Virtu Financial, Inc. (VIRT) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Virtu Financial Conference Call announcing 2016 Fourth Quarter Results. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Andrew Smith, Head of Investor Relations, you may begin.

Good morning everyone. Thank you for dialing in. As you know, our fourth quarter results were released this morning and are available on our website. 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, and our actual result and financial conditions may differ materially from what is indicated in these forward-looking statements. It is important to note that any forward-looking statements made on this call are based on information presently available to the company and we do not undertake to update or revise any forward-looking statements as new information becomes available. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained our Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. In addition to GAAP results, we may refer to certain non-GAAP measures including adjusted net trading income, adjusted EBITDA and adjusted EBITDA margin. You will find a reconciliation of these non-GAAP measures to GAAP terms included in the earnings materials with an explanation of how management uses these measures. Speaking and answering your questions today are Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. I would like to now turn the call over to Doug.

Thank you, Andrew. Good morning and thank you all for joining our call this morning to discuss Virtu's fourth quarter and full year results. I am very pleased to report that our global business performed well in the fourth quarter of 2016. For the quarter, Virtu reported adjusted net trading income of $100.3 million and $0.24 per share of adjusted EPS. The fourth quarter was really a tale of two quarters. October volumes and volatility were similar to the third quarter which was marked by a low volume and mute volatility environment. The U.S. Presidential election in early November brought us some much welcome change to market conditions as we saw an uptick in demand for our market making services across all of our asset classes globally and these positive conditions carried on through the first half of December. Although the year end was characteristically quiet we are generally pleased with Virtu's solid performance and profitability in this quarter and the full year 2016 given the overall market conditions. We could not have achieved the consistently profitable results in this quarter or the full year of 2016 without our diversified global and scale platform which continues to perform well in all market conditions and as well our relentless focus on cost. Despite the challenges of a mixed operating environment during much of 2016, I believe the first full year as a public company for Virtu was successful in several respects. First, we maintained what we believe are best-in-class margins for market making firm despite the mixed operating environment and the additional cost and expenses associated with operating as a public company. Secondly, we broke ground on expanding our technology offerings by launching our technologically driven agency execution business and entering into an agreement with J. P. Morgan to provide outsourced technology and market structure expertise to a part of their U.S. trading operations. Next, we acquired a minority stake in Japannext and expanded our footprint in the increasingly important Asia Pacific region as the year-over-year growth in our APAC equities business demonstrated. Next, we acquired strategic telecommunications assets from a trading firm allowing us to stay on the forefront of technological developments in our industry while maintaining cost discipline. Also although there were a number of notable events on the regulatory front, we saw no material negative impact to Virtu's business from anything in the regulatory environment and in fact the finalized method to regulation for example should be a strong positive for our business going forward. We are optimistic about 2017 and believe with the new pro growth and pro business environment in Washington that the stage is set for the return to a more normalized volume and volatility environment globally and a more sensible regulatory and enforcement environment. As such, we look forward to creating more value for our shareholders in 2017. Now let me touch on some thoughts related to our business, the environments of 2017 and some strategic initiatives underway at Virtu. With regard to the operating environment it is worth noting that as a technologically enabled market making firm, Virtu's business thrives as natural buyers and sellers in each of the 235 plus marketplaces that we connect to in 36 countries trade. In series of elevated, anticipated or actual volatilities these interactions tend to be more frequent and therefore more profitable. Measures of anticipated volatility like the VIX and realized volatility were particularly low in the fourth quarter and in particular for the entire second half of 2016. Looking ahead we see reasons to be optimistic with several underlying factors that have the potential to create favorable levels of trading activity including changes in Fed and Global Central bank's policies and the changing regulatory and tax environment that will allow banks and other market participants to increase their trading activity. In addition, as a fully diversified market making firm, global geopolitical uncertainties, both scheduled and unscheduled will continue to lead to enhanced market-making opportunities for us across markets. Turning to some strategic initiatives we in started 2016, I'll first talk about our initiatives to offer Virtu's superior routing capabilities to the buy side in equities. Those of you who follow Virtu noticed this has got underway around the time of our IPO when we responded to critics of so-called HFT by engaging directly with various market participants. We demonstrated how Virtu operates with our passive market-making approach in a non-conflicted and technologically enabled manner. I am pleased to report that we now have multiple buy side clients up and running sending us order flow every day. We have a meaningful queue of customers to onboard and our onboarding client in Europe as well. We believe that the European approach of requiring unbundling of agency services as mandated by MiFID II will only make our non-conflicted routing capabilities more attractive to the buy side. More importantly, from our perspective the feedback we have received from our customers to date has been outstanding. As you know, this is a competitive marketplace and so far the early feedback we have received fits squarely with how we see the business evolving. We began this business not to compete with long-established market participants who can offer a variety of products and services to clients, but to create