Virtu Financial, Inc. (VIRT) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the Virtu Financial 2019 Second Quarter Earnings. 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] We ask that you reserve your questions to one question and one related follow up in the absence of time to allow everyone to have a question. I would now like to turn the call over to Mr. Andrew Smith, Head of Investor Relations. Please, go ahead.

Thank you, Michelle. Good morning, everyone. As you know, our second quarter results were released this morning and are available on our website. Today's call may include forward-looking statements, which represent Virtu's current belief regarding future events and are therefore subject to risks, assumptions and uncertainties, which may be outside the company’s control. Our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. It’s important to note that any forward-looking statements made on this call are based on information presently available to the company, and we do not undertake to update or revise any forward-looking statements as new information becomes available. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report on Form 10-K and other public filings. In addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. These non-GAAP measures should be considered as supplemental to and not as superior to financial measures prepared in accordance with GAAP. You'll find the reconciliation of these non-GAAP measures to the equivalent GAAP terms in the earnings materials with an explanation of why we deem this information to be meaningful, as well as how management uses these measures. When used on this call, adjusted net trading income refers to our trading income, net of all interest and dividend income and expenses and all brokerage, including any exchange related fees. Speaking and answering your questions today are, Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. I'd now like to turn the call over to Doug.

Thank you, Andrew. Good morning and thank you for joining today's call. As we reported earlier, we generated $0.16 of adjusted earnings per share on $238.9 million of adjusted net trading income in the second quarter. During the quarter, our Market Making business and our Customer Market Making business in particular was impacted adversely by the market conditions including retail participation, which was down 20% in Reg NMS names and over 35% in OTC names from the first quarter, representing one of the lowest levels of retail participation in the last several years. Despite these market conditions, our Market Making business performed well compared to the diminished opportunity set and met our own internal metrics, given the market conditions. In addition, as I will go into in more detail later, our Execution Services business had already demonstrated the upside from the integration of the ITG business, as it outperformed the market conditions during the quarter. Before I share additional comments about the second quarter and the third quarter to date, I will first provide an update on our ITG integration and touch on some of our key organic growth initiatives. I'm very pleased with the progress we have made integrating ITG and we have seen clients responded very positively to Virtu technology, our continued commitment to customer service and the transparency we deliver as part of our client solutions. Virtu's Execution Services offering is a great example of how we were able to marry technology and people. Both are necessary, neither sufficient on their own. That is to say, we're able to grow at scale while maintaining a high level of client service, which was the hallmark of ITG, because we have, first, the right kind of technology which I've discussed with all of you over the years on these calls, is a unitary global multi-asset class technology stack, as well as the right people, who are fluent technologies and software engineers, if you will, but also great client service professionals. Taken together, we feel like we built and are committed to continue building a unique and truly integrated global model that strategically and sustainably positions us to benefit from the significant secular changes the industry is currently going through and it's compelling in its combination of technology, training expertise and unique liquidity. We are excited about the prospect of leveraging Virtu's technological and diversified asset class capabilities across our new suite of global products and growing client base to drive our organic growth initiatives. I would also like to provide an update on our revenue dis-synergies estimates related to the ITG merger. We value every client and earning and maintaining their trust is of utmost importance to our business. Thanks in part to the depth of the ITG relationships and to extensive client engagement by hundreds of dedicated employees, we're happy to report that we are trending below our initial estimate of $10 million from ITG clients. In fact, we've seen meaningful interest in our suite of products. For example, just the announcement of the transaction with ITG, we've added over 50 new clients for our suite of broker-neutral products. Our analytic client base continues to grow since the ITG merger was announced in late 2018. I'm pleased to report that since the transaction closed on March 1, we have added over $1 million of annual revenue from new subscribers and from existing clients increasing their subscription more than offsetting a deminimis amount of departures. In short, our value proposition of marrying technology transparency and service is resonating with the key decision-makers on the buy side and sell side globally. I'm excited to report that we are well ahead of our schedule on achieving our expense synergy targets. Our progress with the ITG integration and our overall strong expense discipline has enabled us to increase our overall expense synergy target by 25%. Since closing the ITG transaction five months ago, we have been actively working to achieve sustainable fixed cost synergies, across the combined firm, including data center consolidation, system consolidation and the client migration to Virtu technology. We've also made great progress combining our sales forces and have begun internal cross-training program to educate our global sales force on our combined client offerings as they begin to jointly engage with clients. While achieving synergies through efficiency and automation is one of the key to our success, we're also committed to having the right people in the right places at Virtu. We're actively hiring and have added over 40 people around the globe since the transaction closed and we will continue to hire as needed. While expense management is the clear driver of our expeditious approach to integration, integration also enables us to execute on our organic growth initiatives to capture significant revenue synergies, which are referred to in slide 5 and 6 of the supplemental materials. Simply put, we are enhancing client experience by upgrading