Virtu Financial, Inc. (VIRT) Q1 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Virtu Financial 2020 First Quarter Results Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Debbie Belevan, SVP of Investor Relations.

Thanks, operator, and good morning, everyone. Thanks for joining us. As you know, our first 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. On today's call, we'll have Mr. Doug Cifu, our Chief Executive Officer; and Mr. Alex Ioffe, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. Please note that our actual results and financial conditions may differ materially from what's indicated in these forward-looking statements. It's important to note that any forward-looking statements made on this call are based upon information presently available to the company, and we do not undertake any or update or revise any forward-looking statements as new information becomes available. We refer you to the disclaimers in our press release and encourage you to review the description of factors contained in our annual report and Form 10-K and other public filings. During today's call, we'll refer to both GAAP and non-GAAP results. 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. Non-GAAP measures should be considered as supplemental to and not as superior to financial measures prepared in accordance with GAAP. You'll find a reconciliation of these non-GAAP measures to the equivalent GAAP term in our earnings materials with an explanation of why we deem this information to be meaningful as well as how management uses these measures. And with that, I would like to turn the call over to Doug.

Thank you, Deborah. Good morning, everyone, and thank you for joining us to review Virtu's first quarter results. We hope that each of you and those you care about are safe and well. Let me start off by extending our sincere appreciation for the bravery and dedication of emergency responders, health care professionals and those who leave their families every day to ensure our safety and maintain essential services. I'd also like to thank everyone at Virtu for their exceptional resilience in these challenging times as well as our customers who are turning to us more than ever and putting their trust in this firm, our people, our technology and our products to manage their risk across asset classes globally. As a firm, Virtu is committed to furthering COVID-19 relief efforts. In conjunction with the Viola Family Foundation, we continue to donate food, PPE and have made financial contributions to over 70 charities and health care facilities in communities where our employees and clients live and work worldwide. We have also pledged to match up to $5 million of employee contributions to pandemic-related relief efforts and families in need. Before discussing our results, I would also like to highlight important aspects of Virtu's internal crisis response, including our responsibilities to ensure the well-being of our employees, to continue providing best-in-class service and to provide stabilizing liquidity to the global capital markets. Starting in mid-January, to prepare for any potential business disruptions, we initiated our global business continuity plan and began a phased rollout. By early March, our offices were on lockdown with approximately 95% of our staff working from home. As a global financial technology firm, we had the networking, security and connectivity capabilities in place to make this happen quickly and maintain business operations while ensuring that each of our 1,000 employees could remain home and safe. Our BCP team is developing plans for bringing limited groups of staff back to offices once we have determined it is safe and our people feel comfortable to do so. Our approach will be methodical and generally more conservative than government-issued guidelines. We have a deep commitment to the health and safety of our people and will not pressure or force folks to commute or return to the office before they feel comfortable. Furthermore, we have made a commitment to our employees that no broad-based layoffs will be initiated this year, and we will continue to offer support as individuals face the implications of this crisis. In short, nothing is more important to me than the safety and well-being of our employees. During this period of extreme volume volatility, our institutional customers continue to rely on our assistance to navigate a uniquely challenging global environment, locate and access liquidity, transfer risk and provide robust performance analysis. Under prolonged market stress, Virtu Systems performed as intended. They are designed and diligently tested to withstand outsized levels of order flow and load. This is critical to client support as well as to ensure the transparent and orderly operation of capital markets worldwide. Given our scale, clients look to Virtu for advice, analysis, liquidity and execution services. Developing client relationships by providing unique content and advice remains a key focus as we work to ensure clients feel connected to us and to their peers more than ever despite working from home. As part of this effort, we are regularly hosting interactive virtual client content sessions we've dubbed Virtu University. Opportunities like these excite me because this is the core of Virtu's partnership ethos. We want to empower clients to gain and retain a competitive advantage through our technology. For us, it's a clear win-win scenario. Virtu, the client and the capital markets all benefit. For our retail customers, we continue to provide superior execution quality, delivering over $365 million of price improvement in the first 4 months of 2020, more than the entire amount provided in all of 2019. The first quarter of 2020 will be defined by the global economic impact of a pandemic with massive intervention to support global economies, precipitating record trading volumes and volatility. All things considered, market infrastructure handled the surge in volumes extremely well with safeguards and circuit breakers functioning as designed. We continue to have an active ongoing dialogue with regulators, exchanges, central banks and government agencies and have been impressed with the fiscal and regulatory responsiveness. Overall, our firm has navigated this crisis from a position of strength, fortifying our leadership position and highlighting our significant role in the global markets. Now I would like to review our Q1 results. Alex and I will keep our comments brief so that we have plenty of time for Q&A. As you can see from our press release and supplement presentation, we delivered exceptionally strong performance amidst the volatile market environment. In Q1, we generated an average of $12.7 million per day or $785 million in total of adjusted net trading income, more than triple Q4 2019. I'm also pleased to report that this strong performance continued into the second quarter, with April's average daily adjusted net trading income up about 8% versus the first quarter, for an adjusted net trading income range of approximately $284 million to $290 million or $13.5 million to $13.8 million per day. This is meaningfully ahead of Q1 results, as illustrated on Slide 4. These results were driven by a number of factors, some of which have a compounding effect on each other. While there are many nuances, the recent market environment is best summarized by looking at changes in volatility, volumes and retail engagement. It is important to consider the impact that volumes and volatility, often an indicator of wider bid/ask spreads, have on our businesses. During the period, we observed a fivefold increase in realized S&P volatility and nearly a 70% increase in U.S. equity volumes over the prior quarter. Retail engagement surged early this April -- early this year and spiked in April, continuing a trend that began in 2019, with the move to 0 commissions. Of course, we saw similar surges in volume volatility in other global markets and asset classes as well, most notably in our commodities business and specifically on our crude and global gold desks globally. In addition, our FX business saw significant growth in the first quarter, leading to quarter-over-quarter FICC results that increased over 200%. While the environment presented increased opportunity, our record-setting results significantly benefited from previous investments in several strategic growth measures as evidenced from our overperformance in the first quarter and our sustained performance into the