Good day, and welcome to the Virtu Financial 2021 Second Quarter Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Andrew Smith.
Please go ahead.
Thanks, Tom, and good morning, everyone. Thank you for joining us today. Our second quarter results were released this morning and are available on our website. On this morning's call, we have Mr. Douglas Cifu, our Chief Executive Officer and Mr.
Joseph Maluso, our Co President and Co Chief Operating Officer and Mr. Sean Galvin, Our Chief Financial Officer, he will begin with prepared remarks and then take your questions. First, a few reminders. Today's call may include forward looking Statements which represent Virtu's current belief regarding future events and are therefore subject to risks, assumptions and uncertainties, which may
be outside the company's control.
Please note that our actual results and financial condition may differ materially from what is indicated in these forward looking statements. We'll revise any forward looking statements as new information becomes available. We refer you to disclaimers in our press release and encourage you to review A description of risk factors contained in our annual report and Form 10 ks and 10 Q and other public filings. During today's call, in addition to GAAP results, we may refer to certain non GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. Non GAAP measures should be considered as supplemental to and not with an explanation of why we deem this information to be meaningful as well as how management uses these measures.
And with that, I'd like to turn the call over to Doug.
Good morning and thank you, Andrew. This morning, we reported our 2nd quarter results, which reflect our resilient and balanced business model, as well as the continued success of our organic growth initiative. For the quarter ended June 30, we generated $0.63 of adjusted EPS on 5 point $4,000,000 per day of adjusted net trading income, bringing our results for the first half of twenty twenty one to $2.67 per share and an average adjusted net trading income of $8,630,000 per day. Last quarter, we announced a $300,000,000 increase to our share repurchase program, which brought our total authorization to $470,000,000 We have repurchased 3,400,000 shares for approximately $100,000,000 during the Q2 and over $30,000,000 worth since the end of the second quarter, bringing the total amount repurchased under the current authorization to approximately $230,000,000 As we stated previously, we remain committed to returning capital to investors and have prioritized share repurchases for the foreseeable future. We aim to be in the market consistently buying back shares as we work to accomplish our capital management goals.
Importantly, In the Q2, our more greenfield growth initiative continued to shine in both relative and absolute terms compared to historical results. On Page 6, you can see how these initiatives contributed meaningfully to our performance, generating $500,000 per day of adjusted net was nascent only a few years ago and we have achieved these results by leveraging our scaled infrastructure and distribution channel supplemented with a handful of individual hires. While these results are impressive, we are especially excited about the continued growth potential of these truly organic opportunities. In options market making, for example, our daily adjusted net trading income grew quarter over quarter Despite the 13% decline in options market volume, we continue to view options market making as a key long term engine of growth that complements and enhances our existing market making business, creating new revenue synergies across asset classes and regions. Other key initiatives include our ETF lock desk and our deployment of legacy KCG quant style strategies continued their long term growth trend In the quarter, market volumes in U.
S. ETFs declined about 13% in the quarter, while our ETF block volume was down less than 1%, illustrating on market making in Bitcoin and ether in various forms, including spot instruments on a couple of the major venues, as well as ETFs and futures. As a leading market maker in ETFs around the globe, crypto ETFs fit naturally into our scaled market making operation, leveraging our growing We are also in the early stages of developing our ability to stream cryptocurrencies over our direct to dealer streaming liquidity platform, PFX. Through this platform, we will provide liquidity product is yet another way that the total addressable market is growing for Virtu's scaled liquidity provisioning and execution services. Taken together, our growth initiatives are making tremendous progress and help raise our baseline performance through the cycle.
As Joe will detail in a few moments, we believe that this positive growth trajectory combined with our stock buyback program provides a compelling long term story for our investors. We look forward to updating you in the future about the progress we're making on each of these opportunities and our contribution to Additionally, the steady growth of these initiatives as well as the continued less volatile performance of our Execution Services segment has led us After several quarters of elevated market activity, realized volatility fell nearly 30% in the 2nd quarter, dropping to 9 Further, U. S. Equity volumes were down 28% overall and retail equity volumes in the United States were down even more compared to Q1. Despite the steep drop in volatility, we highlight the sustained levels of retail engagement and general market volumes compared to historical levels.
It is important to note that despite the changing operating conditions versus last quarter, our market making business realized $232,000,000 in adjusted net trading income were $3,700,000 per day. This quarter's performance is similar to the Q3 of 2020 where we generated $4,000,000 of ANTI per Albeit realized volatility was 34% lower this quarter than in Q3 2020. Our Execution Services business also performed in line with the market opportunity this quarter, realizing $110,000,000 in adjusted net training income. We are now 2 full years past the acquisition of ITG and looking at the bottom of Page 3, you can see the steady progression of this business. This continued growth reduces the quarter to quarter variability to our operations, while still giving investors significant upside As I said in the Q1 earnings call, we at Virtu welcome the robust dialogue around the regulatory framework that governs our capital market.
