Virtu Financial, Inc. (VIRT) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Virtu Financial 2018 Q1 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Andrew Smith, Investor Relations, you may begin your conference.

Thank you, Chris. Good morning everyone and thank you for joining this call. As you know, our first quarter results were released this morning and are available on our website. 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. 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 maybe outside the company's control, and our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our Annual Report and Form 10-K and other filings with the Securities and Exchange Commission. 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. In addition to GAAP results, we may refer to certain non-GAAP measures and you will find a reconciliation of these non-GAAP measures to GAAP terms included in the earnings materials. Now, I would like to turn the call over to Douglas Cifu, Virtu’s Chief Executive Officer.

Thank you, Andrew, and good morning everybody. We’re going to try something a little different today, we’re going to try to limit our prepared remarks to keep them brief and focused solely on the supplemental materials and then I will hand it over to Joe for some further discussion and then we’ll try to save as much time as possible to answer your question. So starting on slide 3, and as we announced this morning, Virtu realized $340 million of adjusted net trading income and $0.76 of adjusted EPS in the first quarter of 2018. I’m proud to report that both of these represent records for Virtu since becoming a public reporting company. There were several factors which contributed to this outstanding performance this quarter; first, revenue synergies from the continued integration of the quantitative market making capabilities and the customer franchise that we inherited from the acquisition of KCG in 2017 combined with the efficient financial technology and order routing capabilities from legacy Virtu continue to bear fruits in the first quarter. This is the second full quarter after the closing of the KCG acquisition and we could not be more pleased with the result and believe we are still in the early stages of reaping the strategic benefits of this combination as we migrate all of the legacy KCG market making and institutional trading to legacy Virtu technology. To be a little more specific about these revenue synergies, I mentioned several examples of these in our prior two earnings calls. Namely first, we are adapting and deploying the KCG more quant-driven strategies to new market places and that Virtu has already has access to utilizing Virtu technology. Second, we are using the KCG quant know-how in the Virtu market making strategy. We think that those mix that that DNA if you will makes those strategies more nimble and more profitable. Third; and we’ve achieved some examples of these in the last several calls. We’re trying to effectively internalize KCG’s hedging flow with the rest of the firm through Virtu skill technology which allows for that level of internalization and integration. Naturally, as we continue to get further away from the closing of the KCG acquisition it becomes more and more difficult to quantify these categories as the firms have blended together. But given the market conditions in the first quarter, it’s very clear to us that having a scalable integrated firm was a very significant competitive advantage that helped us generated elevated results in the first quarter. And other factor that contributed to our performance in the first quarter is a continued rationalization of our cost base and integration process. This quarter adjusted operating expenses were $133 million in line with a detailed expense guidance provided previously. We continue to believe that we will achieve the synergy targets and expense guidance we have provided and our scalable business will generate cash flow margins that are among the best in the industry. That’s how we have always run Virtu and continue to do so. We have reduced cost dramatically and believe that when the integration is complete, we will have realized approximately $300 million in operating expense synergies or approximately 40% of the combined cost basis of both firms prior to the merger. Our headcount on May 1 is 536 people; obviously it’s down materially on a combined basis, while revenues have increased. This confirms our thesis our market making firms do not need to be managed and run like large financial institutions. Importantly, I want to note that this headcount is inclusive of more than 30 new hires that we have made in the past six months. So in addition to right-sizing the combined companies, we have actively sought to attract and hire the top talent necessary to achieve our long term goals. Third and obviously which will be on the front of their mind, the operating environment in Q1 improved considerably, average realized volatility in Q1 was 19.8, a far cry from the 5.7 average in Q4 and markedly above the 2017 average. This environment clearly played a significant role in our Q1 results, but quarter-over-quarter the impact from sustainable revenue synergies and integration efforts are clear drivers of continued improvement across our firms. While the environment thus far in Q2 has not sustained the overall averages for realized volatility that we saw in Q1, it does remain decidedly better than the second half 2016 and overall 2017. This is important as we consider our return to long term historical averages and realized volatility, which is what we are seeing thus far in Q2 as a meaningful improvement over the operating environment of the past couple of years and this is a positive for Virtu. Finally, we continue to make significant progress on the capital management front and we just repaid another $100 million of our term loan. This brings total repayments to $626 million from the July 20 closing, which means we have reduced interest expense by approximately $35 million per year. We targeted a long term debt-to-EBITDA ratio of up to 2.5 to 1 by year-end 2018, and we are nearly there at the end of this quarter at 2.6 to 1. Turning to slides 4 and 5, our market making segment generated $314 million of adjusted net trading income and execution services generated $27 million. You can see our performance in the market making segment this quarter was outstanding. Unsurprisingly our performance was led by America’s equities franchise owing to the volatility in the US equities market as well as the index options led performance in global FICC options and others. While Virtu has never had a material presence in the broad single [naming] equity options category or equity and volatility index options, market making business were significant contributors to this quarters’ results. I was also very pleased with the growth of our FX business, which has continued to improve from the first half of 2017 and had a very nice quarter in the first quarter of 2018. Our execution services business improved its adjusted net trading income over Q4 excluding BondPoint. We are committed to a robust agency execution business led by superior technology and transparent trading and post-trade analytics. In addition, we remain confident that we can realize previously unexplored synergies between the institutional business and the market making business as our key institutional clients have responded well to the opportunity to interact with our central risk book of retail orders. Finally, on the regulatory front, we remain very pleased with the tone and tenor of the regulatory content coming out of Washington. We no longer have regulation by enforcement and regulation by headline grabbing, but rather regulation that is data driven and is receptive to input from market participant such as Virtu. I will now turn it over to Joe to go through the remainder on materials and I look forward to answering your questions. Joe?

