Good morning. My name is Jacquelyn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Virtu Financial 2018 Fourth Quarter Results Conference 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 at Virtu Financial, you may begin your conference.

Thanks, Jacquelyn. Good morning, everyone. As you know, our fourth 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 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, including the announced transaction and are therefore, subject to risks, assumptions and uncertainties, which may be 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 the cautionary notes regarding forward-looking statements in our press releases and encourage you to review the description of risk factors contained in our annual report on 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 trends included in the earnings material. Now I would like to turn the call over to Douglas Cifu, our Chief Executive Officer.

Thank you, Andrew, and good morning, everybody. 2018 was a record year for Virtu as we marked several milestones in our company's history, including record revenue and profitability. We recorded over $1 billion in adjusted net trading income for the first time ever. Our adjusted EBITDA was $620 million, another record. Our normalized adjusted EPS for 2018 was $1.96, and the normalized adjusted fourth quarter EPS was $0.67, reflecting strong performance across the firm in a positive environment. We completed the first full calendar year of the acquisition of KCG and have substantially completed the integration on our guiding towards $338 million of cost synergies on a run-rate basis heading into 2019, or 58% of the expenses of KCG prior to the acquisition. In November, we announced the strategic acquisition of ITG for $1 billion, which I will expand upon today. ITG is the premier execution-only institutional brokerage franchise and complements our vision to create a premier, global financial services firm that provides real liquidity across markets and client-focused solutions as a valued agent. From a financial, strategic, competitive and operational standpoint, Virtu has never had a stronger platform from which to grow our business organically. The aforementioned $1 billion in adjusted net trading income generated a 61% adjusted EBITDA margin, an incredible accomplishment in an environment, and especially in the midst of a multifaceted integration of the KCG acquisition. Our total outstanding debt was $931 million at the end of the year, or 1.5 times our 2018 adjusted EBITDA after we repaid $750 million of the indebtedness incurred to fund the KCG acquisition, which obviously, afforded us the flexibility to acquire ITG. We also returned capital to our stockholders in the form of our $0.96 annual dividend and our $100 million stock repurchase program during the course of the…

Thank you, Doug. I will review our performance for the fourth quarter and full year 2018 by referring to the supplemental materials we released this morning with our press release for fourth quarter earnings. Beginning on Page 3, we generated $299.2 million of adjusted net trading income in the fourth quarter and $1.02 billion for the full year 2018. Our daily average adjusted net trading income for the fourth quarter was $4.75 million and $4.1 million for the full year 2018. It's worth noting that there was 1 less trading day in the fourth quarter of 2018 due to the national day of mourning on December 5 for President Bush. So there were 63 trading days in the fourth quarter and 251 for the year instead of 252 for the year. Adjusted EPS was $0.67 for the fourth quarter and $1.96 for the full year of 2018, while adjusted EBITDA was $195.1 million for the fourth quarter and $620 million for the full year. Reflecting our expense management and successful integration of KCG, our full year adjusted EBITDA margin was 61%, consistent with best-in-class peers in the exchange and financial technology peer group. Our adjusted EBITDA margins in 2018 range from 50% to 66%, owing to our philosophy of maintaining a lean, fixed cost platform to ensure superior returns even in market environments that are less than favorable. Our operating expenses were generally in line with our overall guidance for the second half of 2018 and beat guidance for the full year. We will go into detail on that in the following pages. We are maintaining our previously provided full year 2019 guidance or cash operating expenses, which will result in $338 million of total synergies resulting from the KCG acquisition. Separately, we have disclosed publicly details around anticipated ITG…

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

Yeah. Good morning, Doug, good morning Joe. And first congrats on the strong quarter. Even better than preannounced results. So I've already gotten an e-mail saying that -- it sounds like that you're more bullish on the ITG acquisition. And I guess the question is, we've talked to clients, we know you've been out, as you said in the prepared remarks. I was talking to clients and just some feedback and why the feedback we've gotten has been incrementally positive? And how are you getting people over -- or getting to that more positive view? A couple of people that we talked to certainly were more positive after they talked with you. If you could expound on that?