an offering with superior capabilities and analytics that we can service in a Virtu way, without incurring meaningful startup cost and profitably operating from day one. With regard to Technology Services, we continue to be excited about the prospects for this business in the ongoing discussions we are having with potential customers. We believe the time is right for an efficient multi-asset class technological platform like Virtu to be sought after by global financial institutions concerned about future technology spent. The agreement we signed with J.P. Morgan in July for example is up and running and from our standpoint is working quite well. We see great long-term potential with this arrangement based on our early interactions. We have also been approached by other global financial institutions that seek to understand how our technology, global scale and understanding of markets and market structure might help their businesses and we will continue to explore partnerships like these that enhance shareholder value. Turning to our investment in SBI Japannext, we stated when we made this acquisition that it was a meaningful opportunity for Virtu to increase its footprint in Asia. So far we are very pleased with the investment. We view the market structure in this part of the world as evolving favorably for us. Although we are not generally disposed to make strategic investments, Japannext has given us the opportunity to have a front row seat participating in and influencing this change in that part of the world. We view Japannext as the top TCS [ph] in Japan run by a world-class management team and has provided us a unique opportunity to provide our market-making services in a large established market with a top-tier business partner. These interactions contributed to the 11% growth of our APAC equities business from 2015 through 2016 which is an impressive growth in a challenged environment. Finally, we announced in the fourth quarter our intention to purchase strategic assets, telecommunications assets from a trading firm. We are excited about this acquisition for several reasons. First, it is an example of how the competitive environment in our industry favors large-scale global firm like Virtu. That firm's decision to shift its focus and unwind its proprietary business in favor of an asset management model is a great example of the scale required to compete. Second, the assets we are acquiring are world-class and will allow us to maintain our superior technological footprint in a cost-effective way and third, along with the purchase we acquired professionals that are already working in Virtu in this area. We think 2016 was a positive year for the ongoing market structure debate in the United States and globally. A few areas to note. First, we view the Tick pilot as a real success. As a market-maker we have been able to provide more depth of book and quote more names included in the Tick pilot. Second, we remain supportive of the recent approaches for the New York Stock Exchange and the Chicago Stock Exchange around new speedbump proposals. As I said in the prior call, we particularly applauded the constructive solution put forth by the Chicago Stock Exchange which we believe would promote greater liquidity and price discovery by protecting the market's liquidity from market participants solely seeking to opportunistically profit from short-term price fluctuations. We also support the ongoing discussions around the efficacy and necessity of our existing order protection and market access perform and remain committed to working with regulators and other market participants in this area. In particular, we are focused on the recent debate around market data and the current system around selling market data. We continue to believe that there is something fundamentally wrong with how the current system works and the regulators endorsement of global exchange economic models based on charging market participants like Virtu for data that we create in a somewhat noncompetitive fashion. Outside of U.S. equities we continue to support real-time trace reporting of U.S. Treasuries to bring needed transparency to this. And finally, we welcome the opportunity to work with the CFTC and acting Commissioner Giancarlo in implementing a very sensible regulation 80 [ph]. Overall we believe that the change of administration and attitude towards markets in Washington will be a strong positive for our business in 2017 and beyond. Despite the mixed environment that persisted for much of 2016, we have reason to be very optimistic about the future. I'll turn to some specific comments about the fourth quarter before turning the call over to Joe for more review and then of course your questions. Our America's equities category turned in a strong performance in the fourth quarter. Our average daily results were up 29% despite volumes up only 7% and realized volatility coming in 10% lower than Q3. Our European equities category performed similarly well. Together these categories were 30% and 11% of our adjusted net trading income overall for the full year 2016. While we had a slower quarter in APAC, 2016 was a banner year for our APAC equities category. We completed the aforementioned Japannext investment, expanded our footprint and improved our trading. Our APAC category contributed 12% overall to our 2016 results and we are very pleased with this progress. As you know, our global FX business has borne the brunt of this recent challenging environment. We saw improvement in our results in the fourth quarter and are optimistic as ever about the future of our FX business after making significant infrastructures and other investments in 2016. Venues more focused on spot volumes which are more pertinent to Virtu's business experienced mixed volume results in the fourth quarter and most were up only modestly while volatility remained quite low. Our average daily results in the fourth quarter were up 21% versus the prior quarter which outpaced the volumes in the quarter, so we are very pleased with this performance. Our commodities business results in Q3 you will recall included a trading gain from a prior settlement of $3 million. So including the $3 million revenue our global commodities business was generally flat from the prior quarter and in line with volume expectations. Finally, as Joe will outline, we kept our promise to our investors by managing our expenses during 2016. In addition, our board decided on $0.24 per share dividend payable to shareholders of record on March 01, 2017 making a total of $1.68 per share that we have returned to our investors since our April 2015 IPO. As I have repeatedly said, our Board and Management Team remains committed to returning capital to our shareholders and as such I have seen no reason whatsoever why this policy would be altered in 2017. Now, we'll turn the call over to Joe, to provide more detail on our results. Joe?

