Virtu Financial, Inc. (VIRT) Q4 2018 Earnings Report, Transcript and Summary

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 year, fulfilling our promise to be good stewards of firm capital. Our businesses ended the year on a high note, and we have demonstrated through all market conditions that the operational efficient and technologically advanced culture of Virtu could scale to grow a client facing business. Our Market Making businesses achieved $924 million of adjusted net trading income in 2018. While we do not break down the noncustomer facing Market Making operations of legacy Virtu from the customer Market Making operations of legacy KCG, I wanted to offer some highlights. The non-customer facing Market Making business of Virtu has continued to demonstrate that it is a growing franchise. In fact, our noncustomer facing Market Making business was up over 30% in 2018. I highlight these accomplishments to point out that the core Virtu financial technology and operating efficiency around Market Making and post-trade settlement in clearing are the engine that drives the firm in global markets in multi-asset classes, and our legacy business is stronger than ever and growing. In addition, our customer facing Market Making businesses had a record year, reflecting the high quality of the people and the quantitative strategies embedded in that franchise. As a reminder, the customer Market Making business has long-term relationships. In many instances, relationships that stretch over 2 decades, with firms that provide retail investors, RIA's and others with execution capabilities. Virtu competes for this order flow by providing price improvement to retail investors, real customer service and value as a market center. When we acquired KCG, we committed to investing in and growing this business globally by integrating it with Virtu's financial technology and continuing to provide superior execution quality and services as we have taken great strides to do so. 2018 was a record year as our Virtu customer Market Making businesses were up over 50%. Overall, we believe we have strengthened this business segment, improved profitability and offered superior service to our growing list of counterparties. Our Execution Services business generated $96 million of net revenues in 2018. We spent a good part of 2018 analyzing and thinking about how this business fit into Virtu's future. The business we acquired from KCG requires significant technological and strategic overhaul, and we have streamlined the business, converted to an optimal product offering and a single common technology platform, and we believe that we are well positioned to grow in 2019. Recall that prior to the KCG acquisition, Virtu began building at its own agency execution capabilities, driven by our ability to be efficient around technology and provide micro market structure analysis around executions. With KCG, we inherited an Execution Services business, with 800 buy- and sell-side relationships in Europe and in the United States. We learned quickly that we could provide these buy-side customers enhanced executions because of our superior technology and offer them unique liquidity by inviting them to opt in to our central book derived from our retail order flow from our Market Making business. Since closing on KCG in July of 2017, we have consolidated trading systems, people and processes to a single platform to provide scale, align efforts and streamline communication to create a better product and facilitate future acquisitions. We combined legacy Virtu and legacy KCG's agency offering into a single agency trading environment, which replaced three from the previous firms, including all aspects of monitoring operational risk, regulatory reporting, user functionality and post-trade TCA analysis. Of course, our acquisition of ITG demonstrates our continued commitment to growing our Execution Services business. On that note, I'd like to talk to -- take a minute to talk about 2019 and ITG, specifically, in terms of how the integration planning is shaping up and our thoughts about the transactions since our announcement on November 7. An important consideration in our decision to pursue ITG was the compatibility, attractiveness and stability that -- of the Execution Services business as well as the favorable structural changes in the space from transparency and unbundling of execution and research, which are increasing the addressable sides of the market and creating opportunities for organic growth in the space. We like the Execution Services business because it is synergistic with our existing Market Making business and provides recurring subscription base and commission income that is less variable quarter-to-quarter than our Market Making business. For example, Triton, ITG's EMS product is critical to the operations of ITG's customers and is integrated into the customer workflow. We believe that combined with Virtu's technological capabilities, we can expand the capabilities and efficiency of Triton, making it more useful to the end customer. Specifically, we believe that many Triton customers would like a more robust offering to trade multiple asset classes through a single platform, making it a truly global, multi-asset class EMS. Virtu's global and multi-asset class order routing capabilities will allow us to significantly enhance Triton to offer these services. ITG's TCA analytics product is an industry standard benchmark. The scope of this product is enhanced by ITG's global reach and customer depth. We believe with Virtu's superior ability to analyze micro market structure, we will be able to enhance significantly this product offering, measuring execution quality and market impact in more asset classes and more geographies. Also, ITG's broad product offering fits extremely well with Virtu's core capabilities and provides opportunities to grow the franchise overall by developing economies of scale and scope. ITG is truly a global business, with very attractive and well established franchises in Asia, Canada and in Europe, in addition to the United States. Combining our Execution Services business with ITG creates, by far, the market leading execution only institutional business globally. Virtu and ITG's managements are actively communicating and on the road, engaging with dozens of our mutual clients across the United States, Canada and Europe, including hosting client dinners and roadshows in New York, Boston, Chicago, the West Coast, Florida, Montreal, Toronto, London and Paris. The reception is very positive with recognition of the ongoing benefits that Virtu can provide to ITG's existing products and services by operating a single technology stack and offering unique customized liquidity. We have continued to identify opportunities around the addition of four multi-asset class workflow solutions within Triton and analytics, the option to interact with Virtu's varying liquidity offering and enhance algos and routing transparency. Clients are excited about step function enhancements made possible by Virtu's global multi-asset class expertise. As had been reported, we have begun working with clients around processes and procedures to -- we intend to extend and buttress pertaining to Triton, commission management, analytics, to ensure the integrity of client information. Together with ITG, Virtu will be the premier provider of Market Making, Execution Services, workflow technology and data and analytics product to global institutions and retail brokers. Virtu will be unique among its peers for its technological capabilities, efficiency and ability to provide these services on a global basis across asset classes, with a unique understanding of markets and trading, which our competitors on the agency side lack. We will be further unique in that we will be the only independent Market Making and agency firm to have multi-asset class capabilities across multiple geographies. While we expect that our quarter-to-quarter revenues will continue to reflect the volatile nature of global markets, we look at the ITG acquisition as a source of growth and stable quarterly revenue for several reasons. First, the client franchise at ITG is growing and stable. Second, the business is less sensitive on the downside and upside to volatility, and lastly, the elements of the ITG business have recurring revenue characteristics. In closing, I would like to note that the positive environment that persisted throughout the fourth quarter has continued thus far into January, and we are continuing to benefit from realized volatility levels that are above historical averages. We entered 2019 with a streamlined operation, poised to leverage our core strengths to grow the platforms ITG will bring. Virtu's Market Making and agency businesses are off to a strong start in 2019 and continue to demonstrate the organic revenue growth we expected from the KCG integration. I will now turn the call over to Joe, who will review our performance this quarter and overall in 2018. Joe?