Sure. Yes. Thank you, and good morning, Rich. Yes, I think it's really two elements to that. The first is, you're right. We've been out there, we've talked to dozens and dozens of ITG customers, both here in Canada and in Europe, and I think this is obviously the initial concern around we're adding an additional conflict because ITG, historically has been an agency business. And we're -- we get that, we are very sensitive to that, and we're very direct and transparent about that. I think they like the transparency and the directness of Virtu. We have no other way of conducting business. There's no gray area at Virtu. It's all black-and-white, and so we've been very upfront about how we will physically and virtually separate the businesses to ensure that we are good stewards of customer information, all the things you would expect that we do, and I think customers are encouraged to hear those words. I think -- to flip it on its head though, I think there's a lot of excitement from the customer segment and indeed, from the ITG folks, with regard to the capabilities that Virtu has as effectively an execution firm that is multi-asset class and multi-geography. There's really a clamoring out there in the marketplace for expertise that ITG has in global equities but also in FX and fixed income and in commodity products, right? Because everybody has needs in those areas or a lot of these firms have needs in those areas. And historically, ITG has tried to provide some of those services through Triton and through analytics, and they've done a terrific job with the tools that they have. But now partnered with a firm that makes its living -- today, 90% of its living, being a market maker in…

Thanks. That's very helpful. I guess, and then the follow-up question would be, I was surprised to see continued headcount reductions and other 6% down on headcount. And I guess, can you just sort of elaborate on where you continue to be able to reduce employees in the combine? And is any of that to be -- you expect to duplicate? I guess you're going to do the same, provide the same roadmap or program to ITG in some sort as well.

Yes, I think look -- I mean, obviously, when we announced the KCG transaction, we made it very clear that we thought that we could apply our operating efficiency and views around automating processes to a business that candidly was in dire need of that. And as we have continued the integration, Rich, we found other areas where we could automate and fortunately, that has meant headcount reductions and whatnot. And particularly, like we're both Market Making firms, all the post-trade -- middle and back office post-trade processes. I don't think people truly recognize and give us credit for the power of our homegrown technology around middle and back-office solutions, all right? And looking at ITG, I think a lot of the issues that they have had around headcount has to do with the fact that they have wonderful franchises, but they're very silo, technologically. It may have started as kind of twins but they've evolved over the last 15 to 20 years to be like 13 cousins that don't really speak very well to each other anymore, right? At Virtu, that's just not a state or condition that we tolerate. Because everything -- and you've been here and you've seen it, everything is multi-asset class, multi-geographic, and that's from the front-end all the way through the post-trade processing, right? So when you have a catalyst, a technology that can do that, it's going to mean, by definition, you're going to need a lot less folks in operations and reconciliation and whatnot. That doesn't mean that we pick solely Virtu people over Knight people or Virtu/Knight people over ITG people. We're going to pick the right and the best personnel regardless of where they came from. But I do think one of the themes that we've tried to espouse, maybe not particularly well, is that we are -- that we bring a lot of efficiency to the financial services market, and we have the catalyst that enables us to do this. Not just the front-end and the trading system, it really is the middle and back-office. And if you talk to folks around Wall Street that struggle, that's really where they struggle the most. And so that operating efficiency has enabled us to reduce headcount, and we will continually strive for that operational excellence.

Thank you.

Thank you.

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

So now a follow up on ITG. I guess, given your customer feedback so far, any updated thoughts on revenue retention targets that you set out at the time of the deal? I think you talked about, about a $10 million revenue dyssynergy. I don't know if that's still a reasonable placeholder for now. And as you think about potential revenue synergies and additional capabilities you guys discussed, do you ultimately expect a bigger benefit in terms of incremental dollars to come from the trading side, or the non-trading side? So kind of the Triton/TCA product.