second quarter. As we have discussed on prior calls, the investments we have made in scaling the KCG quant strategies globally, our global ETF block desk and our options marketing business, among other initiatives, have contributed in prior quarters. When volumes and volatility spike, these strategic initiatives as well as our continuous enhancement in global and asset class expansion contribute to substantial returns by improving our yield on each subsequent opportunity. Our low fixed cost structure drove significant margin expansion as normalized EPS was $2.05, up 659% from $0.27 in Q4. And adjusted EBITDA totaled $570 million, 400% higher than the prior quarter and 32% higher than our adjusted EBITDA for all of fiscal 2019. Our adjusted EBITDA margin was an impressive 74% in the first quarter. As you can see on Slide 5, our Market Making segment delivered record-breaking results in the period, with ANTI soaring more than 335% over the previous quarter. In our Execution Services business, which includes fixed and recurring revenue sources, we recorded an increase in ANTI of 27% over the prior quarter. Though increases in market volumes and turnover benefit both of our businesses, increases in volatility and wider bid-ask spreads compound the opportunity for our Market Making business and drive outsized returns. Because we are a global multi-asset class platform, these results were further pronounced as the recent macro volatility rippled across various asset classes and markets where we operate. Our risk management and market making technology functioned as designed, and we maintained our disciplined focus. We did not take on new or outsized risks as we managed an avalanche of orders and executed record amounts of shares, which on many days exceeded 3 billion and even 4 billion shares per day in U.S. equities. Given the exceptional market volatility in late March, we considered it prudent to opportunistically supplement our short-term broker-dealer borrowing capacity by $450 million to ensure that we're able to meet the liquidity demands of the global markets and provide execution services to our clients. The $300 million facility provided by our founder, Vincent Viola, has not been drawn upon and is set to expire at the end of September. Some aspects of the market may be starting to settle down in recent weeks. However, many drivers remain very strong in Q2 to date. Average U.S. equity volumes in April remained over 80% higher than last April and VIX was over 30%. Growing retail engagement continues as one of the largest drivers of our Market Making results. As has been reported, retail activity is at or near historic highs, and recent disclosures from the major discount brokers indicate this trend is continuing. As I mentioned, in April, we delivered $13.5 million to $13.8 million per day of adjusted net trading income, an 8% increase over our average for Q1. In addition, we have sustained market share growth not just in our U.S. Equities business, but also in virtually every other market globally. We view our performance this quarter as integral to the Virtu value proposition, demonstrating the versatility of our platform and the sustainability of our business model. In calmer markets, we deliver significant margins and profitability by controlling costs and maintaining a high level of service to our clients. Add to this, the outsized returns we realize in extraordinary environments like Q1, and you can appreciate the attractiveness of our earnings model. Those who are familiar with our business understand that our growth is not linear, but rather follows an uneven pattern correlated to market volumes, volatility and customer engagement. Our growth is comprised of a solid but expanding foundation of recurring and consistent high-margin revenues in calm markets with outsized returns during busier times. These outsized gains may obscure the growth of our baseline earnings, but our foundation is driven by organic growth from existing businesses, which include servicing our clients' liquidity and execution needs, plus new strategic initiatives that have increased our baseline over the past year. These initiatives include expanding our presence in new products and markets, driving operating efficiency, optimizing our capabilities and driving client growth. These organic growth initiatives delivered attractive gains in the first quarter, comprising approximately 8% of our ANTI in the quarter as compared to the negligible amount at the end of 2018. Specifically, as we shared on last quarter's call, we are starting to realize the benefits of our investment in our ETF block franchise at the end of 2019. I'm pleased to report that we've seen significant growth in 2020. Our year-to-date average daily P&L has increased over 285%, and we have already realized 27% more P&L in 2020 than we did in all of fiscal year 2019. We also achieved significant results from our introduction of quant-style KCG strategies into new markets and asset classes and there is significant runway in this opportunity as we continue to scale the business. In addition, Virtu Capital Markets, which assists public companies looking to raise primary capital, raised over $500 million of equity capital through at-the-market offerings so far this year as client activity accelerated in the second quarter as issuers looked to access our public equity markets to raise additional capital. Our longer-term strategy of acquiring large financial service firms adjacent to the Virtu core business, streamlining and enhancing them technologically and operationally from the inside, was again validated in the first quarter. Our results are more than just a function of market volumes and volatility. Higher retail engagement remains a key driver of our customer Market Making business, which has benefited from the growing trading volumes fueled now by 0 commissions and, more recently, new as well as seasoned traders working from home and taking advantage of market volatility. As you can see from Slide 5, IBKR shares traded and our Rule 605 volumes reflect this growing trend in Q1. Slide 6 illustrates Virtu's increasing participation in Rule 605 volumes as we have continued to grow our market share by competing on execution and service quality, especially in these exceptional times. It's important to understand that, in addition to the consistent base of recurring profits, our business provides the opportunity to be long volatility and natural hedge to the market, producing outsized returns in times of market disruptions, plus a long-standing track record of returning capital to shareholders. We remain committed to delivering an attractive capital return for our common shareholders. Since our IPO, we have returned 65% of capital, consistently paying a $0.24 dividend for 20 straight quarters. This rate of capital return increases to 69% when including share repurchases. In addition, as we demonstrated in 2018 and 2019, we will be responsible with the net cash we generate by diligently repaying our term debt. In light of the returns this quarter, we plan to prepay $200 million of debt before the end of the second quarter, saving an additional $8 million in interest expense. We will continue to apply our free cash flow to reduce our term debt to lower debt to adjusted EBITDA with an internal management target of 2:1 by the end of 2020. Alex will provide more detail on our revised 2020 expense guidance. But in sum, we remain committed to disciplined expense management as demonstrated by our previous track record related to expenses. However, as a result of the global pandemic and our commitment to our 1,000 employees globally, we have increased our cash compensation this quarter to reflect onetime assistance payments to employees related to COVID-19, higher-than-targeted headcount as a result of our decision to defer any reductions in force in 2020 as well as an increase in our cash comp accrual related to our outstanding ANTI results to date. I am excited about the outlook ahead. The attractive fundamentals to our business continue to persist, and our ability to convert opportunities into results has strengthened as a result of our integration efforts and strategic investments. Since our inception, we have built a highly respected global franchise powered by the best people in the business and our scaled, singular multi-asset technology platform. And now I'll turn it over to Alex, who can provide further details on our financials, before we open the call up for questions. Alex?