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 synergies and reiterate today, a plan to achieve $123 million of net expense synergies. In terms of leverage and overall debt, we ended the year at a debt-to-EBITDA ratio of 1.5 times. Obviously, the strong performance and $620 million of EBITDA helped this ratio as well as the repayment of $750 million of our term loan. A 1.5 times debt-to-EBITDA ratio exceeded our stated goal at the time of the KCG acquisition and allowed us the financing flexibility to pursue ITG. When we announced the ITG acquisition, we stated our intention to pursue a refinancing of our existing term loan and raise an amount that would allow us to complete the acquisition. We have now successfully completed the marketing related to this refinancing and funding an anticipated terms of LIBOR plus 3.50% at 99.50, subject to the completion of definitive documents. Turning to Page 4. You can see that sequentially, our Market making and Execution Services businesses were up meaningfully in the quarter, with Market Making up 73% and Execution Services up 28%. Some thoughts on the market metrics on the bottom of this page. You can see realized volatility of 24 is up 3 times on average from the second quarter. Along with consolidated equity volumes being up 33%, these metrics drilled the performance this quarter. Average realized volatility for January remains strong at 18.9. Turning to Page 5. You can see our Market Making performance broken out in more detail between Americas equities, rest of world equities and global FICC plus options and the dramatic increase in both Americas equities and rest of world equities between Q3 and Q4. Page 6 has the detail on our core operating expenses. A few things to note here. Our communications and data processing expenses, which represent the global connectivity plan as well as our market data, finished the year at $169 million. This amount was approximately $290 million when you look at separate Virtu plus KCG spend, premerger, and you could see the trend continues down as a benefit of the continued integration of our technology and market data plan. Similarly, depreciation expenses trended down in Q4 and were $61 million for the year. With regard to cash compensation, overhead and occupancy category, the biggest driver of this is cash compensation. You can see in the analysis on Page 6, our compensation to net revenue ratio ranged between 17.5% to 23.7% throughout the year. This is consistent with Virtu's historical guidance since we went public in 2015. Our comp to net revenue ratio would be in the upper teens to low 20s. This year, we finished the year at 19.5%. You will recall, we have been providing detailed expense guidance and did so at the beginning of 2018. Overall, versus the second half of 2018 guidance, we came at around the high end of the guidance. For the first half, we finished well below the low end. Overall, the midpoint of the core expense guidance we provided for all of 2018 was $486 million and we came in overall at $461 million, beating the midpoint of the guidance by $25 million. You will also note here, we are not changing overall expense guidance for 2019. Naturally, when we close the ITG transaction, these numbers will be incorporated together with ITG expenses. Page 7 has a summary of our debt capitalization. Again, we are very happy with the preliminary outcome of our term loan marketing in a challenging credit market. We priced our $1.5 billion term loan at LIBOR plus 3.50%. We were able to achieve this outcome owing to the strong track record Virtu has in the credit markets and a history of quickly delevering as we generate excess cash flows. Post the ITG acquisition, we anticipate our leverage will go back up to the mid-2 levels and we anticipate deleveraging back down for a long-term target of 2 to 2.25 as we realize capital and expense synergies. Page 8. We have refreshed our cumulative payout analysis, given the strong performance in Q4. If you look at the historical payout of dividends and share buybacks, we have returned close to 90% of our earnings to shareholders since our IPO. All the more impressive when you consider, at the same time, we returned $750 million cash to retire debt over the same period. With that, I will turn the call back to the operator for your questions.