Yes. That's a good question. So we're not adjusting the revenue to synergies yet because we haven't been in the there and we haven't experienced anything yet. So in fairness, we're going to keep the target where it is. I would note, in Knight, we had a much higher dyssynergy number than ultimately that we realized. I mean, arguably, it was kind of zero because -- and you know why. So until we get in there, we're going to keep the target as it is. I -- my gut tells me that it's going to be significantly lower than that. We haven't had any Triton customers for example, turn off. There's been some minor hand-waving around analytics but again, there's so many customers there, and the individual numbers are kind of de minimis and immaterial. So I'm very bullish, if you will, that we will outperform in that area. In terms of what I get really excited about, and you can hear it in my voice and in the introductory remarks is the strategic fit between the two companies, and I do think there are significant opportunities, and you hit upon one of them. I mean Triton is sitting on countless hundreds of desktops of really significant institutions that we, for years, have wanted to get access to, right? And so it's a delivery mechanism and an execution management system, and we're a firm that one, we think can make that product in and of itself better, right, because of the throughput and output of an execution management system is what Virtu is all about. Market data in, orders out, we're pretty good at that. And secondly, we're pretty good at that and understanding market structure globally. Not to criticize ITG, I think they've done a wonderful job, they've got…

Great. That all makes a lot of sense. My second question is shifting gears a little bit from the quarter. Obviously, there's been -- it had a lot of headlines related to MeMex at the beginning of January, so I wanted to get a couple of thoughts on that front. I guess one, given that, I guess one of the key initiatives of MeMex is to lower pricing and market data connectivity, increase transparency and all these things you guys kind of talked about. How do you think about the other side of the argument against it, that potentially could actually create more complexity? You have to connect to more venues, and that could actually increase at least, temporarily, cost for the industry. And in terms of market data, specifically, IEX doesn't charge for market data. It doesn't seem like that made a big difference to the way market data expressed to current exchanges, so why would this be different?

Yes, that's a great question. I think, look, obviously, it does create a 14th exchange, right? So there's going to be incremental costs associated with that. Look, I mean the whole premise of what has happened here is that you have the industry, this isn't just Virtu, right, if you think of the 9 firms that form MeMex, Citadel, the 4 retail firms and then the 3 great banks that we're partnered with, really represents a cross-section of the U.S. equities market and indeed, there are dozens of institutions that, when the announcement came out, want to be part of this. Banks, broker-dealers, retail brokers and institutional investors that all want to be part of this. So as an industry, we're all saying that the monopolistic pricing power that the exchanges have had around market data and connectivity is -- just is not fair and reasonable. And there's a statute, the Securities Exchange Act of 1934 that says that those elements of an exchange need to be fair and reasonable, and when the SEC ruled 5-0 against 2 market data increases that NASDAQ was proposing, I think that was really a catalyst for the industry to say, you know what, one market force is -- should prevail here but two, the regulators candidly have not been doing their job, and so this new group came in to the SEC and said, Hold on a second. We're not -- we're no longer going to rubber stamp these things. We're actually going to look. And you'll notice that the exchange is to date, and they never will unless forced to -- will never really disclose what their costs are and what their margins are for providing those products because my friends at IEX put out a really interesting study that showed that…

Got you. Great. Thanks for taking the questions.

Yeah, thank you.

Your next question comes from Chris Allen from Compass Point. Your line is open.

Good morning guys. Nice quarter. Just wanted to ask a little bit on the -- just in the quarter, on the FICC and the Execution Services line, so we look at kind of the indicators there from a volume and volatility perspective, FICC would have been kind of, this eyeball on the numbers would've implied year-over-year growth -- I mean, decent year-over-year growth, which we kind of saw but sequentially, we thought it'd be a little bit better. In Execution Services, the revenues were below first quarter of '18 and second quarter '18 levels even though volumes in -- from an industry perspective were up nicely. So I'm just kind of -- what kind of drove the sequential move there, and just how to think about those lines moving forward.