Yes. Thank you, Doug. Good morning, everyone. Thank you for joining us in these unusual times. I'll just touch on the financial high points as I know many of you want to get to the Q&A. In the first quarter, GAAP net income was $388 million and a record-setting $400 million of normalized adjusted net income. Also, record adjusted net trading income, which is our trading gains net of direct trading expenses, was $785 million. GAAP basic and diluted earnings per share was $1.80. And removing onetime integration costs and non-cash items, normalized adjusted earnings per share was $2.05 per share - sorry, per share. Turning to Slide 11. We remain committed to maintaining our disciplined focus on expense management and achieving our previously stated operational goals long term. We revised our guidance for occupancy, overhead and cash compensation to reflect an increase solely to cash compensation for the reasons Doug just mentioned, including an increased compensation accrual as a result of our significant outperformance to date. As you would expect, in operations and admin, we had a substantial decrease in travel expenses in the first quarter, and we expect almost no expenses for travel and marketing events for the second quarter. As Doug mentioned, we plan to repay $200 million of our term loan debt during the second quarter, further reducing interest expense by $8 million per year. This is in addition to the $10 million of annual savings that we secured earlier this year when we repriced our term loan. Finally, we declared a customary $0.24 dividend for the quarter, which will be paid on June 15 of this year. Back to Doug.