Thank you Doug. I will pick up on slide 6. Now we wanted to put this order in perspective, given the various moving pieces which include the continued integration of two firms in to a scale and unified operation, enabling our record performance. Back in the third quarter, we provided detailed guidance on the following Q4 operating expenses, first half of 2018 operating expenses and then full year 2018 operating expenses. If you look on slide 6, you’ll see we were on target with this guidance in Q4 and remain on target for the first half of 2018. So the 133 million of core adjusted operating expenses is slightly less than half from the first half 2018 guidance, and the trend there remains favorable. I also wanted to drill down a bit on our compensation expense for this quarter. Our adjusted GAAP compensation expenses were 59.5 million for the quarter. This represents 7.5% of net revenues. But this comp-to-net revenue ratio is in line with Virtu’s compensation ratio as a standalone company in 2015 and 2016. As I said, we expect operating expenses to be within guidance and wanted to point out that the compensation ratio in particular is something that’s demonstrative of the significant operating leverage in our model. We include this analysis to demonstrate our commitment to the Virtu philosophy around expenses and point out that this is ultimately a technology- driven service business with a service business cost model. Slide 7 reviews the capital structure and long term debt. We are ahead of our targets for debt repayment in our trailing 12 month debt-to-EBITDA ratio is 2.6 times. If you’ll recall, we have a long term target of a range of 2 to 2.5 times by year end and we are well on our way to achieving this goal. We’ve also used 11 million of our $50 million authorized share repurchase program in Q1 to repurchase 375,000 shares at an average price of $29.27. (inaudible) takes a step back and reviews Virtu’s capital return history. To restate our philosophy, we believe in returning excess capital to shareholders and stakeholders. When we went public we set a policy that would return at least 70% of our net income to shareholders overtime. We view this policy over the long term not quarter-to-quarter because of the inherent variability in our results. Indeed, we said what we believe to be a fully appropriate dividend policy because of our long term confidence and sustainability of returns. You can see through the end of the first quarter, since we’ve been public; we have returned 89% of our earnings in the form of dividends. Our capital return priorities remain, reduce our debt load to a long term debt-to-EBITDA target of no more than 2.5 times, consider opportunistic share repurchases, and maintain a payout ratio in the long term of at least 70% of our net income. Finally, on slide 9, we wanted to put the operating environment in perspective. Obviously February 2018 was an extraordinary month from a volume and volatility perspective and you can see we have the last six month on the bottom left of the slide 9. Importantly, although the March-April environment was less than the Q1 average overall we remained well above historic lows in 2016 and 2017. For example, looking back to the third quarter of 2016 till the end of 2017, realized volatility number rose above single digit averages. The good news is that although April market conditions dip below the Q1 trend line, realized volatility remains consistent with a more normal environment. With that I will turn the call back to the operator, so we can begin the Q&A portion.

[Operator Instructions] Your first question comes from Rich Repetto of Sandler O’Neil. Your line is open.