However, We and others are concerned that the calls for reform are based on false narratives and factually unsupportable conclusions. These misconceptions obscure the fact that we are participants in the most robust, transparent and fair marketplace in the world. For retail investors, their experience in the United States has never been better and by comparison is markedly worse in Canada, the United Developments in market structure, advances in technology and the introduction of intense competition have resulted in vastly expanded product offerings, low or no cost trading, and importantly, superior execution quality. In summary, the benefits of today's market structure to retail investors are quantifiable and the supporting factual evidence is striking. In the current high profile debate about U.
S. Equity market structure, many folks, including regulators, politicians and critics I'm looking at the available data to draw a conclusion. However, the data being used to assess execution quality for retail investors comes from Rule 605, which most agree has significant shortcomings and provides an incomplete view of execution quality. Current Rule 605 significantly underestimate the benefits that regulation competition transparency and the current market structure have created for retail investors. We recently published a report which we furnished to the SEC that addresses many of 605's shortcomings and updates to enhance the rule.
The biggest hole in Rule 605 is that it measures price improvement by comparing an order's execution price to the prevailing NVBO without regard for the number of shares being executed. This means, for example, When we fill a retail order for 9,000 shares of a stock, execution quality is measured based on the NBO price level no matter how many or how few size improvement and it happens a lot. In fact, in 2020, 45% Of the shares we filled were on orders that outsize the entire NBBO, that's 45%. If Rule 605 was updated to measure this benefit, as many folks have requested, including numerous retail brokers and exchanges Like NASDAQ, regulators and brokers would see that in 2020, Virtu provided over $3,000,000,000 To conclude that this price and size improvement retail investors received today would exist if, as some critics suggest, retail orders were all sent Thank you, sir. Thank you, sir.
Thank you, sir. Thank you, sir.
Thank you, sir. Thank you, sir.
Thank you, sir. Thank you, sir. Thank you, sir. Thank you, sir.
Thank you, sir. Thank you, sir. Thank you, sir. Thank you, sir.
Thank you, sir. Thank you, sir.
Thank you, sir. Thank you, sir. Thank you, sir. In addition to having a complete view of all available data, which means actual trades, not theoretical model, having an accurate understanding
of our current market structure
In our report that I just mentioned, which is included in the appendix of today's investor presentation, With the staff and commissioners at the SEC as well as folks on Capitol Hill, we use data to address their concerns and we will be releasing A follow-up paper to provide even further important detail. At Virtu, we serve as a trusted counterparty to nearly Every retail broker and wealth manager in the United States, but also to all of the top broker dealers and hundreds of institutional buy side firms, including the top 10 asset managers in the United States. We are confident that in the end, that data End Reason will win the day and regulators, politicians and critics will continue to see the massive benefit of the ecosystem which regulation, Competition and transparency have created for retail investors. With that, Joe will now provide more details on our quarter and our growth initiatives. Joseph?
All right. Thanks. I will review some thoughts on Virtu's ability to generate growth through both Organic initiatives and through the excess cash flow we generate and how this all translates into revenue and earnings growth rates over time. If you look at Slide 5 in our supplemental materials, we tried to distill what a peak to trough growth rate for Virtu looks like. We have published this slide previously and we're producing it here.
Understanding that our results will be volatile on a quarter to quarter basis, On this slide, we have distilled the historical pro form a median entity for Virtu. So that's assuming Virtu, KCG and ITG Using the current operating expense projections, this translates into $2.69 of EPS and using the current capital structure This is a start of median performance over a 6 year period That excludes any of the growth initiatives Doug talked about. So next, we look at the parameters around the growth initiatives. Again, These amounts may be themselves volatile. We believe a near term set of organic initiatives can generate between 500,000 I wanted to point out this real underlying significant growth in Virtu's core business.
Layering On top of this growth is our ability to generate significant cash flow. Virtu generates significant amounts of Even in this more subdued environment, our business generated $0.63 of EPS, almost 68 percent EBITDA margins, and we were able to buyback Approximately $100,000,000 worth of our shares. With our current overall debt levels now at a long term sustainable notional amount of 1 point in relation to our current market capitalization and allows us over time in any sample time period through the cycle To acquire through open market repurchases a meaningful percentage of our company. Importantly, if you look at the chart at The bottom of the page of Slide 5, you see the annual amount of free cash flow expected to be generated by Virtu at various hypothetical and Corresponding percentages represent, based on shares outstanding, the amount you can repurchase in any 1 year. For example, in the first half of this year, we have averaged 8,600,000 Per day, we purchased 195,000,000 of our shares year to date, representing approximately 4% of the total shares outstanding and this We have significant part of it.