Great. Thank you, Alex. Before we move to Q&A, I would like to quickly note that despite our outperformance so far this year, our strategic priorities remain unchanged. We will continue to deliver liquidity and value-adding products and services as we adapt to the market's evolving needs. Our already sizable scale affords us the unique ability to continue growing our capability without increasing overhead. The first quarter illustrates that our focus on constant incremental improvement has enabled us to realize stronger results at each opportunity and that our global multi-asset class scale allows us to participate and multiply those opportunities and service more clients wherever they are. As we confront the latest challenges, we remain focused on disciplined risk management, operational excellence and investment in scale technology and infrastructure that is ubiquitous across asset classes and geographies, all contributing factors that help to ensure that Virtu is prepared for whatever comes next. To our employees and our clients, please stay safe. We'll get through this together. And finally, on a personal note, as we announced earlier this week, Joe Molluso will be returning to Virtu. We all are thrilled by this development, and no one more than me. You'll be hearing more from Joe on our next and subsequent investor calls. Operator, we are now ready to begin the Q&A session. Thank you.

[Operator Instructions] The first question today comes from Rich Repetto of Piper Sandler. Please go ahead.

Good morning, Doug. Good morning, Alex. Also, welcome back, Joe. Hopefully, he's listening to the call. Congrats on the outstanding quarter, and thanks on all the disclosures as well. So my first question is on Page 6, Doug. When you look at - and the April disclosures helped tremendously. When you look on Page 6, the Rule 605 shares, looks like April shares are pretty close to March. And it seems like, when we look at IBKR shares, they were down a little bit more, like about 20%. So I just want to get a better picture of retail. It appears that the retail, your -- the overall retail broker base is trading relatively flat with March, if that's - and see if that's the correct view.

Yes. Thanks, Richard. Thanks for the good question. So overall - and there was a good article about that this week that I saw. Retail as a percentage of overall market volumes has increased substantially, and it's probably driven by the two factors I mentioned in my script, the zero commissions. When you can do something for free, I guess people do it more often. And number two, since a vast preponderance of folks are working for home or at home, there's more opportunity to trade during the day. So that has driven retail as a percentage of overall market volumes. And certainly, we have seen an uptick in our market share because of that. But you are correct. The - our market share in April is similar to what it was in March. And we continue to be competitive. So that continues to be a driver of our profitability and our growth. And again, I've often said on these phone calls, market share tends to be overstated and over -- and people focus on it a lot. I mean, we could increase our market share dramatically, but that would make us unprofitable, right? And it is a very competitive market. There are three or four other great wholesalers out there that we compete with every day. And we're competing on execution quality in the form of price improvement, and service, obviously, biggest, we're providing guaranteed execution. We are the market center. And so we try very hard to provide that great customer service, but also do it in a manner that is both attractive to our clients and their end users. I mean I gave you a pretty outstanding amount of price improvement that we provided in the first quarter. It just boggles my mind. That's not reflected in our financial statements at all. That's literally prints that go to the clients and users that they see on their confirms. And we do that in a manner, which is, again, marginally profitable to us on an individual trade. And then overall, given our scope and scale, generates outsized returns.