technology, improving client interfaces and support interactions and expanding product and service offerings by delivering global multi-asset class experiences to our clients, including integrated ITG's dynamic and globally distributed set of products with each other to deliver more products to more clients in a more scalable and performance manner to drive growth in a recurring and reoccurring revenue. For example, we are delivering enhancements to two of our marquee broker-neutral and multi-asset class desktop products, Triton EMS and TCA portal by improving integration with each other and embedding them into client workflows creating greater efficiency and product distribution. As part of this enhancement, we will be launching a new next generation of Triton, Triton Valor we have to get the V in there somehow that will begin deploying shortly. The new technology driving Triton Valor provides improved scalability for our global distribution of an integration with new EMS and TCA features and multi-asset class functionality that will further set us apart from other buy-side offerings in the market. We are also excited to tell you about a pending launch of our unique version of outsourced trading which we are calling Execution Concierge Service that leverages Virtu's existing multi-broker technology platform to offer complete, global multi-asset class outsourced trading solutions powered by Virtu and led by the Head of our Commission Management Business, Jack Pollina, a veteran ITG employee. Virtu's Execution Concierge Services or ECS is as scalable extension of our multi-broker platform and products combined with our high-touch trading service and global client coverage. Virtu is the only provider with a global multi-asset class platform of EMS analytics, fixed network Algos and CSA products and solutions, giving us a valuable unique advantage of being able to meet all of our clients trading and operational needs in-house. ECS includes Virtu's global multi-broker and multi-asset class solution that deliver transparency and quantifiable benefit throughout the trade life cycle. Our flexible offering scales with our client needs and they will be able to choose the level of multi-asset class outsourcing that fits their needs, full service hybrid or flexible on-demand arrangement. As part of this initiative, we are enhancing client access to Virtu's custom liquidity solution that offer price and size improvements with reduced market impact in global equity, global ETF, FX, metals and fixed income. We believe we will be able to increase recurring revenue with these enhancements to our global multi-asset class product set, expand liquidity solutions for clients and create opportunities to fulfill more client orders in-house. Taken together, these growth initiatives and other compelling actionable opportunities comprise the bulk of the $25 million to $50 million of revenue synergies we have identified and quantified to date and we're already taking steps to realize these opportunities. We remain focused on successfully integrating these various strategic transaction and realizing these growth initiatives. We look forward to keeping you updated with our progress. Looking at our topline results. Our Market Making business saw reduced opportunities this quarter, driven by broad declines in market volumes and volatility. Even so, our customer and noncustomer Market Making businesses performed in line with our metrics and expectations against the decreased opportunity set. While not unprecedented, the market volume in this quarter presented one of the lowest market-making opportunities in many years and bore the closest resemblance to the second and third quarter of 2017, albeit with significantly less retail engagement. Looking more closely to this quarter's environment. We see that U.S. consolidated volumes were down 8% versus the prior quarter and realized volatility averaged 11.45%, down 17% from the prior quarter. As I mentioned earlier, retail engagement was also lower in the U.S. with retail equity share volumes down 20% and OTC equity volumes down over 35%. The volume was similar for global equity with Pan-European volumes, down 5% and realized volatility of the EURO STOXX 50, down 3% compared to prior quarters and Asian volumes on the TSE were down 8% and realized volatility on the Nikkei declined 32% compared to the prior quarter. Our business continues to evolve and we have not seen any diminution in market share that affects profitability. In fact we have earned additional share recently from some of our larger Market Making clients. While the poor market conditions continued in the first several weeks of July, the opportunity has markedly improved overall given the recent market volatility. Beginning around the last few days of July, we have seen the most favorable environment since the beginning of the year and our business has responded accordingly. We continue to look for opportunities to deploy our scale technologies and products to markets around the globe. Recently we were approved by the Toronto Stock Exchange, the Canadian Stock Exchange as a Market Maker or registered trader allowing us to expand our Canadian Market Making activity and create opportunities for us to interact with unique order flow and expand relationships with the issuer community. In the U.S., we have launched Market Making in single name options by leveraging our existing fixed cost infrastructure to build out our options capabilities. Also on the Market Making front, we've become increasingly active in corporate bond and increased the global coverage of our ETF block deck. Regarding our Execution Services business which includes our end-to-end suite of buy-side and sell-side products and solutions, I'm pleased to report a solid quarter the first full quarter since the ITG acquisition. Execution Services' net revenues were $105 million which is overall consistent with the first quarter. And despite the lower market activity in the quarter this business was resilient and performed well, demonstrating the stickiness and stable nature of the business. Key drivers of our performance in Execution Services were growth in multi-asset class analytics subscribers as I mentioned previously; POSIT U.S. ATS block volume decreased by over 14% in the second quarter compared to the first quarter, while our main competitors volumes were generally flat; POSIT Alert or block conditional trading platform saw volume increases by 24% in the U.S. and 15% in Europe compared to the prior quarter when volumes declined market-wide, demonstrating the impact of the technology improvement we have made to the Alert service this closing. As I mentioned earlier, we were excited about how much we are expanding and strengthening the core of our client business by adding multi-asset class capabilities with Triton Valor and our TCA portal especially in conjunction with the pending launch of our global outsourced trading desk offering. Now, we'll turn the call over to Joseph Molluso to review the financial results. Joe?