These organic initiatives together with the substantial cash flow and appropriate levels of debt going forward enhance our evidence of Virtu's
The Q2, as presented on Slide 3 of our supplemental materials, our adjusted net trading income, which represents our trading gains, Net of direct trading expenses totaled $342,000,000 or $5,400,000 per day, It's 49% lower than Q2 of 2020 and 55% below the Q1. Market Adjusted net trading income was $232,000,000 or $3,700,000 per day, 58% lower than the year ago of $1,700,000 per day, which is a 6% decrease year over year. Our adjusted EPS was $0.63 for the 2nd quarter. In the Q2, our overall compensation expense was $84,000,000 or 20% less than Q1. Our Cash and overall compensation ratios were 21% to 25% of adjusted net trading income respectively.
As I previously consistent with the specific cost guidance we previously provided for 2021. Adjusted EBITDA was $197,000,000 59% lower than the prior year quarter and 65% below the 1st quarter. Our adjusted EBITDA margin was 57.6 percent for the 2nd quarter, which is down 20 points from the 1st quarter, but continues to be reflective of our efficient Our long term debt was $1,600,000,000 at quarter end, reflecting a $35,000,000 repayment in the 2nd quarter. Finance interest expense was $20,000,000 for the Q2 of 2021 compared to $22,000,000 for the prior year We remain committed to our $0.24 quarterly dividend, which we have consistently paid over 24 quarters in every environment since our I will now turn the call back over to the operator for Q and A.
We will now begin the question and answer session. And the first question comes from Rich Repetto with Piper Sandler. Please go ahead.
Good morning, Doug. Good morning, Joe and team. I guess the first question is a follow-up on the size improvement. Doug, I've got a chance to go through the deck and see the deck again on it. I guess the question is about
I think you brought it to
them and they're reviewing the Brule's 605 reports. But are you getting any, What do you call it? Indications that this is actually sinking in their OpEx in the coming months.
For the question. I think it has been very, very impactful. The response from I'll talk about the regulators in a second from the We recognize that 605 was outdated and that there was need for reform. And frankly, the primary driving force behind Our report was there was this narrative out there that somehow, oh, Odd Lots are skewing the data and a lot of the critics were It's just about Odd Lots and Robinhood, blah, blah, blah. Well, that was complete bunk.
We knew it was complete bunk and we debunked it. We just showed the data and said when you Actually include our lots and assume they are quotes, then it actually improves the 605 statistics. So we kind of Flip the script, if you will, and the critics there. And so we're all about myth busting here and providing facts and data. And so when we brought this to the regulators, I think they were frankly shocked And in a positive way, I don't think they recognize the value and it's not just Virtu, it's the entire wholesaling ecosystem.
It's Citadel, The other 6 or 7 competitors that provide this price and size improvement is meaningful. When you segment order flow, it permits the wholesaler So the great benefit of the retail investor to have meaningful size and price improvement. I said it in my script and let me reiterate it. 45% of the shares that we fill, the orders that we get exceed the liquidity that is at the top of the book On National Securities Exchange, it's 45%, 54% of the notional side. So there we are providing Real liquidity to small and mid cap issuances is exactly what the regulators and the critics 1, and this is what helps capital formation.
There was an intense focus at the SEC in the last 10 years In terms of how do you get liquidity to small and mid cap names, well, there it is folks, that's what we do. And so if the wholesalers weren't there, you would have Enormous widening of bid offer exchanges and the capital markets would suffer. So the evidence is compelling. And at the end of the day, the SEC has always, always Driven by facts and data. I mean that's what they're there for, right?
Analyze the facts and data that are available to them and then propose rules and regulations that enhance the marketplace. So every one of the proposals I've heard thus far banding around in the Twitter sphere, if you will, would have the So we're going to continue to be forceful advocates for what we think is right. We're going to be continue to be very, very transparent and And how we present this information and we're going to continue to be responsive And as I said in my prepared remarks, we're updating our reports to include Some supplemental questions we've got to address the narrative somehow that execution quality in Canada and Europe is better Because of because they've banned or they've limited piece off, actually the opposite is exactly the case that there's lack of competition out there. The The opposite is exactly the case. Price improvement has increased 7 50% since 20 13, so the facts and data don't lie.
And when regulators look at that, and this is a country of laws and rules, right? And The Administrative Procedures Act is very, very clear. If you're going to start changing rules and regulations, you better have the facts and data to support them. This isn't about politics. It's about impacting marketplaces and we take our responsibilities very, very seriously as a market regulator and we know that regulators will do the right thing and we're here to assist
Thanks, Doug. That's very helpful. The follow-up would And maybe if you could do it simple, so I think most of us can understand it. But A lot has been said about payment for workflow not being accepted in Canada and Europe. And could you explain You know why that is in sort of simple terms, brief terms, so a lot of us can follow along, But that's been used as a big comparison, I guess.