I appreciate the comments you made about what the things, how you’ve integrated and how from a revenue standpoint, I guess the synergy that you’ve combined between the two firms Doug, given this quarter and the outsize results you said was decidedly better. But if you could help us as we model going forward, we’re back at historic norms, but is April, like I don’t think it’s a 5.6 million net trading income per day. But say if you were at 4 million before, in the 4 million to 5 million range would you be midpoint there or above or below that or just some quantitative way for us to sort of get a feel for that.

We’ve always steered away from giving direct guidance. I know that frustrates you, it frustrates some folks on the street, but I think this quarter is emblematic of why we’ve steered away, because every time I’ve done a forecast in the last 10 years that I started Virtu with Vinnie, I’ve been wrong both for the high side and to the low side. I think the key point that we’ve tried to stress over and over again from the first call that we did in the third quarter with the KCG integration is that this is a dynamite combination of these two firms that we’ve put together a firm that has fabulous customer franchises, great quantitative models and a superior with some great people in it, and some superior back testing and simulation environments with a firm that has a long history of having very nimble, scalable financial technology. And so our quarter-by-quarter numbers will vary given the market conditions around volumes and volatility, but fundamentally there is a growth storage here both from a revenue synergy perspective and also from a scaling of this business perspective. And again, I’m obviously avoiding the question to be clear we’re not going to give you a direct answer and you know, you and I worked together over the years and have never given any direct answer and I’m not going to do it now. The point I made about the second quarter is obviously February was a superior from a volume and volatility perspective. We’ve seen that before, certainly in the 10 years that we’ve been operating Virtu and then in the three years that we’ve operated as a public company, I think of the third quarter ‘15, the first quarter of ’15 where there were exogenous events which accelerated volumes and volatility and that’s the story of this business which is over the long period of time, we’re going to continue to grow. We’re going to continue to take advantage if you will of market place opportunities like we saw in the first quarter. The thing that encourages me and I’m a positive upbeat guy is that realized volatility has not returned back down to 6 or trading at a significant discount from (inaudible) state up there in double digit. So, again I hope that’s the new normal over the last two years. I got a lot of questions asked, hey is there a systemic change in volatility here. I think the answer is clearly not. So looking forward I’m very optimistic about the potential of the combined firms. And as I mentioned in my prepared remarks, it’s harder and harder to say Virtu and KCG because we really have less than a year after the transaction become one.

And just one follow-up Doug or Joe, you’ve clearly Virtuized the combined firm from both the cost and the capital perspective. And if you look at the synergies you’re almost 90% there for the year-end target, the debt pay-down. You’re 40% there, and I guess is it because the run rates sort plan this front end sort of big cost takeout and so forth. I’m trying to gauge the possibility or the potential for you to exceed, I guess, I know certainly in the year, but these targets which are meaningfully there already on synergies and debt pay down etcetera.

I’ll have Joe answer the specific, I just wanted to make one comment, which is, first of all I appreciate you making Virtu in to verb because we’re afraid of virtualizing things and obviously I’d like that comment. I think it is important to note that hopefully you all see the manner in which we operate and when we say we’re going to do something, we’re going to do it. And it is very possible to run firms of this type with a lots more of a footprint from a headcount perspective and there are very significant synergies to be obtained from combining these firms. But again it’s all driven by the fact that Virtu’s underlining financial technology which was built from scratch if you will, with in the last 10 years was architected with the notion of scalability and being ubiquitous across asset classes and geographies. That’s a key differentiator of this firm as compared to other firms that have tried to make these combinations work and have not succeeded. So with that horribly 30,000 foot comment, I’ll turn it over to Joe for more specifics.

I think when we originally announced the transactions, we had closer to 250 million, we’ve revived that to 300 on annualized basis with 233 I think, and we’re sticking with the 300. You’re right, the ability obtain big numbers upfront was specific to this acquisition and we can go in to the detail, the non-US operations originally, but – were originally impactful, but I think the important thing is that the guidance that we’ve put out there in our first quarter as a combined company of Q3, we always put out numbers that we feel comfortable and confident in. I think that we are comfortable and confident that the 300 million is the right number and that we’ll get there on a run rate basis next fiscal year, and by the end of this year we should be at a 250 to 275 range like it says on slide 6. In terms of capital, I think, we originally said that we would return 440 million of capital to reduce debt. We’ve done 626 million to date and you take out the BondPoint net proceeds of 276, without BondPoint we return 350 million of capital, so we’d have 90 million to go to get to that original goal. And so I think by the end of this year we are well in our way. So obviously this quarter helped a lot in terms of the debt-to-EBITDA ratio and certainly operating expenses are not headed up. So even if you look at a more normal environment whatever that is, if you take the fourth quarter of 2017 and put it on the first quarter of 2018 expenses base, you get EBITDA numbers that are 110 million or 120 million, and if you just extrapolate that out to the end of the year with this, you were going to be close to 2 and 2.5. So we feel good about that.