Yes. I think -- let me just handle Execution Services first. I think, look, I mean, we candidly took a business that was a mess. Technologically, it was a mess and just operational and structurally, it was a mess and redid it. There were a number of services around like portfolio trading and market on close and things along those lines that candidly, we just kind of shut down for periods of time because they need -- I was not satisfied with the risk reward of being in those market places. So we had to really almost rebuild and clean up from a risk perspective the operations here around Execution Services. I think we've done a great job with that. I give Steve Cavoli who runs the business a big shout out. It's enabled us to be excited about merging with ITG because I do think we have a solution now, but there's certainly pains when you do that. You really -- we really didn't have a product to sell while we were in this -- into our own period where we're effectively trying to recreate a business while continuing to run it, so that's really the key issue there. In terms of the FICC business from third to fourth quarter, nothing really jumps out at me, Chris, to be candid with you. I mean, I think the only thing I can think of was probably volatility in Turkey that probably helped our FX business in the third quarter that wasn't quite there in the fourth quarter. I mean, year-over-year, much was written by some of your colleagues about the demise of our FX business, and nothing could have been further from the truth. It was up over 30% this year. So the products are there, they've only gotten better. I'm unconcerned about that -- those quarter-to-quarter results because I know year-over-year, we've made substantial strides in that marketplace. I think we have now a product in VFX that is significantly more attractive to end users, and the same thing in fixed income. We have a streaming fixed income product in active treasuries, both outright and in spreads that I think people find attractive. So those are businesses that are very well poised to grow.

That's Doug. That's it for me.

Thank you.

Your next question comes from Kaimon Chung from Evercore ISI. Your line is open.

Just kind of want to just go to the MeMex venture. Just let me get a sense of how fast you think you could scale that by garnering more participants beyond the 9, getting regulatory approval and maybe just something about like, expected time frame of -- and probably your ambitions?

Yes. And well obviously, in Virtu world, it would be ready to trade on Monday, but that's not really practical given the fact that we have to file a Form 1 and build the technology around it and candidly, hire a CEO and all that kind of stuff. So this is not like some side project. We have really smart people at each of the 9 institutions that are actively engaged. I'm on the board, if I'm a smart person, I guess I qualify, and it's very, very well capitalized. I will tell you -- I'm not going to name names, but just about every bank that we do business with, all of our competitors on the broker-dealer side, we have the wholesalers, some HFT identified type of firms and most excitingly and most interestingly, a number of institutional investor firms have reached out and expressed an interest in being investors. So we could have had 25 firms in this initial closing and certainly, we will do an incremental financing at some point, but that will be determined by the board and our CEO. I'm just one of 9 directors sitting on the board. We didn't want to have a huge consortium to begin with because I think it's -- anything is difficult in a committee, and so limiting it to 9 made a lot of sense, and we have plenty of capital to get rolling and certainly, we're talking to some very, very attractive candidates at the executive and technology level that I'm very excited about. So we'll have announcements around that relatively soon. In terms of getting the filing filed, I think it'll be some time in the first half of the year, for sure. And I think the idea is to be up and running late in…

Thank you. That was very helpful. And then maybe just a quick follow-up. I heard your comments about the good realized volatility levels continuing in January, though the spot VIX is down a lot. Just trying to get more color around how Q1 is tracking, maybe just by asset class of product.

Yes. Yes, it's a good question. So happily, some of the volatility that we saw in the fourth quarter, particularly in December, has continued. Realized volatility is off, obviously, from Q4, where I think it was like a 23 average or something in that zip code?

Q4 is like 24 and January average was around 19. So whatever you want to take from that, Kaimon, I think it's -- January trended well, but it's not -- it's off slightly, right? The numbers -- the realized volatility numbers are off slightly but still, if you look at the last 12 quarters, a realized vol around '19 is well above the average of that period.