Thank you, Doug. Our results for the second quarter included GAAP revenues of $378.5 million, GAAP net loss of $55.5 million, and a diluted loss per share of $0.27. Adjusted net trading income was $238.9 million. As a reminder, Virtu closed the acquisition of ITG on March 1st, 2019, just five months ago. The second quarter reflects the first full quarter of consolidated results which include ITG. To compare results across the quarter on a more apples-to-apples basis we have included the adjusted net trading income for the Execution Services segment overall as if ITG were included for the entire year. You can see that despite disruption caused by the merger closing and the adverse market conditions the Execution Services business was resilient in the face of these events and was down 4.5% quarter-over-quarter while the market volumes were down 8%. As Doug mentioned, our overall revenue decline this period adjusted for ITG was largely driven by reduced opportunity for the Market Making segment. The customer Market Making segment in particular reflected the diminished opportunity this quarter from reduced volumes and bid/ask spreads, driven by significant reduction in realized volatility together with decreased retail participation. Turning to expenses, our operating expense performance and outlook continues to be strong and we are lowering expense guidance and raising expense synergy targets for the ITG acquisition. Full quarter operating expenses were $165 million. Comparing this to full year 2018, adjusted for the program share of ITG expenses we have already realized $59 million of gross synergies versus the original target of $133 million. As reported on our last call, we were on track to realize over 85% of the original target on a run rate basis by the end of 2019. As Doug mentioned briefly, we are now expecting to achieve over 100% of the original target by year end. We are reducing full year guidance for adjusted operating expenses to $585 million to $615 million implying full year 2019 realized gross synergies of $146 million based on the midpoint of that guidance. We are also introducing expense guidance for 2020 at $620 million to $650 million for the full year which results in overall gross synergies of $167 million, a 25% increase over the amount announced at the time of the transaction. Turning back to our second quarter results. We earned adjusted EPS of $0.16 for this quarter and adjusted EBITDA of $89.2 million. Net interest expense for the quarter was $34.7 million and debt to EBITDA stood at 3.2 times at the end of the quarter, as the adjusted net income excluded $20 million of amortization of intangibles, $12 million of stock-based compensation and $65.2 million of a write-off of future rent and leasehold improvements related to the abandonment of the ex-KCG offices in New York City. The effective tax rate used for adjusted this quarter was 24%. Diluted shares increased 0.78% over Q1, 2019, mostly due to normal vesting of employee share grants. On our balance sheet as of June 30, we had approximately $1.6 billion of trading capital including $458 million of cash and cash equivalents. This closing on ITG in March, we paid down $50 million of debt. As you know, we track the cumulative dividend payout in our business over a long period of time. In the supplemental materials on slide 11, you can see our cumulative payout is 83% since our IPO and is 90% including share buybacks. As we have stated many times, ours is a cyclical business and we view the current payout as adequate and sustainable over the long term. Now I would like to turn the call over to the operator for Q&A.

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

Yeah, good morning, Doug. Good morning, Joe. My question will be on the Market Making segment. And obviously results were difficult this quarter. And I was wondering to get some increased transparency into it, Knight in its old days would report dollar volumes, because we're having a tough time I think trying to triangulate between volatility as well as the retail opportunity, but we did know just the dollar volume. Do you think that any increased metrics or that could be a possibility to give us some more insight into the Market Making segment intra-quarter?

Yes. Yes. It's a very fair point. And obviously, I mentioned in our in my remarks that we obviously track internally with a fair amount of detail obviously a lot of different metrics, because we're making markets all around the world really both in the retail segment, but also on the non-customer Market Making segment. And so we have somewhere between 35 or 40 different internal measures. So obviously, it would be difficult to do that. And we'll consider doing something maybe on the retail side, because I don't think that there's enough publicly available information that allows you guys fairly to kind of slice and dice our business. If we just gave you a gross notional of all of our Market Making, it would be an extraordinary large amount and it wouldn't be necessarily instructive right, because obviously U.S. treasuries will be market making a huge notional amount than the -- just the notional amount of the transaction there are significantly larger. So let us reflect and consider how we do that. The only public metric right now, which I've pointed out in my remarks and I know you're aware of is what Interactive Brokers puts out in terms of retail participation. And I did make that point in the comments that those volumes were down 20% in Reg NMS names and down 35% in OTC names. And as you well know, we have a leading OTC cash out here and so it definitely impacts the profitability of that. And as well not getting 20% less of Reg NMS orders with lower volatility is -- it has a significant negative impact on the retail wholesale customer Market Making business that we inherited from KCG. It's not even necessarily a linear impact, because as spreads narrowed and volumes come down, it can have a pretty dramatic impact on profitability. I mean, the business still made money. It was very profitable, but obviously a significant disappointment from prior quarter.

Yes. It would -- the dollar volume request would only be for the retail side of it so that could be helpful. I guess my related follow-up would be, when you look at the Execution Services compared to the first quarter, definitely you outperformed market volumes. I think it was a 4% decline or something like that. But when you look at I guess the year average in 2018 to what Knight Execution Services did along with ITG on a net trading basis I'm coming up when you combine the two somewhere around $120 million. And I guess do you -- just trying to sort of reconcile that difference. Do you think that's just a change in volumes as well because I heard all the comments about the synergies and the less revenue attrition that you're seeing?