Great. And one follow-up, Doug. Thanks for the sort of the guidance on what you're going to do with the excess cash you generated as far as paying down debt. So I guess my question would be just on the sort of the cash puts and takes or consumption in the quarter. You set up the revolver, but you didn't draw it down. I know clearing requirements, I believe, jumped up as well. But could you just go through sort of the trends? And has that all a lot, what do you call, declined with still elevated volatility, but not like March?

Yes. Great point. I mean, obviously, when there's increased volatility in the world, all of the clearing houses and prime brokers that we deal with, I mean, we're in 240 different marketplaces and 37 different countries as a market maker, in 50 countries as an institutional broker. So there's different rules and different margins and cross-margining and whatnot. And obviously, we strive very hard to be as efficient as possible, that's the Virtu hallmark, with our capital. But clearly, when there's increased volatility in the marketplace, you see it. You cover ICE and CME. You see when crude prices go negative, obviously, they're going to increase their margins. And so we have to be prepared for that as a firm and allocate our capital accordingly. And so the NSCC here in the United States and CME and ICE and the clearing houses around the world, certainly, we saw elevated margin requirements, and we adjust our trading on the Market Making side and then do our best on the institutional side to deal with that in the most appropriate fashion. We thought it prudent in March to obtain additional liquidity for our broker dealer, including the $300 million from my co-founder Vinnie. Because, frankly, we thought if this continues, there's really going to be more outsized opportunities. And it's easy, one phone call to Vinnie, who obviously understands the opportunity and is willing to do it on an unsecured basis. And so with the no-brainer, fortunately or unfortunately, depending on your perspective, the market calmed down, and the opportunities have subsided somewhat from March. And so we haven't had a need to draw on that, and we have substantial cash in the firm generated from the profits, net trading profits that we generated. So we're in as flush a liquidity provision - position, excuse me, as we ever have been in the 12 years that I started Virtu. But again, it's nice to have that ability to draw on that if we see opportunities around the world, Rich, where we want to allocate our capital. Because, again, it's not just U.S. equities, right? It could be currencies. The gold market has been incredibly attractive. And crude, everybody watches the TV and sees what happens. So that gives us a great opportunity to provide two sided liquidity in those marketplaces and generate some of the outsized returns that you've seen in this quarter and in April.

Got it. [Technical Difficulty] family and the team all stay healthy.

Thank you very much, Rich. I appreciate it. Thank you. Operator, next question? Operator? Debbie, are you on the phone?

The next question comes from Dan Fannon of Jefferies. Please go ahead.

Thank. So you obviously highlighted just printed a record quarter and highlighted a bunch of positives. I guess if you look across your business globally at product level, is there any kind of subsector that didn't perform as well as you would have thought, given the macro backdrop we just went through or as you think about April, anything that has had a meaningful change? We've seen energy, obviously, be a bigger part, I'm sure, given what's gone on with oil. But anything you would point to that's maybe not performing as expected?

Thanks, Dan, for the question. I'm racking my brain to try to give you an honest answer, as I always do. And obviously, I get a daily, weekly, monthly report of how we're performing against budget, and everything was up double if not triple digits in the first quarter. So it's hard for me to point at anything that didn't perform from Asian and European equities. Obviously, the U.S. equities, Canada, Mexico, Brazil, and certainly our FICC business, were all up significantly from the fourth quarter of 2019. So the honest answer is no. I mean, certain asset classes and areas where more exceptional than others, if I would point out one thing. But other than that - and you're right, in April, we saw this unprecedented volatility in - particularly in spot crude, on the CME, which we anticipated. I give a lot of credit to our energy desk down in Austin and the head trader there is just a genius young man. And we were way ahead of the possibility of negative prices and how that would impact our ETF trading and ripple through. And so we were very, very well prepared as a firm and handled it very well. I was very proud of that.