Yes. Look, and I understand the appeal and the headline of saying, well, if payment order flow is And in Canada, for example, well, in Canada there's and I want to be very careful about how I describe this because I don't want to disparage anybody's motivations, but there's no price improvement in Canada. And the retail brokers, which in large measure are the large financial institutions, because of the market structure In Canada, which provides for price broker time, right? So if you are a broker and you're posting as a market maker an order, you're able to have priority Over other market participants, so if you have a retail broker that has the order, the order gets sent to a National And so the dealers can selectively internalize, right, because of the price broker time preference and firms like Virtu, Citadel and others are Effectively excluded even if we have the ability to match or even improve that price. And so you have selective internalization In Canada, so talk about conflicts, right?
There is this concern that payment order flow creates a conflict between the broker. How about a marketplace where Retail broker is the market maker. People's hair would be on fire here in the United States if they saw that level of conflict. And as well, in Canada, there is so if you're a retail broker and you choose not to internalize an order, you can route that order to a taker maker venue And you have a firm like Virtu, Citadel, etcetera, that they are making well, that's just payment of order flow by another name. Again, I have no problem with that, right?
I think that's part of what makes markets function. But let's not mischaracterize, Joe, and I'm very Proud of the ecosystem because it's just much better. I'm happy to go through Europe. I don't want to belabor it there. Effectively, the bid offer has just widened out.
Rather than having a direct rebate, no concern that the level of competition and transparency here is just
The next question comes from Ken Worthington with JPMorgan. Please go ahead.
Hi, good morning. Thinking about new initiatives, it seems to me like Virtu is well positioned to further expand into the 606 So I guess is it logical to extend your current presence in options in crypto to the equivalent of the 605 business? And is this where you ultimately expect to take these asset classes for Virtu? And then if so, what are the challenges you see in
Great question, Ken. Thank you and good morning to you. So let me address options first. Categorically, that's the plan. And then we have all of the Infrastructure in place, that's a nice way of saying.
We have the relationships with Schwab's, the E*TRADE and all of the other aggregators of Retail Options Flow in this country. I've said many times on these calls and in my conversations with investors That we began our path towards being an options market maker by taking on the most challenging of challenges, which is to be a market maker In index products on lit exchanges in the United States, right, that is what I would call the knife fight and you got to bring a big machete to that knife fight if you want to be Well, we have seen success. We built the infrastructure where we have a very robust low latency infrastructure that we were able to leverage We built the technology in order to become a firm that could quote in options and to be competitive in options. So we have all of the tools to compete and we've got significant resources to do that. Now we have the relationships on the other side and candidly All of our counterparties which trust us and which have gotten great service and experience from us in cash equities not suggesting we're going to overtake them tomorrow, we're not.
It would be wonderful to be number 3 at some point. That would be a success in the first instance. In terms of when that will launch, we will launch that in sometime in 2022, probably in the first half, Ken, And we hope to see meaningful runway. I'm excited about it. This is just a similar feeling to I had in 2008 and 2009 when we were starting Virtu, we had nothing.
It was Vinny, myself and another partner, a bunch of capital and some great ideas, And we grew Virtu really from nothing to something that I think is very meaningful. So it's the same kind of feeling we have in options. We have a wonderful team, which is both an internal team and we've With respect to crypto, it's a similar story. Obviously, we want to make sure that the regulation sort of catches up to the marketplace. We've taken great strides in Canada and Europe where there have been ETFs at the launch.
The Chairman was on television this morning talking about regulation of crypto exchanges and how that's so important. I couldn't agree more with him. We think that's incredibly sensible. And so again, we have all of the accouterments, if you will, to manage the Counterparty risk to be a meaningful participant in crypto, it's spot future and ETF. That could be at the bid and the offer as much as possible for as long as possible during the day, and that's the Virtu DNA.
We've supplemented that with customer market So we've expanded our reach and these two initiatives are in addition of that expansion.
Okay, great. And then just following up on that, as you expand into the 605 How should we think about capital requirements or even other risks to further building out those
Yes, it's a great question. I'll address the risk first. I mean obviously when you're making markets in single names, there's idiosyncratic risks, risks both from a dividend and a corporate action perspective with regard to those names. There is clearly more risk, no different Then the risk we took on when we bought Knight and we became a market maker in 8,000 names, very different from what we did at Legacy Virtu. Options are a different breed, right?