Yes. Yes. No. I absolutely think it's volume-related, because like remember the first quarter of 2018, an explosion of volume there just trying to get me the exact numbers here would be both pretty much from the same source as you do. So in Q1 you had 7.6 million shares, 8.5 million in the fourth quarter. And I came to the average -- that's in my head, but -- and we did 6.9 million shares -- billion excuse me. So it's, obviously, a significant drop-off of the volume. I mean, I am really, really very pleased with the performance of the Execution Services segment in the second quarter. But there's a lot written about Virtu being a market maker and ITG not having a market making business so we're going to lose all this volumes. And it is definitely client that have reduced or turned us off. But in a large, large measure, I would say globally they are in the very distinct minority. And in fact we've seen, which I'm excited about significant pickup from large global asset managers and pension plans whose names you would know very well that are really excited about the; one, the continuation of the great client service and the deep relationships that the folks here at ITG have had over the last 30 years. I can't compliment them enough on their interaction with clients and their understanding of client needs. And you marry that with candidly the performance and the transparency of the Virtu Algo suite and I think that's just the game changing proposition. We're very excited about it. I don't think there's anybody else out there in the market place that has something like that. And layer on top of that the unique liquidity that we have from our internal crossing with our central risk book of retail orders. It's a really dynamic offering that is really resonating with the buy side. So I try to be enthusiastic in my remarks and being more enthusiastic -- we got a really good proposition here. And if you layer on top of that kind of what's going on in the marketplace in the cyclical -- wait a secular rather changes we're seeing in the institutional agency business I just think Virtu is really well-positioned to take care of a lot of client needs in a post-MiFID II unbundling best execution really matters world. And so that's why I'm very, very excited about that business. We announced a couple of initiatives. We're putting forth outsourced trading. We have the full package here from A to Z that we can offer to the buy side and the sell side. We're going to continue to press that initiative.

Got it. And I just looked volumes were down first half versus 2018. So anyway very helpful.

Thank you, Rich.

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

Hi, good morning. Thanks guys. So maybe building on the same line of questions. This is, obviously, not the first time we've seen pretty significant swings to the downside in the Market Making business from you guys. Clearly environment has been favorable. But I guess looking at the global equities business in particular, it seems like the business is underperforming the various benchmark and metrics that we all tend to track. So I guess Doug help me understand your comments around that these moves are all kind of environmental-related and you don't see that as a market share issue for Virtu. How do you assess that position to help us better kind of gain confidence in your competitor's position especially in your non-retail-related Market Making business?

Sure. Sure. I would point out I'm not trying to be a smart guy we've outperformed a lot of the metrics sometime in quarters as well. So I think it really comes down to understanding what the baseline is. And I said what I -- to repeat the comments I've made to Rich, which is we run a very complicated global business in a lot of different asset class in a lot of geographies, right? It is and I know this is a challenge for you and for you guys and we have not done a particularly great job in trying to educate you. It's a difficult thing to do, because we have access, obviously, to all the market share and volume metric from every market from Thailand to Canada to Brazil to the U.S. on the non-customer side. What I can tell you is we track that religiously. We track it daily, weekly and monthly and we have not seen any significant diminution in market share and profitability. That is not consistent with the market volumes and the opportunity set. Has some markets gotten more competitive? Sure. Have we maintained our competitive edge? Yes. In retail, in particular that's a marketplace, which is very easy for us to track because we got this bespoke batch of orders from our retail clients. And so how do we assess that? We, obviously, know what that batch should look like and what our profitability should be on that. It's very difficult absent me giving you that data, which we can't do for you guys to really get insight and understand that. I appreciate that. So Rich's suggestion is a good one because I think we could in a sanitized manner describe what the notional amount we're seeing on the retail side and we'll certainly consider that. And we're open hours always to suggestions to allow you into but like and our FX business in the quarter had a really nice quarter, kind of really nice first half of the year, up significantly overall from last year. So I'm very excited about the growth of that business. It's a great business that has less than a dozen people in it scales magnificently. So folks that were prognosticating that somehow getting out the impacts of business couldn't have been more wrong. So I continue to be excited about it. And our ETF business, for example, is up and we're taking our ETF block test to Asia and to Europe because I think there's a real need for it. It's a great example of marrying the DNA of Knight with the technology of Virtu. For the first time we're seeing institutional orders in Asia and Europe. And so we're going to take out some of the bigger competitors there as well. So we continue to see some of the benefits. Joe you…

Yeah. And Alex just to put a finer point on the macro environment right because Doug is making points good points about how we can kind of help on a modeling basis. But just to put a finer point on the macro environment right, the last time we were in this kind of sustained low-volatility environment, I think it was in the second third quarter of 2017. This quarter realized vol dipped below six, right? So we -- it went to five to eight or 5 9. The average was a little higher because of some better days in May. But then you just compare the last time we had that kind of environment beginning in 2017, if you look at where retail -- the statistics that we -- the public statistics available to gauge retail participation then versus now just OTC bulletin board shares volumes were half of what they were back then. And the IBKR share volume number is 25% lower, right? So I think this is an instance where you have these kind of macro volatility statistics going the wrong way and they kind of dovetail with extraordinarily low retail participation.