Great. That's helpful. And so just clarifying on the expense pickup. I did see a $75 million number in one of the pages. So if you could break down the three buckets in terms of the increase associated with the categories of what you disclosed.

Yes. I mean, we have revised guidance in the supplemental materials, and I'm trying to find what page it's on. And so we don't give that level of granularity between -- Alex, what page is it on?

It's on Page 20.

Yes, on Page 20. So we typically don't - yes, go ahead. No, please go ahead. Alex, you go.

Okay. So the $75 million you referred to is the incremental bonus accrual that we did on top of the more standard run rate to reflect the outsized performance, in addition to the roughly $2 million that we paid to our employees to assist them with the coronavirus issues.

Right. So of the increased guidance, then you'll see we accrued a lot of it already in the first quarter, and that was really reflecting the larger anticipated headcount because of our commitment to our employees, number one. And two, as Alex just said, to recognize the outperformance.

Got it, okay. Thank you.

Thank you.

The next question comes from Ken Worthington of JPMorgan. Please go ahead.

Hi, good morning. And thank you for taking my questions. I think I'm most interested in where you see COVID-19 possibly leading to more lasting or long-lasting changes to the trading ecosystem that might benefit Virtu even after volatility and volumes return to more normal levels. You have a number of initiatives that seem like they may benefit more sustainably. So I'm curious to hear your thoughts on sort of the longer-lasting benefits?

Yeah. Thanks, Ken. That's a great question. It's interesting. I mean, there was a couple of pieces that I've read about this more of a shift towards off-exchange-style trading and more of a need for block liquidity. And that manifests in a couple of different areas around our firm. And I think that is something that you will see here as a continuing phenomena as people are trying to manage risk over the next year or two and as central banks need to delever and return to some normalcy over -- fill in the blank. I don't know if that's a year, two, three, it could be five years, right? Who knows how long this is going to take and how long these programs that virtually every central bank in the world have put in place. And so that means that in U.S. equities, what we do both in our ATSs and then as a market center, will continue to grow. That especially means and we saw a huge uptick in need on our ETF block desk here in the U.S. and our nascent ETF block desk in Europe and in Asia, for unique, block-size liquidity. It also is manifesting in what we are seeing in -- we're not good at marketing. So we call everything V something else, so VFX, which is direct streaming of FX, VFI, direct streaming of treasuries and fixed income products. So all of those are subsumed within the results you see. But certainly, we have seen a significant uptick in demand for unique and competitive liquidity across asset classes. And I think that is something that will continue to manifest as people try to navigate how do they manage their portfolios and move in and out of them adroitly without impacting a market. I think that's a much more challenging thing to do with the overlay of this unprecedented global crisis we're seeing, but I don't even, God willing, when that begins to abate, there still is the overhang of literally trillions and trillions of dollars that has been and will continue to be placed, that needs to be priced and then ultimately digested throughout the system in every and asset classes that manifests itself. So I think that's where we've really invested in the last couple of years since we made the KCG acquisition and they had that DNA and they had the distribution that we didn't really have at the legacy Virtu firm. And so that was in the back of our heads. Obviously, we never anticipated a global situation like this, but just really expanding the tools that we have in our toolbox to provide two sided liquidity has proven to be very, very keenly important in this new environment.

Great. Thank you. And then maybe on the competitive landscape. We had seen firms that might be considered your peers either shrinking or shutting down in recent years, reacting to maybe the more limited volatility off which to trade. To what extent are you seeing these competitors start to bounce back? Like if a firm was shrinking, I could see them growing pretty quickly. But if they shut down, it would take time. So are you seeing -- how are you seeing the competitive landscape evolve? What does it look like today versus what it looked like the day before volatility really started to spike? And are you seeing new competitors sort of successfully enter the market again?