I don't speak to Greeks particularly well. We have people here that do. And so clearly in terms of idiosyncratic and Volatility curve risk, there's more exposure and we will manage those in a Virtuying kind of way. We have our global risk management framework We can cover that, we'll supplement it with subject matter experts and options which we already have and we will continue to market make in the Virtu This is not going to be affirmed as betting on vol curve. That's just not what we do.
We don't bet on directions of market. We certainly don't bet on the direction of volatility. We need to understand the vol curve And we've built models to price it, but at the end of the day, it's not really what we're about. We're not a hedge fund that makes bets on things. So managing risk there will be In terms of capital, I'm going to actually ask Joe to address that because he'll do a much better job than I will.
Okay. There's nothing it's a market That is suited to Virtu style market making like gun centers essentially cleared. We have used a prime broker. We have anything that we put out there in terms of the capital plan for share buybacks And different amounts of cash flow and different levels of ANT contemplates required capital For expansion, it doesn't matter whether it's options, ETF Block or even crypto. I mean, crypto, when you ask about crypto, it's a little bit different in that We're managing different counterparties, but we are very conservative initially here in terms of how we access counterparties And how we get how we just manage that exposure.
The last thing I should mention, Joe, if you were finished, which is with regard to options, I mean, the thing that's obvious and updated again is that we have the Delta hedge in all these products, Ken. Right. So we're really, really well positioned. I mean, we're obviously a large market maker in U. S.
Equities, but also commodity products. And then internationally, we're going to be launching an Asian options In the Q4 this year, right, and we're already there. So that's just in terms of adding some subject matter experts. We have connectivity and we have the Delta hedge. So the growth in options just enables us to achieve more synergies within our equities business globally and within our commodities business.
So we're excited about it going forward.
The next question comes from Dan Fannon with Jefferies. Please go ahead.
Thanks and good morning. And I guess as a follow-up is just on when you think about options market making and you obviously saw strong quarter over quarter growth despite industry volumes coming down. As you look at the capabilities and what you've built out, is there anything that you're lacking? And just trying to think about the potential of this business and kind of the growth from here, Are there is there anything on your end from either a capability, technology, functionality that is still needs to be built out? Or is it now just more kind of the blocking and tackling of normal competition?
Dan, it's a great question and good morning. Look, it really is blocking and tackling. Like I said In answer to the last question, it feels to me like it's 2,009 and I'm a younger man and we're at Virtu and we're starting to launch U. S. Equities and then we launched FX and then we launched energy products.
It is a Laborious time taking, if you will, activity to grow a business. It's what we have done exceptionally well here. And you grow in step functionality. I remember when we launched Virtu the 1st day we traded, we had spent a year getting the thing ready and we made $24,000 the 1st day and Vinny Don't worry, the next time you'll get excited when it's 100,000 and then you'll get excited when it's 1,000,000 and you know what, he was right as he was right about a lot of It's the same thing with options. We started 2 years ago, we were making a pittance and we're banging our head against the wall and all of a sudden you have a good day and you build a market making business, the good news is we've done it before.
We have all of the blocking pieces and all the Credibility and all the capital that we need to do it. It's just a question of doing the hard work to build the business. And we've done it before, Virtu, and we will be successful in it because that's what we do. So there's no impediment. The only impediment is the frustration of time and of having the right personnel to do it.
We have all of those things and so it's just going to take putting our heads down and doing the hard work which we like doing here
Got it. And then obviously the environment much different 2Q versus the previous several quarters. Could you Maybe talk about the progression of ANTI throughout on a monthly basis, kind of throughout the quarter. And I know you've gone away from kind of the shorter term stuff, but maybe some Context for how Q3 has started and just from kind of a run rate perspective?
Yes, that's fine. Obviously, we've got to wait for monthlies. But yes, I mean, the quarter was I don't recall each of the months. I could probably look them up here. I mean, it doesn't I have no recollection that there was a big uptake and then a downtick.
It was kind of around the same feeling for the entire quarter. It felt like a little bit, Dan, like the market was just taking a deep breath. Between the election and all of the events, shall I say, surrounding that, new administration, COVID spending bills, potential changes to tax policy, opening, reopening, what's going to happen, vaccine rollouts, all this It was clear that the marketplace was taking a deep breath. Volumes overall were down, volatility was markedly down. Payment for order flow for equities, for example, was down 41% from Q2 to Q1.
That's obviously a significant indicia About our retail engagement, there was just a lot narrowing of spreads during the quarter. You can see because of realized volatility being down almost 40%. So look, we were very, very competitive during the quarter. We gained market share in our 605 business. Our options business continued to grow.