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 those markets is just an incremental amount of expertise. Think about the investments that Virtu has made historically in financial technology. You see our P&L, you see what we spend on technology and on personnel. Somewhere near $200 million to $250 million a year, ensuring that we are the most robust and the most state-of-the-art, if you will, in financial technology around the world. \ ITG didn't have the capability or the resources, frankly, to keep up with that. They've done a great job with what they have. It's a fabulous global franchise, but I think clients are now seeing the flip side of combining with a first-rate Market Making funding a lot of incremental benefits. The reason I'm even more excited is Rich, as I've gotten out there and talk to customers and understand the power of a Triton, the power of the analytics products and how important they are to the day-to-day workflow of end users, and these are Tier 1 buy side institutions around the world. These guys really do have a first-rate customer list. I've looked at what clients want, a multi-asset class execution management system, well that's Virtu. That's really what we've built over the last 12 years. Sure, the tools will look somewhat different, the front end is different, ITG does a much better job in making the products more user-friendly. They're much better at productizing things. But when the folks from ITG come to Virtu and say, Hey, do you have this? And as we say, Of course we do. Do you have a streaming app product? Of course we do because we couldn't trade ETFs if we didn't have a streaming app product. Well, there's a desire on the buy side for something that looked like that. So there's a lot of products and a lot of expertise in Virtu. And as I said, when we initially made the acquisition, ITG has something that we don't have. It has trust. It has distribution, with literally thousands of customers around the globe that we want to have access to. So strategically, I am much more excited about this acquisition than I was, and I was at level 10 beforehand, so now I guess I'm an 11 in terms of combining the companies.

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 some really talented folks there. The guys that run workflow solutions I've met, I'm very impressed by. But I think they recognize that they could use some help around the architecture of the system, number 1. And number 2, more importantly, in understanding and getting access to other marketplaces and other asset classes that historically have not been ITG's core strength, namely fixed income and FX. And as an FX and fixed income market maker, obviously, we know those market places. We have connectivity to them, so we can say we can make the product better. On top of that, to the point you made, VFX, which is our streaming, bilateral, if you will, product, we'll do it disclosed or we'll do it anonymously. We can give you whatever size you want, we can customize your streams. We've always struggled because of a lack of distribution. We don't have a sales force that goes to the end user. Same thing with ETF, same thing with fixed income products. Right now, we have an embedded sales force, a lot of really smart, really talented people in the United States, Canada, Europe and Asia, and those guys are getting excited because now they have products that they can sell for the first time. So great example, think about Canada. You're a Canadian institutional investor. You want access to an intralist of stock. Well, ITG has got a router right now that does that. It does a really nice job of doing that, deciding whether it's going to execute you in Canada or the United States, but where did you get the FX piece for that? It's got to go outside the house. We'll now internally, we can make that price, right? We're one business, and it's not going to be marked up. You don't have to go to a bank to get it. You got one price. So that ultimately inures to the end-user. So we're going to give a better experience to the end user, and then that end user may say, You know what? Why don't you just stream some FX directly to me, right? I'm a guy that needs to hedge, $20 million, $30 million, $50 million, $100 million a day, really nice user. I'm not getting the right attention from the dealers because I'm not a big macro hedge fund or whatever it is, but I have my hedging needs that I need to execute 1, 2, 5 times a day. We can do that through VFX in a competitive, fully disclosed, fast execution kind of way. That's what gets me really jazzed up, and as well with TCA, right? If you think about pre- and post-trade analytics, market analysis, right, market impact, that's what we do at Virtu. We're a Market Making firm, so we have to understand when we're dealing with a counterparty or dealing with the universe in a claw how our liquidity is impacted or how we are impacted right? So whether it's 10 milliseconds, 10 minutes or 10 hours, we're pretty good at understanding what the market impact is. That's really what TCA analysis is all about and again, that's multi-asset class, right? So here's a firm that has a TCA product in FX, Virtu, right? We just never productized it. We need it for own trading. So the great guys at ITG, the great guys and gals at ITG that have been inside Virtu, I think are very excited looking at the products that we have and they're going to do a great job helping us productize that and getting our liquidity out there to the end user.