Thank you. GAAP net income for Virtu Financial Inc. after attribution to non-controlling interest was $9 million which equates to $0.22 per share of diluted GAAP EPS. Consistent with the financial presentation and our quarterly and annual results since our IPO we provide non-GAAP Financial information to supplement our presentation. On a non-GAAP basis our normalized net income was $32.9 million for the fourth quarter. Assuming $139.7 million fully converted shares outstanding, this equated to $0.24 per share in normalized adjusted EPS. Our adjusted EBITDA which excludes the impact of stock-based compensation and other items was $64.8 million for the quarter with a corresponding margin of 62.6%. Turning to revenues in the overall environment for the fourth quarter our total adjusted net trading income was $100.3 million down 7% versus the fourth quarter of 2015 and up by 6% versus the third quarter. On a full-year basis, adjusted net trading income came in at $414.1 million, down from the record high of $500.7 million in 2015. On a daily basis, adjusted net trading income was $1.592 million per day in Q4. There were 63 trading days in Q4 of 2016. For the second year in a row, the Americas equities category earned the largest share of adjusted net trading income with 31% of the total for 2016. The fourth quarter was particularly strong for Americas and EMEA equities compared to the third quarter and given the overall environment. On a share volume basis, U.S. consolidated equity volumes were up 7.2% versus the prior quarter and EMEA notional value traded was up 11.7%. Americas equities and EMEA equities results were up 27% and 19% respectively versus Q3. We are pleased with these results particularly in light of the continued overall poor environment for a market maker like Virtu. The average mix was up slightly in Q4 to 14.1 from 13.2 in Q3. However, realized volatility was down from an already very depressed level in Q3. Further, the ratio of realized volatility to anticipated volatility as measured by VIX was down as well to 63%, the lowest in some time. The story is similar in Europe where implied volatility and realized volatility were both down versus Q3. In the APAC equities category we ended 2016 with a record $49.9 million of adjusted net trading income. The poor overall environment impacted the results of Q4. However, we are very pleased with the overall progress of this region which contributed 12% of adjusted net trading income in 2016. Turning to foreign exchange and commodities Q4 was a mixed bag, although we saw overall improvement and entered 2017 on a positive note our commodities results were flat versus Q3 when you exclude this settlement trading gain included in the Q3 results. With regard to foreign exchange, foreign exchange volumes were generally poor in Q4. CME futures contracts and notional amount of trade were up, however more pertinent spot volumes were generally down and in some cases meaningfully down depending on the venue. As Doug mentioned, our review on the underlying factors that drive volume and volatility is bullish. However, given the unpredictable nature of the operating environment, we strive to operate Virtu to be solidly profitable in all market environments. To do this we maintain a policy of strong expense discipline and focus on cash flow generation. Our expense management continued to reflect our discipline and we think demonstrates our ability to adjust to the environment. Despite the challenging conditions, our profit margins continue to be among the best of our peer companies. We focus on adjusted EBITDA margin and for the fourth quarter and full-year 2016 our adjusted EBITDA margin was 63.3% and 62.6% respectively. On our core expenses which we include as communications and data processing, employee compensation, operations and administration, and depreciation and amortization were $52 million for the fourth quarter and $208.8 million for the full year. We define these categories as core expenses because they represent the fixed cost of operating our business and are therefore somewhat within our control as opposed to brokerage and clearing type expenses with we embed in our trading profits to derive an adjusted