So it's a constant fight If you will, to continue to maintain and grow our market share and to improve our growth initiatives, and that's what we continue to do. So Was I satisfied with the quarter? No, I'm never satisfied with the quarter. If we had made $0.68 I would have said we should have made $0.72 So that's what you want out of a CEO. Never been satisfied with any quarter we've ever had, even when we've made $2.05 So I know we can do better and we will continue to do better.
The most important thing though is that the plan that we laid out a year and a half ago, whenever it was, where we said, listen, this is what we're going to do. We're going to grow this firm organically. Incredibly judicious about capital management, that's a nice way of saying if a penny every penny here that we don't need for market making that's Not nailed down, we're going to return to our investors in the form of our $0.96 dividend and buying stock back. And that's my game plan for the foreseeable future.
The next question comes from Alex Blostein with Goldman Sachs. Please go ahead.
Hey, guys. Good morning. Thanks for the question. So, I mean, look, so
the Market Making business continues to
be volatile, as we know, quarter to quarter. But I was hoping we could take maybe a little bit of a step back. And Doug or Joe, if you could talk about the confidence level around The lower end of the range of NTI per day, so call it about $6 per day in your slides. As you look out This year, next year, the year beyond that, right? So maybe help us frame how much in your budgeting plans and your growth initiatives is expected to come from things that are smaller today like options that might scale that could compensate for any of the volatility in some of the legacy businesses.
Just trying to get a better framework of how to think about the kind of the minimum revenue levels for the company.
Hey, Alex, this is Joe. The answer really It isn't any different than over the past year. When you look Slide 5, illustrative ranges of outcomes, where the chart starts with 6. I think from the first time we put this chart out, every time I've talked about it, We emphasize this is an annual range, right? This is an annual illustrative range and that quarter to quarter, we could be Below it, look at first half to date, we're at 8.6%, right?
So and why are we confident kind of Starting with chart 6, again, look at Slide 5. Look historically, stripping out all of the initiatives, stripping out Organic growth, options, block everything else we talked about. The 3 companies together, you had historically 5.5 of Average, Antti, we had on the growth initiatives. This is why on an annual basis, I think we're very confident you're putting out this chart saying That's the low end. But quarter to quarter, these things are going to continue to be volatile.
We take a step back in this quarter and look at kind of the levels of volatility, look at where we are. We're playing a 4% of the company, I think, as Doug said, right, we're just going to keep hammering on that. Year to date, if you look at where it was 3.89, All the numbers we put out in terms of share repurchases, in terms of where we should come in EPS and where we're spot on in terms
Okay. And I guess just around the new initiatives, again, like options, when you look out the next, let's say, year to 2, What percentage do you think of ANTI could come from things that are much smaller today?
Well, again, I look at it, if you look at the new initiatives chart, you can see right there's In 2018, these were 160,000 a day and in a muted quarter, they're a 500,000 a day. Q1 of 2021, they're almost 1,000,000. We put that range of $500,000 to $1,500,000 I mean, I think, pick your they'll continue to grow through the cycle, the comps will help us better. Again, just look at it versus the median. I think it's hard to pinpoint on a streamlined basis, Alex, Just looking at it at this quarter is 9%.
It could be between 7%, 8%, 5% Over the past couple of quarters and past year, I'd expect it to uptick a little bit as we continue to as we
The next question comes from Chris Allen with Compass Point. Please go ahead.
Good morning, guys. Maybe just a follow-up on Alex's question on the new initiatives. We saw year over year decline from 2Q 'twenty to 2Q 'twenty one. I'm assuming most of that decline was driven by lower Contribution from the Quant strategies from KCG. Maybe you can just give us some color there.
What's a year over Growth and what businesses within the new initiatives feel better on a near term basis versus others right now?
Yes. I think I'll take that one. Yes, you hit it right on the head, Chris, which is there's going to be volatility within the growth initiatives Because there's more marketplace opportunity. I mean, so for example, ETF block in the Q2 of last year, Maybe I kind of wish that would happen again today, right, because we'd be better positioned for it, but you probably couldn't have a better environment For like fixed income ETF, block market making than you had in the Q2 of 2020. So it's kind of hard to compare Q2 2020 to this period because realized volatility is down 65%.
So a lot of what we're doing there, Options block ETF is susceptible to the whims of volatility. Right. You're going to see that capital markets, which is more of a commission based business, no, but the lion's share of what we're doing in the growth area We'll be impacted by volatility. So the way to look at it is, look at it over the longer cycle, as Joe indicated, and look at what the CAGR is and it's meaningful. So There's nothing really to read into there other than they are parts of our market making business.
They will continue to grow organically as they have, But there will be periods where volatility ramps up and ramps down. And as Joe said, it is consistently Somewhere between 7%, 8%, 9% of our adjusted net trading income and our expectation and hope is that that as a Contributor to the overall firm P and L that they continue throughout the cycle to grow.