Yes. I would actually think that right now, particularly given the volatility in the world and answering the question that Rich had posed earlier, with the demands of central counterparties and counterparties on a bilateral basis for more margin and costs, that scale is more than ever a premium. And so firms that are subscale or limited to an asset class are going to continue to, in my view, to be really challenged. And it is very, very difficult to get trading credit, to get capital, to have PBs and FCMs in this marketplace where there's been some well-publicized losses from FCMs and clearing brokers. They're going to be very loath, I would think, to take on new competitors, and they're going to be -- they're going to be looking at their client lists, as every bank and broker is in the world, and we do, right, to cull from that client list, smaller firms that are subscale, undercapitalized and pose outsized risk/reward returns to those clearing brokers. So I think, again, the winners of, as I've said many times on these calls, I think the winners of -- ultimately of this race, if you will, is going to be the large-scaled, multi-asset class, integrated financial institutions that provide market making services, execution services across asset classes and geographies. It's no different than any other business because we take this massive fixed-cost plant that we have built across all these different exchanges, and we're now using it both for -- on an agency and a principal basis. And we're using that same DNA for our workflow products as well, the backbone of Triton and analytics are in process of being ubiquitous with the backbone of what we do in Triton. That type of scale, I think, is going to be paramount for success in an ever-increasing competitive marketplace where you just need that scale to invest and continue to keep improving. I mean, we don't separately break out what our R&D is, right? I mean, obviously, we have a CapEx budget and we expense what we spend, but we spend hundreds of millions of dollars a year, in my view, on technology, both in terms of gear, but also in highly talented engineers that do nothing but try to make us more efficient and able to provide a better service either as a principal or an agent. And that R&D spend is spread across all and current future products that we have, not just equities, but all these other products where we think we can scale our opportunities.

Thank you very much.

Thank you.

The next question comes from Alex Blostein of Goldman Sachs. Please go ahead.

Great, thanks. Good morning, guys. A couple of questions around capital and liquidity for you, just building on some of the prior comments, I guess, you made this morning. So I guess, first, what are your current plans with respect to tapping into credit line provided by Vinnie Viola? So you're obviously paying down $200 million of debt. So should we think that that's really going to be kind of the next layer of UX and liquidity? And then secondly, trading capital increased to $1.6 billion to -- $2 billion from $1.6 billion, sorry, last quarter. Not surprisingly. But curious if you can talk about the average trading capital over the course of Q1?

Yes, yes. Great. So the - just so we don't mix apples and oranges, right? So we're paying down $200 million of our term debt. We had roughly $1.95 billion of term debt that we had incurred for the KCG and the ITG acquisition. The same playbook we followed, excuse me, in 2018 and '19 when we bought KCG in 2017, borrowed a bunch of money, extracted synergies. We were blessed with some good returns in 2018. We used the proceeds from that trading and as well proceeds from the sale of an asset to amortize that debt down to under $1 billion. We re-borrowed to buy ITG, and we're now in the process of doing the same thing, right? So free cash flow after dividends and CapEx goes to amortized debt. And we've always had this internal management target, which we've articulated, of 2:1. And we're darn close to that right now, thanks to this quarter. And if the second quarter continues the way it is, we'll likely be under that, plus we're amortizing. So that's how we run this firm, and we will continue to run this firm. That's -- put that on the sort of permanent capital structure side. The -- just so we're very clear. We entered into the Viola facility and an additional $150 million to our other broker-dealer facility that we have with a syndicate of 7 banks, to provide us access to liquidity for settlement and for margin in case we needed it. Well, the world changed after the Fed intervened in late March and the markets kind of settled down. Volatility went from realized in the 90s down to realized in the 30s and 40s. Still elevated. It's still very attractive to us, but certainly less so than it was in late March. We had no idea at the time when we took those steps whether or not the market was going to continue the way it did. If it did, we thought it would be prudent to have that so that we could take advantage of all of -- a lot of the opportunities we were seeing out there. The ETF markets, in particular, were incredibly dislocated, and those are capital-intensive businesses to put on positions with significant returns. And so I think it highly unlikely, given where we sit today, that we would ever need to draw on the Viola facility. Because at the end of the quarter, as you mentioned, we've had -- we have more trading capital in this firm than we ever have, and we have a boatload of cash on the balance sheet and then access to our regular broker-dealer facilities and the revolver at the parent, which is undrawn right now. So we're sitting in a capital position that is as good as I can ever remember since I started the firm with Vinnie in 2008. And so absent some return of 80, 90 VIX, which is not out of the realm of possibility, I don't see need to tap into that. So we will continue our plan, similar to what we did in '18 and '19, as I said, to amortize term debt and to pay our regular dividend.