net trading income. On a full year basis, these core expenses were down 3.5% versus full year 2015. Drilling down into the categories our global telecommunications and market data cost came in at $71 million up about 3% from the prior year and in line with expectations. Our operations and administrative expenses were down and our depreciation and amortization line item decreased from $33.6 million in 2015 to $29.7 million in 2016. We achieved these outcomes with regard to these non-compensation related expense categories through active management, relentless reviews of our business and requirements, particularly related to technology and market data, but also with regard to facilities, operations, benefits, all aspects of our business. Active management is particularly important with regard to compensation expense. Looking at the results for full-year 2016, our total GAAP compensation expense including stock based compensation declined from $88 million to $85.3 million. Excluding stock-based compensation, compensation costs were $61.5 million down from $68.1 million in 2015. We were able to achieve these results while transitioning to a public company style equity incentive compensation plan for our employees, managing our total headcount which was 146 as of today, while expanding into new businesses and making sure our employees are well compensated and properly incentivized. The only other notable expense item is the write off of certain expenses related to the refinancing of our long-term debt. As I mentioned on our last call we took advantage of favorable market conditions to refinance our debt and when you do this we are required to take a non-cash charge writing off expenses related mainly to the unamortized expenses from the previous term loan and you can see that number is $5.6 million for this quarter. As you know, the debt refinancing was very successful for Virtu resulting in an extension of the maturity to 2022, the reduction in our LIBOR spread by 100 basis points and decrease in our weighted average interest costs. So we were very happy with this outcome. Turning to cash and capital we provide some updated supplemental materials for your review as we did last quarter. Our cash and capital position remained strong providing more than adequate capital to run our business and maintain an acceptable cushion. At December 31 we had cash and equivalents of $181.4 million, net cash was $156.4 million. We look at trading capital together with net cash and as you can see our trading capital position at December 31 was $385.7 million. Given the passive market neutral approach we have we do not require substantial amounts of capital to hold or management risk positions. You can see this analysis on slide six of the supplemental materials. If you look at our EBITDA and income numbers in relation to these capital numbers, you can see that Virtu earns consistently exceptional returns on capital. For example, even in the challenging conditions of 2016 we generated $268.6 million of adjusted EBITDA using yearend trading capital number of $385.7 million, this translates to a 70% return on deployed capital. From a cash flow standpoint we report normalized adjusted net income and EPS to assume that our company is a fully taxed e-corporation with all of the common units exchange for Class A and B shares in the company, we feel this is a helpful presentation. In order to get a picture of our cash-based results on slide four, as we did last quarter we have adjusted various items that generate or use cash and as you can see the cumulative impact is that we generated $1.99 per share of normalized adjusted free cash flow and declared cumulative dividends of $1.68 per share since our IPO. We have paid out 88% of our pro forma earnings since IPO. If we cash adjust these earnings we paid out 85% of our normalized adjusted free cash flow. When discussing our payout during our IPO we communicated our intent to keep the payout at least 70% of our earnings. Finally, our Board of Directors has authorized a regular quarterly distribution of $0.24 per share payable March 15 to shareholders of record on March 1. Now, I will turn the call back to the operator for your questions.