Your next question comes from Alex Blostein of Goldman Sachs. Your line is open.

This is (inaudible) filling in for Alex. Just wanted to know what are your latest stakes and views on the market data rising and the SEC blocking the market data free increase. And can you also talk about the market data consumption trend within Virtu, and are you seeing any increasing spending or actionizing the (inaudible).

When we started down this path a couple of years ago, just questioning the need for market data increases, I certainly thought a little bit like Don Quixote tilting in to the windmill unless you remember that book from college. And Joe will touch upon some light as my side kick. Obviously it was rolling a rock up a hill and we feel somewhat vindicated, validated. I think the important thing is that this is not Virtu, right. Six months ago, our 24 investment firms from all the wakes and shapes of the financial industry Virtu, Citadel, Vanguard, buy side institutions, retail brokers, IBKR, great firms wrote a letter to the SEC essentially saying look, enough is enough, give us some transparency around these costs. So when the entire industry, the entire customer base is saying, we get it, you provide a really great service, I got a lot of friends at exchanges, but we work really hard for our money. Be transparent around why these costs are increasing and maybe we’ll live with increases. And so at that moment in time, I think and then obviously we’ve got folks at the SEC now Brad Redford and others that are very contexted in this situation and are asking the right questions in our view. And that’s a positive trend obviously for Virtu because that is a significant portion of our cost. We’ve been very good historically about maintaining our cost and only increasing them 1% or 2% a year. So, I don’t think this is going to happen material effect on rolling back cost, I’m not that insane to think all of a sudden these costs are going to get thrashed in half and there’ll be a significant decrease to our expense base. The important point was to say that there has to be some rationale related to how these costs are derived, and they can’t all just be passed along to the industry. It’s not just Virtu it’s all the aforementioned great firms that are saying the same thing. So I think it’s a positive in a sense that we won’t see material increases in these costs. Joe you want to give, fill in a little bit on some of the information.

We have all line of communications and data processing includes all of our telco costs and data center costs as well as market data, we don’t break it out. If you compare that line item to where Virtu and KCG were as standalone companies prior to the merger, it was sort of flat from quarter-to-quarter this year. I think we’re going to see some reductions in that as some of the timing around when the telco expenses kick in. But market data for these – I haven’t extracted the organic growth and market data fees from that publicly, but Doug’s comment is the right one which is, we don’t expect any material reduction in it, but I think what we’re hoping for is that they start going up at the rates they’ve been going up in the past.

And just one more from us, outside of the volumes that we saw on Feb 5, can you just provide any color how [NDI] was tracking in Jan and March if that’s possible.

I think the interesting thing about this quarter wasn’t just like one day; it wasn’t like an August 24 event. Again, I don’t do specifics on monthlies, I know that frustrates everybody and we’re not going to do it here. But it was not an isolated situation. You saw a continued volatility throughout the month of February and that continued through March. I mean clearly its tailed off from the peaks of realized volatility, actually with a premium to imply volatility for a period of time there, which is a great situation for a market maker and imply volatility spike at like 30 and obviously we had some of the market movements in a fix that people were really focused on etcetera and those kind of things. But I think the interesting thing about the quarter was that it wasn’t just a momentary flash, if you will, similar to what we saw around Brexit or around maybe the Trump election. It was more sustained. So January and March were very solid months, but clearly February was an out of form.

Your next question comes from Alex Kramm of UBS. Your line is open.

Real quick, just in terms of the improvements quarter-over-quarter, I think you talked about continued improvements as you were combined in a trading strategy etcetera if that’s the right word, but can you quantify that at all unless you have done that already. A, can you pause out; I think you’ve done that in the past, how much and maybe of the improvement quarter-over-quarter came from the organic opportunities and then maybe related to that. I know this is probably an ongoing process, but do you think the heavy lifting of that is done or do you think there are still some revenue synergies that we should be thinking about as we go through the year.

