequacy. -
Buyback Strategy
Q: Do you adjust buyback purchases based on stock valuation?
A: Management emphasized that share repurchases follow an incremental investment approach with set targets, remaining unswayed by short-term valuation fluctuations unless clear value opportunities arise. -
Expense Guidance
Q: How will expense levels and compensation ratios move?
A: Management expects cash operating expenses and compensation ratios to remain within historical ranges, with no significant seasonal adjustments anticipated.
Research analysts covering Virtu Financial.