Thank you. [Operator Instructions] And our first question comes from Rich Repetto with Sandler O’Neill. Your line is open.

Yes, good morning, Doug, good morning, Joe.

Good morning Rich.

Good morning.

Yes, I guess the first question is, what stands out is the adjusted margins 49% close to 50% and I guess the question is, and it has been asked before, but given the environment why don't your strategies struggle like some of your competitors that were seeing actual losses, quarterly losses?

Well, that’s obviously Rich, I know what we do right, so it’s hard for me to comment on how other firms run their business or what their strategies do and why they react to volatility and rising markets or falling markets in different ways. My theory is and I've articulated this many times, we’re a pure market making firm right? So, we don't have an axe if you will. What we're – our mission is to be the finest increment of the bid and offer and to have a price at every moment in time for the 12,000 financial instruments that we trade. We do that by reference obviously the publicly available market data understanding market structure and having a great technology plan, that’s our mission singly focused. It's what Benny was doing 30 years ago in the trading fit the story and we use technology and scale to provide that efficiency in to the marketplace. So as a pure market making firm, candidly you should make money in rising and falling markets. Now, obviously, you'll make more money when there is more volume and many times you can make more money as you see in this quarter where there are periods of volatility or increased interest where the bid offer spread will expand, but our mission and our focus and our job if you will is to be a service provider, to provide the financial intermediation in the most efficient way between natural buyers and natural sellers. When you do that and you stick to your knitting and you are consistent and you manage your cost and expenses which Joe just went through, which we did, frankly you should be profitable every quarter as we have been since our inception in, since we started trading in 2009.

Understood, that's helpful. And I guess Doug, you did talk a fair amount about the growth initiatives adding several new buy side clients and optimistic in 2017. I guess the question is, is there any way to put some sort of quantitative, how much can this contribute either on a percentage basis or just trying to feel what possible impact it could have on the financials in the coming year, the gross initiatives being the buy side and the partnerships with J.P. Morgan et cetera?

Yes, now look obviously I get it and I know you guys and our investors obviously want to see how can we size that opportunity, how can we grow. We do separately disclose in our Technology Services segment, that kind of we’ve got a couple of technology deals and obviously now we have an agency business. So it all kind of get’s lumped in there and we get at the right moment in time as that business grows we’ll provide more detailed color on it. But I stick with the comments and the statements that I've made on these calls and in other public forum which is we think that’s a meaningful opportunity. We've had great take-up from world-class institutions that frankly we’re very humbled to be in business with and you know some of the names that have been out there in the press. And in terms of sizing it we think it can certainly be 10% of our overall results. Now the one thing that I'm not going to get boxed into is to say, hey how is that going to scale out quarter-by-quarter? And I get it. It’s important for the modelling and what not and people to look at the evaluation and I'm cognizant and respectful of that, but we think this is a real opportunity and we’ve had great uptake and I think the thing that I want people to be focused on is like we are running those businesses as it were two business. We have it ramped up with hiring a bunch of new employees and scale and new technology. We haven't made any meaningful investments in there because we frankly don't have to. What we have discovered is that we are a great financial technology company that really understands market structure because we have to make markets in these markets. And so I think that's a very unique asset if you will that we have and the business partners that we are now doing business with who are very discerning consumers and have frankly their choice to any financial technology company out there in the world, recognize that differentiation. We’re not going to be commoditized. We’re not going to be the cheapest option, but if you want a firm that really has built a great technological plan, is very efficient, is on the cutting edge, but really also understands 235 plus markets in 36 countries we might be the guy to do business with. And so we think that value proposition does scale, it does scale in a Virtu way and we'll continue to pound it and hopefully you’ll see the quarter results increase.

Thanks. That’s all I had Doug and Joe and good luck in 2017.

Thank you, Rich.

Thank you. Our next question comes from Chris Allen with Buckingham Research. Your line is open.

Hey guys how are you doing? And I guess we can just start on cash equities business, if you could just give us may be some color in terms of what drove the performance relative to, I mean we kind of look at the realized volatility metric, I don’t know if there is strength in ETFs or some other element there and also how the start to 2017 is so far?