It's a great point. April was one of the worst months, we've seen here a long time and I think it's exactly the point Joe made – makes, which is realized volatility, i.e. a measure of bid/offer spread narrows significantly; retail investments are on the sideline; OTC volumes, which were a big OTC, because of it get cut in half and you're going to have a challenging month. April was one of the worst months we've had here in the last four or five years and a lot of it that has to do with those outside metrics. So I know that's a long way to answer your question and I believe and I wish I could invite you here and show you the 40 pages of statistics I go through every hour and every day every month. And we're going to do better out try to educate you guys more on what those metrics show us.

Okay. Thanks. And I guess as a follow-up again given the coming out of the really tough quarter any specificity around what 3Q looks like? I know you guys weren't getting into the nuances month-to-month. But again, just given -- it will be helpful to understand how the business is responding to a slightly better environment here.

Yes. No, it's a great question. I mean, July started off -- it looked a lot like May and June, so better than April but kind of consistent with what the second quarter look like. And then I don't remember exactly what day, the day the President tweeted maybe that was the 28th or 29th or something like that of July, you saw a big uptick in volume and volatility. And no surprise I mean that's continued for -- I guess, today is August 8, so we've had a five or six trading days in August. So you've seen a huge burst of activity from a volume perspective I think the nine billion shares that's in the U.S. equities market. And the VIX went above 20, I don't know exactly what realized volatility was. And we captured that opportunity. So you had a dramatic -- I think the word we used in the press release was material increase. I used to be a lawyer. So that means a lot like many double digits of results. So the machines aren't broken. They're working exceptionally well. They're meeting metrics. And when the opportunity set increases significantly like it has in the last five or six trading days we see associated increase in revenue capture on the Market Making side. I know that frustrates people that there's volatility in our earnings and it frustrates us. Obviously, we like to be a lot more consistent. We encourage the President to keep tweeting. That's a good thing for our business. But at the end of the day I'm very, very happy with the way that our business has responded in all segments. It's not just the retail -- it's not just retail. We've seen it in Asia. We've seen a big increase in Japanese futures trading for example in CFD trading, and in FX globally, and in FX in China in particular, and in Turkey in other locations where there's significant pockets of volatility. That's the Virtu model capture it wherever it resides.

Got it. Thanks guys.

Thank you.

Your next question will come from Ken Worthington from JPMorgan. Your line is open.

Hi. Good morning, and thanks for taking my questions. I guess, first on the multi-asset class global outsourced trading solutions that you talked about can you talk about who the target customer is for the service? And any guess on maybe how many ITG clients fit this profile? And then maybe lastly when might you start to onboard clients to this new service?

Yeah. Great question. Thanks Ken. I think look the from my perspective the way I look at it the target client is frankly anybody on the buy side that wants to minimize their existing spend and still have great service and great execution. I really think it's an approach to new clients and existing clients. The benefit of the transaction is that we've got this unbelievable great ITG global sales force and we have the old Knight now Virtu sales force, which is blending very nicely, and so we've got hundreds of folks globally that can sell this offering. So a target customer would be a small to midsize buy-side institution that doesn't want to either wants to outsource entirely, or use us to supplement some of the resources that they have. But the key thing is that Virtu provides a complete holistic solution. So we can give you, Virtu in a box. You've got an EMS solution on your desktop, you've got an Algo suite, you've got Algo Wheel, you've got TCA, you've got Commission Management so that we can we'll pay research for you, right? We've got complete fixed connectivity, the old ITG net business which is a fabulous business, right? So you come to Virtu and we can give you a single-source completely outsize solution, so that your portfolio managers can focus on what they should be focusing on which is alpha generation and let Virtu handle what we're really good at which is taking the alpha ideas from the smart portfolio managers and in a completely broker-neutral manner get that executed in global equities and other asset classes right? So why – you don't need to build that capability and have it internally, we can either do it with the folks you have or frankly provide that turnkey solution. Jack Pollina, the gentleman I mentioned has been in ITG for over 20 years. He understands everything about a broker-neutral business have all the relationships with not only the brokers, but the research community. So we really think it's a compelling offering. And in a world that screams for efficiency and scale, we think we can do that. We think we can grow with these clients and then it becomes a long-standing Virtu clients.

Great. Thank you. And I apologize this is unrelated. But you mentioned that the FX business is performing well. I think you said it was up year-over-year. It looks like the fixed segment the way you're reporting it was down a bit. So maybe first, how do we see the success you're having in FX? And if FX is doing well what really parts of the business - because I think FX is the biggest part of that that FICC bucket maybe that's wrong. But what parts really struggled a lot this quarter?

Yes. Yes. That's a good question. Now we combined – obviously FICC we kind of do it the way the banks do it now right. So it's FX and commodities and which includes energies and metals products. And then it's well – it's a fixed income product as well. So I think FX as I said has had a nice year. There are – think of every geopolitical place where currencies are traded. It's not just the euro and the dollar and the yen, but we go pretty far out SKU and in terms of the pairs that we trade. It's a very globally diverse FX business where we can kind of be everywhere and try to capture those opportunities. As well as you know, we do stream directly to a whole bunch of people throughout the FX offering. And so that business did well. I mean commodities again continue to struggle. A lot of that has to do with a lack of volatility and activity particularly in the natural gas segment which is – has been a long-term theme. And so that really kind of – that's the mix of the business. I know we don't separately disclose it anymore because we just thought it was too granular but we're – we continue to be very excited about our FX business.