I’ll answer the second part first because frankly it’s easier, which is, I don’t think and I said this in my prepared remarks to use a sport analogy. I don’t know if we are in the first quarter, but we’re definitely not in the fourth quarter that’s football not hockey, hockey only has three periods. So maybe we’re in the third inning. There’ still a significant amount of opportunity here. We have not finished the re-platforming if you will of the KCG strategies and the KCG framework on to the Virtu architecture. Certainly we have not finished that in our retail segment, which is obviously and the most sensitive to because its customer facing. We’ve begun that process, we’ve done it more in some of the proper institutional segments and every time you do that, it’s not just the cost say of decommissioning architecture; it’s the Virtu technology is nimbler, it’s easier to deal with and allows for more intraday iteration and allow for more analysis. Intraday its better at structure and obviously it’s much better smarter (inaudible). So every time we’ve done something like this, we’ve seen an uptick. So I’m very excited and optimistic that there is improved enhancement. And it’s not just me the important thing is that the really smart men and women that work here are collaborating and we are excited about integrating. The Austin officer of Virtu has become quantified if you will, because we’ve got a couple of really smart young folks down there as quants or head trainer down in Austin, spending a lot of time working quant strategies as well. So we’ve really integrated the two firms in less than a year and we’re seeing significant uptick as a result of that. So I do think that there is more runway there Alex since we’re very excited about. In terms of like how much of it was the environment as opposed to organic, again it’s very difficult to say because strategies all around the firm performed exceptionally well and it’s hard to do so. It was a lot easier in the fourth quarter right, when we said to you guys, look volatility and volumes actually went down and revenues went up. Here we made a $100 million or so more of adjusted of net trading income from the fourth to the first quarter. It wasn’t all the environment, it was - clearly some of that was a just further enhancement and the strategy is performing well. But I can’t sit here and with a crystal ball and it was X% as oppose to Y% percent. Again, I look at this as a long term Virtu investor, Virtu is what I am. I look at this over the long term and say I’m very excited about this combination.

And then maybe along the same lines, and relative to my model at least, the VIX surprised me a lot and I know that’s a little bit – that there’s a lot of business and I think you highlighted a couple of things. But maybe you can give us a little bit detail in terms of the breakdown today or also which ones of the businesses on a more quantitative perspective performed. Because in the past FX has been a big focus. So maybe those that are a little bit tougher for us to gauge, some incremental commentary, also maybe how those businesses are faring in April, because obviously some of the (inaudible) had realized more commentary its very equity focused.

That’s fair question, obviously we’ve kind of lumped categories together and I know that again that frustrates some people, but I think it’s a better way to look at the business. Clearly, a couple of comments, clearly the VIX franchise in the first quarter saw a superior returns because of all the volatility in the market place, it’s kind of obviously to state that. We are a very large market maker in the VIX family and that shouldn’t come as a surprise to anybody. We’ve doing that for a long time and there was a lot of volume and obviously a lot of volatility there and people paying a lot more bid offer spread etcetera, etcetera. So that was helpful. I did make comment in my prepared remarks on purpose which was that FX had a very nice quarter as well. I think some folks prognosticating that that’s now the Virtu FX. I think that those reports were false. It improved quarter-over-quarter and it wasn’t just volume related because you didn’t see the same volatility spike. And indeed in April our VIX – I’m sorry our FX P&L in April is up against the first quarter. So, I’ll give you that little tit-bit. So, FX is performing better than it had been. Again, as I have said many, many times that is somewhat depended upon what the central banks are doing. When the central bank rates globally are essentially zero, when the ECB is buying bonds left, right and center, the large carriage rate that you see in the FX business just simply disappears. It’s not just Virtu, if you look at the large dealers as well and look at their fixed desk, they weren’t complaining about a lack of volatility in 2016 second half and 2017. In FX, we suffered the same fate. I had zero concerns that our FX business was going to zero; in fact it’s actually going the other way. As the fed is started to raise rates, as the ECB has said, listen, we won’t be the buyer of last resort for the rest of eternity. So now portfolio managers, treasurers are now faced with the very real situation, where they now have to manage their risk. It’s a global world, they have to manage their risk across currencies and so there’s going to be large movements of currencies. When that happens and risk managers are moving portfolios, then Virtu does better. So I’m very optimistic about our scaled FX business and that is one business in particular where the KCG quant capabilities have really helped our business significantly. So that’s a prime example of where the integration wasn’t just Virtu fixing the KCG technology problem, it was really KCG’s years of experience and quantitative looking at markets making the Virtu market making algorithms work better. I hope I answered your question?