Yes, I mean thanks Chris. Good question. I think obviously when I said it in my comments I mean the somewhat I guess the price, I don’t want this to be a political comment because it’s not, the surprise election of President Trump and the ripple effects of that obviously had a very positive impact on our U.S. equities business during the quarter. I think the significant thing about that event was, unlike Brexit, which was limited to a day or two or three, Chris we did see a significant interest and uptick if you will in our market-making services as it is obviously seen by the results and the increased capture rate and all the other stuff that you guys will model out during the quarter. And again, as a leading and you hit it right on the head, as a leading ETF market maker, when you've got people shifting portfolios, when you've got people particularly on the night of the elections but also the next five, six, ten trading days thereafter making fundamental decisions on what does this mean for my portfolio. And a lot of that is driven by ETP products that we happen to be very active in and very efficient in, that’s going to have a significant impact on our operating results in a particular segment, in a particular quarter. So it’s really, that was really the offshoot of it and again it’s just beat the drum again, that’s the business model, like try to be everywhere and be the best fit and the best offer in all these different asset classes, in geographies and you'll get rewarded. Obviously we saw an uptick in the FX business as well. Some of that was related to the improvements and the investments that we've made in terms of personnel and technology, but also obviously the ripple effects from the Trump presidency certainly helped that business. January has been interesting, obviously coming off the increased volumes in volatilities in November and the first couple of weeks of December we were anticipating that January would hopefully be a more active month. You guys see the numbers and whatnot. I think there's been a fair degree of uncertainty as to where the Trump Presidency policies will come out in the areas of tax in particular and maybe some of the regulatory structure. So that uncertainty I think unfortunately has meant that there is less natural buyers and natural sellers and less portfolio shifting in the market and you guys see the volumes in January which have been somewhat muted and not as, not as robust as we saw in November. But it's still very early days in the quarter and I'm an optimistic guy by nature, but certainly, January you guys see the numbers from all the exchanges have been somewhat lower than what we saw in November and in the first part of December.

Got it, that’s it from me guys, thanks.

Thank you, Chris.

Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Hey guys, good morning.

Good morning.

I was hoping you could give us an update on the J.P. Morgan relationship. I think it's been a couple quarters since the announcement came out. I think in the past you guys talked about expanding into potentially other asset classes there as well. So may be just an update on how that's gone so far and what sort of next we should expect from that relationship?

Well, look as with every relationship you've got to date a little bit before you get engaged, before you get married. So I think, look I mean they are terrific people. I think the great results have been I think culturally and ergonomically the firms fit very, very well together. Obviously there was a period where we had to get our systems to speak and compliance and all that kind of stuff. That's all now behind us and we're actively engaged in working with them to enhance their market-making capabilities and in active treasuries and what not. I'm really not going to comment on kind of where it goes from there. I mean, I think it’s way too early days Alex. I mean, we’re humbled and honoured to be candid with you to be in business with such an important financial institution. We've learned a lot from them and hope they've learned a lot from us in terms of how they operate and I think they've hopefully learned on how a smaller may be more nimble firm operates. So, I think there's a lot of great synergies there. But in terms of where the relationship goes, I think it's still early days. I mean we’ve got a multiyear relationship with them, multiyear partnership. It does, you know, it's represented in our financial results where you'll see some uptick in 2017, but I think it’s again and I’ve said this on multiple calls, I think it's a great sign of how large terrific financial institutions that have customers and capital and all the wonderful things that banks have, can partner with very nimble financial technology firms that happens in our market structure very well. So I continue to be very enthused about the partnership.

Got it, thanks. My other quick question was just around the tax reform and obviously it’s early days and nobody quite knows where things will shake out. But for you guys specifically, given the obvious new structure and kind of the way you account for taxes on an adjusted basis, if the tax rate were to go down to something let's say in the mid-20s range, can you give us a sense I guess like, how that would impact your adjusted results? And then more importantly, how does that impact the way you think about the spreads, I guess whether your competitiveness on the pricing side meaning that does that create a special opportunity because you guys have a lot of scale already and section enables you to provide pricing I guess in a tighter spread?

Yes, in my prior life I used to be a lawyer, pretend I was a great tax lawyer but I actually wasn't. So I’m actually going to ask Joe to give a better answer than I could on what it means for our tax rate.

No, you are right Alex, if the corporate tax rate all things being equal goes from the statutory rate 35 to a statutory rate of 25 we will benefit from that by 10% in terms of how we book taxes. I think the devil is always in the details and we presented on a pro forma basis because we think that’s the right way to do it and we think it – the right way to value the company is to assume we’re not in a structure and where, it fully taxed C-corp. So we would see no reason to generally the statutory rate is kind of where your effective rate hovers and we would expect that we would be right around the new statutory rate. And I know there's a lot of detail, lot of things being discussed about having more to do with manufacturing companies probably in a company like that, but we would, we would welcome our public company as a C-corp and pays s corporate taxes, so we would welcome that lower rate.