Okay. Thank you very much.

Thank you.

The next question will come from Alex Kramm from UBS. Your line is open.

Yeah. Hey, good morning, everyone. Just – first of all thank you for the additional disclosure on workflow solution analytics. That's helpful. I do have a question on that one now. First of all quarter-over-quarter it actually ticked down. So just wondering if you can give us a little bit more help what kind of variabilities in that business so we know how to model it better. But then related to that I think Doug you made this comment that you already generated $1 million of I guess new sales or annualized revenue in that business. So obviously it's only been a few months, but if you – if I annualize that and look at it against the new disclosure the growth rate is sub-2%. So wondering what kind of your goals are for that business and how quickly you think you can ramp that as you talk to some of those new solutions?

Yeah. Good question. So in the workflow segment remember the Triton EMS asset or business if you will has two components to it. There's obviously a fixed subscription model to it. So we're getting paid by brokerage for connectivity and a lot of times from the buy-side customer they will pay a subscription fee for that technology service. As well, there is a transaction component. So the more the broker-neutral brokers, if you will trade through the EMS product we get paid more. And so when volumes decrease – I know this very well, because before we bought ITG we were paying a lot of money to ITG for this service as well. And so as volumes decrease obviously the transactional component of the Triton EMS business and the ITG Net business and the Algo Wheel business for that matter declined as well. So, that is really just a result of declining volumes quarter-to-quarter. The subscription part did very well. In terms of analytics, yes we provided the disclosure separately. I mean I look at the analytics business Alex, and I'll answer your question. But I look at the analytics business not as a separate business. The reason we disclosed it because there was a lot of concern that we would have this exodus of analytics customers and actually the opposite has been true. People are excited about one the portal the improvements we've made on the back end to the delivery of the analytics product and also the multi-asset class nature now of the analytics products with the Virtu market data being fed into it. And so we've seen a significant interest and uptake there. I think analytics is a great business because it is part of a whole solution. There are a lot of clients that you can actually lead with analytics particularly in Europe where you've got MiFID II and bad debt requirements. And so some of our biggest asset management and pension fund clients in Europe are actually first and foremost analytics customers and so that's why holistically, it's a very important product. From a dollar incentive perspective, it's never going to be a gigantic business right because it's -- based on how that -- those products are priced. And so, the way I look at it is it's a modest single-digit kind of growth business. If it continues to grow somewhere between 3% to 5%, 6%, 7% a quarter I'd be very excited about it in that to me maybe the notion that we closed the deal four or five months ago there was always uproar about Virtu analytics they're going to have I believe clients fleeing and we actually increased was -- is really the story here. So I think we've kind of got past that narrative and we're now on to the narrative of hey we're a great market structure and technology firm maybe we can provide a better solution. Let's see what these guys have." And that's indeed what we're now seeing in the marketplace.

All right. Thank you for that. And then secondly, maybe just coming back to some of the questions around disclosures and opportunity in the marketplace, not sure if this is fair or helpful, but if I look at your payment for order flow disclosures over the last three quarters, they've been kind of in the same kind of $24 million range per quarter. So to me that suggests that you actually getting a decent amount of order flow or at the same kind of level of order flow. So I guess the question is, is it really then just the environment and the dollar volume that Rich asked about has actually been kind of consistent, or are you having to pay up to get an order flow? Because I think sometimes the -- your customers understand is the opportunity set is lower, your payment for order flow should be lower as well and there's some sort of sharing. So I guess maybe just tell me why that metric is trending flat while your net trading revenues is clearly trading down.

Yes. I'm not trying to be nice to you, but that's actually a very good question and very, very insightful. It's the -- one of the issues with that business structure is, it's obviously a great business we love it we've got 200 great long-term relationships but payment for order flow is really price improvement. And the lion's share of our customers and the vast, vast majority of them don't take a rebate. We're really providing price improvement to the order better than the national best bid or best offer at the time that it arrives and that doesn't happen on a daily, weekly or in some cases even monthly manner. And so client, price improvement and market share and whatnot is set by clients sometimes monthly, sometimes quarterly. So you're sort of always a little bit looking in the rearview mirror if you will. So as opportunity declines spread narrow, realized volatility goes down take a month like April which was kind of disastrous in that regard. Even if you're getting the same amount of workflow or even if it goes down somewhat because the retail participation is down the amount of price improvement that you're obligated to pay in order to keep consistent is kind of a fixed number and as well the rebate is indeed a fixed number. And so your gross high if you will decreases and the amount of payments that you're making kind of stays consistent if that makes sense. And so as a result your net is just going to be reduced, right? So it's actually a really, really interesting way to look at it and it's something that actually we should probably focus more on. So thank you for that question Alex.

All right. Thank you.

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

Good morning guys. I wanted to ask about your comments around the OTC impact in market-making. Covering KCG over the years, it used to be important business for them, but then it really dwindled before you bought them. So I'm just wondering like why are you -- what's the impact here, how material is it to the business and how should we think about it going forward.