And Chris, we break out we bucket the initiatives to the existing markets growth versus new markets. If you go back to Earlier periods, if you look at 2018 on that slide, most of those announced 2019, most of that It was from existing markets, right. So in a volatile business, where you have a quarter like the Q2 of 2020, Which is a great environment. The growth in the existing markets, the legacy case strategies and block Business, we are going to perform better, right? So you're starting from a much smaller base in the options market making Market
and some
of the other stuff, and those are continuing to grow. It's just growing for small banks. So that's another reason why your
And then I also wanted to ask about Execution Services. Last quarter, if I call You talked about some of the growth in the recurring elements of the business, it had been taking market share from other players. Maybe you can give us an update on both of those angles and maybe talk about where you are from a customer penetration perspective.
Yes, sure. Great question. So look, I mean, that is I love that business, right? We obviously We've grown it organically from an inorganic start because we combined the Knight and the ITG businesses together. We extracted a meaningful amount of synergies And let's be candid, like we when you price a customer business and you effectively say to every customer, we're migrating everything you've Using for the last umpteen years is terrific, but guess what, we're migrating on to this new technology and this new platform called Frontier, which is the Virtu System, trust us, it will be better, you will have a better experience.
And so that's been a bit of a process. I I'm very grateful and thankful to our customers who took the time to do the AB testing and they have seen that the Virtu system is It was higher than it was this time last year. We are adding new asset classes to Triton, Right. Triton executed its 1st fixed income trades and its FX trades during the quarter. We've added new asset classes, CDS and swaptions to our Q hub products.
So we're doing things that we talked about when we bought ITG, we merged with ITG rather, that we thought would be impactful to our customer base And that's what we're doing. So we're focusing on leveraging our core technology to do more for our clients and addressing opportunities that we find in the marketplace And we will continue to grow. In terms of the capital markets business can be a little more up and down, Right. A little more lumpy is probably the right way to describe it and similar to I guess what you'd see at a large investment bank. And so capital markets has Fantastic business for us.
The guys that run it are wonderful and have vastly exceeded even my own aggressive expectations after performance. But it was down from Q2 to Q1, not by any fault of their own, just because the market was less robust. And so I continue to be excited about the trajectory of our Execution Services business led by Steve Cavoli, who's done a great job. And the last thing I'll say with regards to some of our subscription businesses, we really launched these big data offerings, I guess you would call it, our Open Intelligence Our open Python products out of our analytics business, which clients and customers really like a lot. So Again, a lot of really, really good tailwinds in that business.
Again, it's still going to be driven a lot by volumes and what the marketplace offers, but Excited about that business going forward.
The next question comes from Sean Logan with Rosenblatt Securities. Please go ahead.
Hey, guys. Good morning. I hate to continue to harp on Payment for Waterflow, but I I do have one question, maybe for you, Doug. It seems there's some misperception of wholesalers' dependence on PFOS. So I was just wondering if you could explain in your own words, what the impact of a ban putting aside The chances of that happening would be on Virtu or wholesalers in general.
Yes. Thank you, Sean. It's actually a great question. In my little diatribe before I should have actually mentioned this, I mean payment for order flow is an expense to Virtu. It picked up in our VC and E line in our GAAP financial statements.
So it's an expense to us, it's not revenue diverge. Obviously, we're paying it, right? Every single retail broker, wealth manager, whatever you want to call them globally that sends us 605 eligible order flow Does it based on the amount of price improvement we are providing to that broker. Let me repeat that. Every single broker we get routes to us based on price Not payment order flow.
There is a small subset of retail brokers and we all know who they are. It's all public. It's all transparent. It's all out there. Yet as a conflict, but yes, it's fully disclosed that as part of our arrangement with them, asked us to pay them a rebate.
That's fine. It's been going on for 30 years. This is not some new nefarious market structure, niche of the market that somehow some people You know, uncovered, right? So the ecosystem works. So if payment order flow were to be banned, which you will not be That is nonsensical.
It has fostered initiation in this country. So I cannot believe in a rational world that that would happen. But putting that aside, it would have no net effect to Virtu at all. So you might ask, why am I doing this and why am I so strident about Because one, my customers like it and 2, I think it's just the right thing to do. I think the ecosystem, I'm very, very proud of it.
So at the end of the day, there are brokers, including a very big one in Boston That everybody knows that that doesn't take payment for order flow for cash equities and that's fine. And they route 99% of their marketable orders to wholesalers. Why? Not because they're getting any payment portable, they don't take a nickel of it in cash equities. They route because we provide superior execution quality and a guaranteed execution.