Thank you.

[Operator Instructions] Your next question comes from Zac Feierstein from Morgan Stanley. Your line is open.

Hey guys. Zac Feierstein filling in for Mike. Doug, just a question on the SEC transaction fee pilot as approved. Just -- what might be your thoughts on that and what direct or indirect impact you think that could have on your business for the industry?

Yes, that's a great question. So look, I mean, we're -- as you know, we run a non-customer, customer Market Making business and a agency business. Certainly, we like further transparency on the agency side. We've been very, very clear where we don't route orders in a fee dependent manner, so we think this is a positive. If it reduces our costs, if you will, in terms of having to route orders, that's a good thing, ultimately for the firm. We've been big supporters of 606 reform, which came out where we think institutional brokers should tell their client realtime, if they want, and that's how we're capable of doing it, why an order got routed, where it got routed and be very deterministic about why we execute on behalf of a client because I think that's what best execution requires and very simply, so that's what we do. And we think if it gives the buy-side more comfort around order routing and transparency, I think that's a strong positive for the industry, and we're all in favor of it. As a market maker, putting aside and putting on my Market Making hat for a second again, for the hundredth time, we're not a rebate trading firm, so this won't have an impact on our net. What we pay the exchange is net. If it reduces the overall access fees in general, you know, the difference between rebate versus cost, I'm all in favor of it, that's a good thing from our perspective. Certainly, in our capacity as a retail market maker when we're posting nonmarketable limit orders, right, we have to -- that could be a good thing from our perspective depending upon kind of what our end users -- how they behave and whether they send more orders…

Appreciate that. And just want to get your updated thoughts kind of in '19, on any KCG revenue synergies from here and maybe where that could come from or kind of what you're seeing there.

Yes. Great question. So look, I mean, I said our integration is largely done. We've completed it, if you will, in the institutional side and certainly, on the old get-go and non-customer Market Making side, it's done. I say these things in like, in a hand waving fashion. It's -- I have to complement the folks that work at Virtu today because they've gone through an enormous amount of pain and time in terms of replatforming just probably millions of lines of code, and the effort that was undertaken was really gigantic, particularly some of the old get-go folks in Chicago really had to take everything they've done over the last however many years and replatform up to Virtu. That was not a lot of fun for them. Now that it's over, I think there's a significant opportunity for them to begin iterating again and to use the Virtu technology in a way that grows their trading revenue. Same thing, more importantly -- or just as importantly on the retail side, with that replatforming effort is still in process because we didn't want to screw up any retail customers, and so I think there's a lot of incremental benefit there. And then secondly, we are no stretch of the imagination done, and I've talked about this a number of quarters in taking the KCG quantitative strategies around the world. We've done some of it in Japan, little bit in Canada and a little bit in Europe. But in Europe, not as much because we didn't have enough data from MiFID II. So I think there's a lot of runway left still in how we think about approaching those markets in a more quantitative fashion using the great assets that we acquired and the great people that are now a part of Virtu that came from the KCG. And then the last thing is, KCG had a great ETF business here in the United States obviously, because of the retail relationship. We really didn't have distribution outside of the United States. I think again, with the ITG transaction, think of that KCG/Virtu product being able to put on a block ETF, either as an agent or a principal. It's just being enhanced through the ITG acquisition, so I'm excited about that. I really think we can compete with some of the firms out there that have had this broader global block ETF business, if you will. Operator, I think that's all we have in the queue.

There are no further questions. I'll turn the call back over to the presenters for final remarks.

Excellent. Well, thank you, everybody. Obviously, a very, very successful and exciting year for Virtu with the KCG acquisition. We thank you for your support, and we will continue to update you on the exciting developments around our combination with ITG. Thank you, everybody. Have a great day.

This concludes today's conference call. You may now disconnect.