Well, about 25 guys sitting 200 feet away from me, I think it's pretty important. And we've -- and they've done a great job and we've got very, very significant market share. And in a larger firm obviously Chris, it's less impactful. But within the Market Making segment and certainly within our customer Market Making segment it is still a significant part of what we do. And don't think of this as just some crazy pink and bully name you never heard of. Its inter-listed stocks that are not listed to the United States and so -- like you have Canadian Canada stocks. You have firms like Nestlé that don't have a sponsored Tier one or Tier two ADR program. So this is basic blocking and tackling Market Making for non-listed securities which we do in a hybrid manner with human traders, but also using algorithmic inputs right? So it's a very important and a key part of what we do on the customer Market Making side. As well, it obviously is an important part of what our retail partners expect us to have. It's part of the solution where we provide both OTC and NMS capability. So it's very, very important. And as well, if we're getting a large block of an NMS name it'll go to that desk as well. So those guys are very central to what we are and how we operate. And so when that volume is down 35%, again the impact is going to be pretty dramatic and it may not -- it's going to be more than linear right because you're going to have declining spreads and declining volume. It's not a good situation. So that's why I separately highlighted it. It is still an important part of what we do certainly on the customer side.

And it's also just another benchmark for retail participation, Chris. I mean there's not a lot of them. So we -- I mean it's an important part of the business and it's also something that helps directionally when you look at retail volumes.

Got it. And I mean what -- like what are the top three benchmarks we should be looking at going forward? I mean used -- you guys used to breakdown Market Making between U.S., Asia Pac and Europe. Obviously, now it's just global. You should -- kind of changed the playing field in terms of what metrics we should be looking at over the last I'd say few quarters. So can you give us the top three that we should be focusing on to think about the businesses? Because clearly like -- all the metrics we looked at this quarter were misleading relative to the results.

I mean again, I think, I'd say realized volatility spread is the most important and some indication of retail participation. We use OTC volumes and we use the IBKR volumes. And then...

Represent 2030 -- indication of what's going to happen in that segment.

Exactly, yes. And then global volatility metrics I'd say is after that and then global volume metrics and then volume and volatility in FICC like FX and rates volatility. But I'd say, Chris I think Doug's point about how things are not linear number one and number two when you got -- if you look back over the past two, three, four years you see quarters where realized vol was lower and we did better, but you see retail participation level 25% higher. You see OTC bulleting board volumes 2x what they were here. So I get that it is highly imperfect, but in directionally is there -- they're the right metric to look at.

Thank you. And just last one for me. I mean within the FICC bucket, can you guys -- I mean obviously your total FX is a little bit better, but then some other it's a little bit weaker. I mean what -- like can you size that bucket roughly in terms of what the contributions are from the different asset classes? Because FX for example, you're saying is better in 2Q. But every metric -- like volatility was low in the quarter, cash trading was low in the quarter, futures trading was low in the quarter. So I'm just trying to think about it or frame it. So anything that you guys could give us from a guideline in terms of size of the different business within that line will be helpful. That's it for me.

Yes. If you go back and look at what we - before we merged with the Knight and ITG, we separately have -- we kind of sliced that down a little bit. And so the relative shares there between FX energy metals which are our commodity segment then FX fixed income and options you could kind of see the relative contributions. They haven't changed all that much. I should have commented when Ken Worthington asked me the question before that it also includes options, which includes like our VIX family and single name and big index options. And obviously in a quarter where volatility is fairly muted you're going to see a proportionate negative impact on that part of the business as well Chris. And so that would have been a negative contribution if you will to the proportional revenue in that particular segment. So FICC is broadly speaking everything that is not a global equity. And so relative -- the relative size is not significantly different from when Virtu as a stand-alone company report those buckets differently.

Thanks.

Thank you.

Your next question comes from Dan Fannon from Jefferies. Your line is open.

Thanks. Good morning. So Joe, I just want to talk about expenses and flexibility obviously reduced guidance this year. Can -- if the revenue environment like we saw in 2Q in July persists, I guess can you talk about variability or flexibility you have in that guidance, or any changes we could think about in terms of the baseline you're building for 2020 and the guidance you gave as well in terms of what kind of revenue backdrop you're assuming?

Yes. Sure. I mean look, I think, the reason why we give ranges is part of that flexibility is within the range. So in a persistently low it gives us -- poor environment like this I would expect this to be in the low end of the range. Can we put a range out there? I don't want to guide that we're going to be below the range. But our -- a significant amount of our expense base is compensation and a significant portion of compensation is variable. So we have a great deal of latitude there. Obviously, on the compensation line the communications data processing I think that's pretty much set. There's a plan market data plan in a -- plant that we maintain. As Doug mentioned we're in the process of consolidating that. And then on the overhead side again, we're very aggressive in carrying that down. Of course in a sustained environment like this we would do more. I -- we don't like it. We know our EBITDA margin this quarter, you know, I would expect in a sustained environment like this we would want to get that back to kind of where we were historically I think low environment like in the high-40s or 50%. So that's as good as I think I can do in terms of quantifying that for you.

Okay. And then as a follow-up. $25 million to $50 million of strategic growth opportunities identified, is that a 2020 figure that we should start to see that, or are you seeing that kind of annualized that for the back half of this year? Just trying to get a time period for those numbers.