That’s great and thanks for sneaking in that little FX tit-bit.

Your next question comes from Chris Allen with Rosenblatt. Your line is open.

Just following on Alex’s question, just getting the (inaudible) is down like VIX was in the quarter relative to the prior quarter. Can you give us any sizing of how it kind of fits in to that [decline]. So you obviously have seen a normalized volume prospective and volatility perspective a little bit in the second quarter, just trying to help us think about the past there and the magnitude that we should be thinking about maybe first quarter relative to fourth.

It’s obviously good question. Again, I’ve resisted getting in to specific sub categories because I have found that that ultimately doesn’t really help the analysis of what we’re trying to accomplish here which is right overall firm. And I get why you’re asking the question Chris and obviously it’s a very and legitimate question. Look, obviously you can look at the volumes of the CPOE, I know they have a call at 8.30, you can ask them what their volumes were like. I know they’ve put them out monthly. We’re a significant market maker on the CPOE futures exchange and we trade options as well. So that was a significant opportunity for us in the first quarter. But there are other elements within or other asset classes and sub-asset classes within say namely FX, which I just spent to answering Alex question, I spent a significant portion answering that and we saw an uptick there as well in our energy business and metals business did very well. We’ve seen some growth in Asia in particular in our FX business as that becomes more of a 24 hour integrated business. And at the end of the day I’m not going to size with the opportunity, but clearly it was a significant opportunity. But I’m very comfortable that that category will continue to grow. And again the key point of that category is that we are a multi-asset class market maker that goes across geographies. We’re had that strength and so we’re making markets in not only the VIX futures but the options and all the ETFs that are – represent or the ETP products if you will. And so that’s just a great opportunity for multi-asset class, multi-country market maker like a Virtu.

The only question I had was just, rest of the world equities, I was surprised it wouldn’t be up a little bit more than we saw. In any commentary are there volumes in Europe and is your cash flow pretty good there in the quarter? So any color there would be helpful.

It’s really; obviously it’s the Asian countries which we previously reported separately and the European countries and then obviously very different segments. I would say Asia, Tokyo volumes overall share volumes were down around 70ish percent in the quarter, from the fourth quarter, so that obviously doesn’t help. Europe, you’re right was up. I think part of the issue is clearly the uncertainty in getting used to miss it too. I saw some statistics when I was over in Europe last week speaking at TradeTech, so I had an opportunity to talk a lot of buy side investors. And the uncertainty, I’ll be nice and call that (inaudible) a miss or two and where the route in terms Dark Pool and the SI is new. That forced a lot of people in to periodic options and in to the large block crossing facilities that ITG and Liquidnet and I guess [BID] and so you saw an uptick in that volume. Exchange volume didn’t really change and obviously the BCN went away, walked across the networks in our legal and Dark Pool volumes were hurt not only because there was a double capper, because there was uncertainty as to the enforcement of the double cap. So all of that did not help our European business. Now that being said, long term I’m a big believer in the SI regime. What I said at TradeTech, maybe I wasn’t that eloquent, but I’ll say it again which is that institutional investors do not necessarily want to transact on an exchange. There’s a reason there’s always been and there always will be off exchange liquidity. So method two is trying to force people on to exchange, they just don’t want to go there, which is why you saw the rise of periodic auctions and block crossing networks. Our SI capability in Europe is first grade; we were connected to 12 brokers right now. Probably we have more broker connectivity than any other SI provider in Europe, but it’s still very early stages. The estimates are and the data will come out in June that’s somewhere between 2% to 3% of the market in the first quarter within SI. So it’s a baby step. So all that BCN and Dark Pool volume has kind of migrated to the periodic auction and it’s a block crossing and a little bit to exchanges. I’m very confident that a lot of that’s going to come back to SI, because that’s openly what we were doing in the broker proxy network. It’s where we made a lot of money. So at the end of the day, I’m very optimistic about where Europe’s going to lead. I just think it was a very difficult quarter in Europe for the SI providers because it was so darn new.

Your next question comes from Ken Worthington of JP Morgan. Your line is open.

Can you talk about maybe new products that have launched or have gotten much bigger in the quarter? I think you launched cyber currency trading. So it isn’t right on whether any other new product neither equities or [SIC] are about much bigger this quarter.