The only other comment Joe I would make is I should point out, our offshore operations are based in two lower corporate tax rate jurisdictions. So were in Ireland and in Singapore and both those rates are 12.5 and Singapore 15 or 17 dependent upon what the category is. So as a global company if the new Washington if you will lowered the corporate tax rates to 20% to 25% it really would help us as well because our offshore profits are below that. So we would have to move things around and restructure. And I think you also asked like how has it impacted the bid offer. I mean, I think one of the things that does not get talked about is, there is actually a financial transaction tax in the United States. It is called the Section 31 fee they call it a fee not a tax. But I'll tell you what, it is a tax. It definitely impacts where we can make bid offer spread and it impacts our profitability. It shows up in our variable expense line. So, people don’t talk about a lot, but it's pretty significant. I know it allegedly goes to fund the SEC and the excess goes to the “Treasury” but it is a big part of the bid offer spread. And candidly if that fee was reduced in a new administration with the new SEC Chairman taking a look at it, I mean that would actually help our U.S. equity results considerably.

Got it. That’s very helpful. Thanks guys.

Yes, thank you.

Thank you. [Operator Instructions] Our next question comes from Ken Worthington with JP Morgan. Your line is open.

Hi, good morning. As we think about 2017 and the FX business, maybe talk a little bit about what are your priorities for kind of continuing to get that business to recover? NTR is still sort of, well below levels of experience over the last couple of years. I guess maybe how are you thinking about adjusting to both the ongoing market structure changes that the FX environment is sort of going through and then adjusting to just the lower levels of volatility, are there other things you can kind of invest in and due to kind of grow NTR to those prior levels?

Yes, good question and I think, the further like I’ll say fragmentation efficiency the FX market actually is something that does, will and does favor a firm like Virtu. One of the things that we did in 2016 and we’ve seen some success already was further automate and scale that business. Five years ago, six years ago when we were trading FX and I have said this publicly and privately before, was we had access for cash platforms and the CME. Scroll forward to 2017 and there is literally dozens of platforms and brokers that we can make markets to for further dissemination of our price and our product offering has scaled considerably. So applying for Virtu automation and regular if you will to that asset class that's something that we really focused on in 2016 and we started to see some of the benefits in 2017. I think as that asset class becomes more transparent, as you see more competitors, as you perhaps see more kind of real-time price dissemination, as if you actually saw some type of centralized clearing, again I’m speculating, there is nothing in the works, all of those things Ken in terms of market structure are going to benefit Virtu because it’s going to start to feel a lot more like an equity style business than more of a bilateral spoke type of business and that’s obviously very good for uss. I think some of the other regulatory challenges like we're a significant market maker in the swaps products. If that becomes easier and under Dodd-Frank to do onshore in a competitive stuff environment, it is not that easy to do right now. It’s one of the unintended consequences I think of Dodd-Frank. I think that could be a significant uptick to us. So expanding the repertoire of pairs that we effectively make markets in maybe some, I'll call it sensible reformation of Dodd-Frank to enable more competition, I think there are a lot of unintended consequences in the FX market around Dodd-Frank. I think people can look at that and say, hey this really probably wasn't the driver of the financial crisis and Dodd-Frank has made it more difficult and more challenging for both dealers and non-dealer market makers to participate in certain type of products. So if there is some sensible reformation I’ll say at Washington that’s probably positive to our business, but again this is not a business where we’re going to go directly to buy side counterparties. We were very comfortable with the relationships we have with the big dealers. We’re not going to scale out and have a sales force and all that kind of stuff. I think there is a lot of room for a very efficient market maker like Virtu to take our prices and effectively redistribute them through business partners whether we call it banks, technology providers or exchanges, or ECNs whatever you want to call them, there is a lot of room for growth there.

Great, thank you very much.

Thank you.

Thank you. Our next question comes from William Katz with Citigroup. Your line is open.

This is Jack Keeler filling in for Bill. Thanks for taking the questions this morning.

Yes, good morning.

First one on the Technology Services business, you mentioned you've had conversations with other financial institutions, just kind of curious how much of this has been you guys still being inbound calls versus reaching out to these institutions and I know you just mentioned about the sales force, I know it’s kind of an un-Virtu thing to do, but do you have any dedicated salespeople and is that something you would think about doing in the future?