So they've effectively outsourced that service to Virtu and to the 6 or 7 other wholesales that they deal with. And these are really, really Martin, really, really successful people with access to every piece of technology understanding of the market that they possibly could. So in what universe Is that wrong? And in what universe is that not good for the retail investor? And again, that's why we'll continue to be front footed on this, positive and strident and very transparent because I know that the wholesaling ecosystem has provided an enormous amount of value and has enabled An enormous amount of innovation, right?
People talk about lack of access to this and that and equality and whatnot. We should all be very proud that in this Anybody that has an iPhone or some type of device can download an application from I don't care what broker it is and for no dollars, dollars 0 commission And by not only just a share, but $5 worth of some stock that they may have interest in, that's empowering. That's democratization of a marketplace. And so in order to that's what competition and regulation has brought to this country. We should all be Very, very, very proud of that.
Great. Thanks. And then sort of Along those same lines, we've heard talks of vertical integration from the retail and things like that. So I just wanted to get your thoughts on that or just an update on what you're seeing on the M and A front In general.
Yes. So, that's a great question. Look, I mean, I think when people say, and look, I'm not trying to talk about any particular broker or anybody, but what anyone has said, They're all my customers. We love them all, okay? I am the Switzerland hero of customers.
At the end of the day, People are concerned about conflicts. So the notion that a retail broker would somehow start up a market making unit and I mean if there is concern about payment for order flow where you have a 3rd party, multiple third parties in Fully transparent regulated way providing a rebate, can you imagine what the regulators down in Washington and at FINRA would say about A retail broker starting up its own wholesaling unit, that's the first thing. The second thing is it's actually it lacks a fundamental understanding of how wholesaling works. The reason the ecosystem works for Virtu, Citadel, Susquehanna, 2 Sigma, UBS and everybody else is because we have 200 If we were solely a market maker for pick your name of ABC Broker, we would not be in business today. It doesn't work that way.
You need a full cornucopia of these orders that balance against themselves. We have had many periods of time, days, weeks, months, this will surprise Where we are losing a meaningful amount of money from large retail brokers, individuals, right, and we adjust our execution quality, sometimes it gets better, sometimes it gets worse. But if we were solely trying to provide market making services to a single retail broker, it would not work. So the notion that a retail broker, which has No ability to do this today would somehow wave a magic wand and throw some fairy dust on a situation and become A wholesaler with regard to its own order flow, I mean candidly is almost naive.
Go ahead. Okay.
A well sized quarter where we kind of get that back to the nominal level that we think we are at today, right. So we're at the right capital structure today. So I guess To the extent that you want to model in kind of like a re upping of any kind of reduction Because of the required repayment, then you are right.
Got it. Okay. Thanks. And then, apologies if I missed this earlier, I hopped If you could also touch upon the mix and composition within the different strategies, how that sort of evolved and then how you see the environment shaping up in July for the environment relative to those 3 months of the Q2? Thanks.
Yes, sure. Good question. I did Dan Fannon, I think, asked about this before. Obviously, we've gotten away from a monthly results. But what I To my recollection, there wasn't a material swing from April, May, June.
I mean, it was kind of a consistent I said earlier and I'll repeat, which is that I say it felt like the wind kind of came out of the market a little bit and people kind of took a deep breath. Volumes were down 30% and realized vol was down 30% to 40%, all of the metrics I know you have access to and you're aware of. So that Combined for the type of quarter that we had, which again, if this is the new normal in terms of volume and volatility, We'll take it. It's obviously it provided a reduced market making opportunity, but we gained 605 market share. Our options Business did better relative our ETF block lines were roughly flat relative To the marketplace being done.
So we continue to march forward. Again, we're not I've kind of gotten away from the monthly financial and I've I've gotten away from prognosticating about like the next quarter. So I'm not going to really comment on July other than to note that it looks like some of the volumes and volatility numbers, Rina, coming back in July. August has always been either kind of a feast or famine kind of month, Michael. Sometimes When the S and P downgraded the United States in 2012, it was a great month for a market maker and then other years everybody's in the Hamptons.
So it's hard to maybe they're in the Hamptons already because they've been there for a long time. So it's kind of hard to look forward beyond that. Again, We're running this firm for the long term and trying to get away from kind of, forget about quarter to quarter Fluctuations, but certainly month to month, because I just don't think that they're really meaningful in the longer story that we're trying to lay out here.
This concludes our question and answer session. I would now like to turn the conference back over to Doug Cifu for any closing remarks.
I just want to thank everybody for taking the time and I would be remiss if I did not note and comment as Kristin Cannon, Billy Holtell about Rich Repetto's Running Style. Rich, we're proud of the fact that you're out there exercising and we assure you that you are much faster than Joe and myself. We are not a running management team. So we would beat you in the shot, but anyhow, we look very much forward to
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.