I think I’ve said on the last call, I can’t quite remember. I hope I’ve said this publicly, if not I’ll say it now. We’re a market maker in the CBOE and the CME futures products around cyber currency; I guess their Bitcoin futures right now. We do not currently make markets in any of the cyber cash markets primarily because of our concern around risk management. In other words, our ammo has always been to trade in transparent and regulate exchanges, with centralized clearing or clearing for a prime broker. In cash, if you will bitcoin or those types of currencies that are currently not available and so we have concerns around counter party risk. So therefore we’ve dipped a toe in, but it’s a very, very small toe. But I do – Again I don’t have to make a qualitative judgement as to whether or not those are appropriate asset classes, if you will. It’s a new asset class we’re excited about it if and when it becomes more regular, regulate and essentially cleared, certainly we will put a big toe and all the little toes will follow and we’ll be a big market maker there. So we’re excited about that. In terms of other products, obviously we started market making and Spotify any time there’s an IPO, we do all that. I don’t think there are any other new futures and certainly we’re already in 36 countries, so there wasn’t any new product in particular kind of that is popping in to my mind that came up in the first quarter. We already made markets in 19,000 or so instrument. Andrew is actually telling me its 25,000 because I was looking at the OTC product, so its higher than that. So we pretty much have spun the globe here. Clearly there is a proliferation of ETP products. We had a big issue within this week, had a whole suite of new products they want to launch, we’re a big supporter of that, we become an element or AP in these products and so every time one of those things happen that’s a new opportunity for Virtu. So we continue to integrate with these issuers and continue to grow, but other than that there’s nothing in particular that tops the line.

And then Joe as we think about competition for the year, and I know that you guys have already kind of reiterated the guidance. Obviously big earnings quarter as we think about how you are accruing compensation, is it more straight line or are you accruing more with how you expect kind of revenue to come in through the year. In other words if 2Q happens to have a lower revenue just to kind of come down too or should we sort of straight line the comps from 1Q?

We accrue comp on a top-down and a bottoms-up basis, so we look at bottoms-up headcount, we look at individuals, we look at performance of the business, we look at performance of individual businesses, and as with Virtu no one here has payout deals or strict comp to net revenue targets. So it’s geared more towards straight line Ken and then we check that versus the performance of the business, because the model is not a high comp to payout model, it is an operating leverage model. So there is a band, if you look at the old, the pre KCG-Virtu numbers that I put in the stack here, you can see this quarter’s numbers right around there. I could see it ranging from – that ratio ranging from a high teens to the low 20s. But that’s where we like it, so that’s kind of how you should think about it.

[Operator Instructions] Your next question comes from Kaimon Chung of Evercore ISI. Your line is open.

Most of my question has been answered, but just wanted to get your perspective on the recent scrutiny on the VIX, do you think it’s still a good gauge of volatility given some of the issues surrounding it, like the settlement of Houston auctions, the review on the VIX linked products and proliferation of ETS and now that the regulators are looking in to it. What’s you sense of what’s going on there and any concerns if that could impact volumes?

Their call is in 50 minutes I don’t want to pre-amp them. Look I think Ed (inaudible) are two of the best if not the best in the industry, they’ve dealt with this in a forthright upfront manner. I said in the last call and I’ll say again, my experience and our experience is more with the futures exchange there. And the way that those, the way that they manage their test and closing cross and settlement is like any other future exchange we’ve ever interacted with. It’s very transparent. I think all the participants that are experienced there understand how it works. I think unfortunately there was a suitability issue with regards to folks that were holding ex-[VIXI] and the XIB product. It’s not an investor product, it’s a trading product. So if you’re holding it for a year because you wanted to be sure of volatility that was probably a really bad idea, and was particularly a bad idea on February 5. The closing price at 4 o’clock has little relationship to what the settlement price is going to be because future exchanges settled at 4.15 and market makers and professional traders know that and retail investors and others don’t. So again, are there issues around suitability that regulators I’m sure will look at? Absolutely. Is that an investor education question? Clearly it is. Is fundamentally the product flawed and did CPOE in my humble opinion do anything wrong? I think the answer to that is no. When it comes to options and settlement of the VIX that is way beyond my pay grade. Just a lawyer by trading so I can’t do that math, but I’m sure adding Ed and Chris will give you all the answers that you want to that question.

There are no further questions at this time. I will now return the call to our presenters.

Thank you very much everybody for your attention and your interest in Virtu. We look forward to speaking to you on our next regularly scheduled call. Thank you.

This concludes today’s conference call, you may now disconnect.