Yes, I mean I guess on the lean salesman of Virtu not to be too flipping, but no, again there aren’t, it is not like there are 100 customers. I mean you could probably name on one or two hands the large financial institutions. I think the great news is because we're in the market and because we have relationships with your employer and just in every employer that’s on the phone and others that we do business with either as a trading partner or prime brokerage customer over the years and we have those relationships. So these were all inbound calls because obviously when there is noise around us entering into arrangements and doing various things, I think that raises eyebrows in corridors in the institutions and people say, hey I want to know what’s going on. Might this make sense for me to do something as well? And so, I think our reputation with most or all these financial institutions is stellar because we are transparent fully regulated market maker and we've had really good business relationships with these folks over the years. So, these aren’t commoditized products. We're looking for strong strategic partnerships. I know I'm being vague intentionally, but you kind of get it which is large institutions look at the efficiency scale and market structure, expertise that we can bring. Those are areas within large financial institutions that I understand having talked to executives at these financial institutions where they are kind of trying to figure out what they do and how they can become more efficient in providing services to their customers. We’re all trying to solve the same problem which is markets are getting more efficient and end-users are demanding efficiency in pricing. It seems like a natural fit because we as a general matter don't have customers, don't have relationships with the buy side, don't have research, don’t have IPO accounts, all those wonderful things that large financial institutions have and have developed over frankly centuries, it would be silly for us to try to compete with that and we would never do that. But how can you marry the efficiency scale and market structure expertise that we have with all the fantastic things that a large financial institution can bring? We've done that now in a couple of instances and might there be opportunity to do that again, absolutely.

Got it. Thanks and what are your thoughts can you give any, is there any color you could give on the pipeline for future Technology Services deals, is this something that you have conversations ongoing or is it in the future if more came out you would be interested in doing it?

I mean they are certainly ongoing as I said in my script, which means that we're in talks with people. They are at various stages though. Hey tell me what you guys do, does it make sense to let’s try something out, so you could see it this might work. Again, I don’t want to sit here and promise and say we’re going to sign up two of them in 2017 and this and that. What I've said is, this is not going to be a couple of dozen of business partners. We're a small firm and when we do these things we do them very intensely because we want to prove that we can really provide value to the business partners. This isn’t a question of setting up some commoditized technology, algo, licensing kind of business. There are plenty of firms that do that and I assume do it very, very well. What we can offer is really a holistic understanding of technology and market structure which we think is kind of unique because I feel the way that we make money understanding the markets and being really efficient. And if we can partner with somebody that needs that efficacy and understanding in a very, very efficient, not off the shelf kind of manner and we think it - and it works for them and it works for us we’ll do it. But again, I'm not going to sit here and promise that it will be X, Y, and Z over the next number of quarters because I think that would candidly be irresponsible.

And remember just as you look at this, as you look at our financials as you see as we pointed out the Technology Services is where these revenues develop and the agency execution piece of it were developed hopefully in a more steady way as we kind of onboard customers as and that's just the equity, agency execution piece. I think what you are asking about is more the Technology Services/outsourcing which by nature is going to be lumpier.

Got it. Thanks guys and then Joe, just a question for you, obviously the expense for access [ph] was pretty strong year-over-year in 2016 and while it was a pretty challenging environment, if you see a similar environment in 2017 was there any kind of delayed spend or delayed investment 2016 that you are planning to use in 2017 instead or could you kind of stay at kind of run rate levels as the environment challenged?

The answer to your question is no. There is not anything that we, that we did not report on expenses, any deferred expenses any delayed expenses and I would say emphatically yes, we can maintain the run rate and we will do what we have to do adjust the environment even if it got worse. So, we do have continued for us and we feel strongly, you've got to be able to make money in all kinds of environments including the quite core environment in the third quarter and fourth quarter.

Got it, thanks for taking my questions guys.

Thank you, Jack.

Thank you. And I am showing no further questions at this time. I would like to turn the call back to Mr. Douglas Cifu for any closing remarks.

Thank you very much, operator. Again, we thank everyone for their interest in Virtu and for a very successful 2016. We look forward to even more success in 2017. Thank you everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.