Yes. It's more 2020 Dan because we're rolling out Triton Valor as I said shortly. That's going to be multi-asset class. It's going to have FX trading capabilities in it for the first time in ITG/Virtu history, right? So we're going to see a significant uptake there where our clients are going to be using FX Algo including Virtu liquidity. TCA portal is now going live and we've got 30-ish or so clients I think in beta on that. So we think they're starting to happen, but they're not going to really kick in until 2020. There's a number of other things we're working on as well.

Got it. Thank you.

Thank you.

Your next question comes from Michael Cyprys from Morgan Stanley. Your line is open.

Good morning. Thanks for taking the question. Just following up a little bit on the FICC side, maybe just diving in more on credit. Just curious what trends you're seeing around credit. How meaningful that is today? How are you thinking about the opportunity set within the credit? And then just maybe an update on some of the initiatives that you guys are thinking about or have in place as more credit trading goes electronic, how you're thinking about capturing that? And I know you had the partnership that you announced with MarketAxess. Perhaps you can update us on that as well. Thanks.

Yes. Yes. Thank you for the question. Yes. I mean, I changed my tune on this a little bit in the last 12 months. A lot of that has to do with getting educated and then candidly merging with Knight Capital. The folks at Knight Capital have this wonderful block trading ETF business that they've run for a number of years. A lot of the flow there is not privately generated with a sales there. But a lot of it is generated from our retail partner broker relationships, RIAs et cetera that when I do a portfolio transition whatever it is and we're there to provide two side of liquidity. Not surprisingly, a lot of that interest is in the fixed income market. And so therefore, we are a market maker in fixed income ETFs in a large way. That led us to that conclusion well there's an underlying instrument. That's a credit instrument. Why can't we be a participant there? So we're live on MarketAxess and trade revenue and all the other electronic venues where one can be a participant there and that has obviously now piqued our interest. If we're going to do that let's -- why can't we do that in a meaningful way? We're a good market makers. Obviously, it's a little bit different in terms of what the risk profile looks like and the hedging profile or whatnot. But I'm a big believer in MarketAxess in Tradeweb and firms like that that have done a great job in terms of electronifying this asset class. There's a lot of key steps. It's not going to be one million names that are going to get traded electronically, but certainly 500 to 1,000 to 2,000 will be. And so we are building up internally our capabilities there. We are a significant -- in my view a significant player there now. It's not -- so there's a lot of runway in that area both here in the U.S. and in Europe. But I think as we do, we've decided to take that DNA that WAP trading capability marry it with the Virtu pricing capability and technology and bring that to Europe and Asia. And so that's happening now as well. So we have a natural synergy there between our customer base our ETF market capability and our technology to be I think a significant participant in the credit market electronically.

Great, thanks for that. And just maybe just as a follow-up. Now with ITG, under your belt, just curious how you see, your competitive set evolving, as you look out, across the industry today, across both of your businesses. And I guess, just with, both of these businesses here, Market Making. And the customer-centric business together, what sort of synergies or competitive advantages, do you think that gives you, in the marketplace, now with both of them. At the...

Yes. Yes. You asked a very good question. Yeah. Just to be very clear, I've never considered I was a competitor of the large bulge bracket firms. I mean, I look at, your firm Morgan Stanley and JPMorgan and Goldman. And all these other great firms that have been around for a long time, they've got a very different value proposition and a very different orientation from Virtu. In fact, we work very collaboratively with all those guys. We consider them customers. And then we're a customer back on the prime side. So it's a very nice symbiotic partnership we have, with the bulge bracket firms. There are obviously firms that are not bulge bracket firms that are either, trying to compete on execution only. Or maybe have some small research. But at the end of the day, really are not significant global banks. And so, those are the firms that we're competing with. I think we've got a unique value proposition that they don't have. We've got global scale. We've got the resources, to invest hundreds of millions of dollars in technology, because we're doing it on our Market Making side. And most importantly, to answer the second part of your question, we have something that none of those firms have, which is our own bespoke natural liquidity. Because we are a market maker, all around the world, and in particular, in U.S. equities where we've got this 7,600 Reg NMS names and a whole bunch of OTC names, that we are market making in any moment in time. And so there has been -- and we call that VCRS or VEQ and the OTC Link little bit. So we've kind of melted that all together, into this very significant offering. We now have dozens of asset managers that are live. And that have access to this. It's purely an opt-in business. And it gives us a real competitive advantage against, candidly any other competitor that doesn't have that. And frankly, there aren't any because our retail competitors, in the wholesale business don't really have this business. So we do -- we think Virtu is extremely well positioned globally, as the destination for executional in technologies that are driven. It’s very transparent with unique liquidity, kind of business that completely virtually integrated with, end-to-end service providers and is truly a global business.

Great, thanks for taking my questions.

Thank you very much.

I have no further questions in queue. I turn the call back over to the presenters for closing remarks.

Okay. Thank you all very much for taking the time and your interest in Virtu. And we look forward to speaking with you, at the end of our third quarter. Thank you very much.

Thank you everyone. This will conclude today's conference call. You may now disconnect.