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 we, as an industry, and we at MeMex can provide those exact same services for 20th of the cost. So clearly, there's been some egregious pricing going on. So I think the combination of the industry saying this, i.e. market forces, overlaid with regulators candidly finally doing their job, and I give a lot of credit to Chairman Clayton at the Brett Redfearn for actually opening up the industry's eyes to this. I do think there will be change, and I do think it's the right thing to do, and I do think IEX has better proven that you can run an exchange and charge a lot less or charge nothing, frankly, for market data. I don't want to get into why IEX doesn't have market share, there's a whole bunch of reasons for that, and MeMex really is going to be dramatically different than IEX in terms of its discipline, in terms of its market structure, in terms of what it's going to be about. But the excitement that the consortium has about this is only heightened by the reaction and the positive feedback we've gotten from the participants of the market. I know there's been some critics out there, people scratching their head, but at the end of the day, think about an industry where virtually every single customer has basically said, We don't like the way that you are conducting the business. You're charging us too much and so therefore, we're going to start a competitor. It's pretty compelling.

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 2019, early in 2020. That might slip a little bit depending upon whether the government's open to handle our filing and all those kind of things, but look, the momentum is there, I could not have been happier with the response of the industry. I think the exchanges are trying to point this as like, a Virtu sizzle thing. Nothing could be further from the truth. It was an avalanche of support from the retail brokers, I mean, you know the big 4 that put their names and their money behind this thing and certainly, the 3 sell-side banks that we have involved are the top of the heap, and there were a dozen more behind them that were interested in doing it. And as I said, a bunch of institutional investors as well. So for whatever reason, and I've given you the reasons of what I think but certainly, there's a lot of unhappiness, I guess, with the incumbents out there. I run a customer business. I would not be happy if 75% of my user base decided to start a broker-dealer because they didn't think I was being fair in how I price things. But that's just me, that's how I run a company. The exchanges will react the way they do. We continue to do business with them, but we communicate with them, I have no -- this isn't a personal issue, this is really just business. And at the end of the day, I think we're going to have a very successful exchange. And remember, the name of the exchange was The Members Exchange, right? It's not an exclusionary club, anybody can join this club, anybody can be a member. And it's going to be an exchange that's run for the benefit of its members, not for anyone in particular, not for any particular group, right? It's going to have a lot of transparency and very simple order types that everybody can understand. And more importantly, transparency around what it's costs are and passing those costs onto its members in a fair way. That's really what this is about.

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 to us or less orders to us, those kinds of things, so we're kind of all over the place. At the end of the day, these transaction fees are just friction in the marketplace, and so we're big believers in reducing that friction. Do I think a rebate is inherently evil? No, I don't, I've said that very clearly. I think it's an enhancement for someone's display liquidity. That's a good thing. In the marketplace, I never understood why people were so critical about a rebate. I get the whole conflict issue, but as a market maker or market participant, if you're willing to display an order, you're effectively adding something to the marketplace, you're showing your hand, and so to be incentivized to do that, to me, is not inherently evil or a conflict. I think unfortunately, when that book came out, it conflated those two issues between order routing, which is one, you're acting as an agent on behalf of a principal, you should act in that principal's best interest, and liquidity provisioning or displaying your hand, where you're being incentivized. Nothing wrong with that. So at the end of the day, I think -- I'm hopeful that the access fee pilot will conclude in the way that my brain thinks, that these things are separate and apart and one, you need disclosure and the other is not inherently evil. So I think ultimately, the SEC -- and I -- again, I complement Chairman Clayton and Trading and Markets because I think the pilot was well thought out. And hopefully, it will provide enough data that we can reach sensible conclusions.

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.