Great. Thanks for that. And then my second question is just around, again, kind of staying on the capital topic for a second, I guess given the need for capital in volatile times, can you talk a little bit about how you manage allocating capital between the market maker and the customer business in executing services?

Yes, that's a great question. Great question. So look, I mean, obviously, at the end of the day, I sit and see all the various books and businesses we have. We have regular-way capital allocations that we typically do to our commodities desk or our energy desk, right? That's all done through prime brokers. We know what the margin requirements are going to be from the great prime brokers that we do business with. And then in the U.S. equity segment, which is the only segment we self-clear, we -- and along with other firms, we've obviously reverse engineered what the NSCC's margin, how they calculate margin, right? So we try to stay on top of that. In the institutional business it's a little bit different, right, because you're getting orders in from clients and it can be a little -- and you're not really controlling what orders you're getting and what the margin ultimately is going to be. We have built an NSCC margin calculated for that, some where we receive a parent order. And I think all brokers, if they don't do this, they probably should do this, we can kind of price that order and say, okay. Well, here's a parent order for x $100 million of security based on its volatility. Here's what the NSCC, we think they're going to charge us in terms of a VAR margin. And so therefore, is the commission rate acceptable, does it compensate us for the capital that we're going to apply. If not, we've got risk controls and credit limits with all of our institutional clients. So I'm not afraid, if you will, of applying those risk limits. I mean, no broker, I think, should have unlimited risk limits with respect to clients. And so we manage that intelligently looking at what a particular order is going to cost us and then what the relationship is with the client and what the commission rate is. That's just good business. On top of that, we do have a good relationship with a third-party clearing firm. And so we have a good -- a significant percentage of our institutional business today, Alex, we place with a third-party clearing firm. So they have the -- and obviously, we pay for that, right? So there's the ying and yang of having to pay that broker, right? But again, we're using their balance sheet then for volatility. So I think, going forward, we will continue this hybrid model on the institutional side. We will self-clear some. And we will -- we have 1 relationship now. We'll probably add a second relationship, as other broker-dealers do, to sort of have 2 clearing partners that in times of volatility, and in regular times, we can use the good offices, if you will, of those clearing brokers to partner with us on our institutional business. Market Making will always self-clear because there it's a heck of a lot easier, obviously, to control your own risk and control your own positions, as we've explained. But on the institutional side, I think going to more of a hybrid approach is probably the right answer.

Great. Thanks for all that detail.

Yeah. Thank you very much.

The next question comes from Chris Allen of Compass Point. Please go ahead.

Morning, guys. I just wanted to ask about how the opportunity set has kind of evolved from March through kind of present day. Looks like mid-March to the end, basically, everything was kicking on all cylinders, albeit retail has improved since then. April looks like a combination of very strong retail activity, crude volatility, still a healthy realized volatility in equities. You noted in your prepared remarks that you've seen some tailing off. So maybe you can give us some color on what areas have tailed off. What's remained strong right now in terms of the beginning of May? We can see that on the retail side and thinking as crude tailed off and how do you think about maybe the different market opportunities right here and right now?

Yes. Yes, good question, Chris. So you're spot on. I mean, the last 2 weeks of March were as volatile and active a period certainly as I have -- I mean, I was -- the firm had started during the financial crisis. And obviously, we lived through the 30 exciting minutes of the flash crash, but nothing was like those last two weeks in March, just in terms of the sheer magnitude of the volumes that we were seeing. And this is not just U.S. equities. I mean, it was beginning the day. I mean, I basically was living here at Virtu. So I was seeing, when the Australian market opened to Japan, and then obviously, through the European markets, and also throughout the day, and I think our U.S. equity segment tends to overshadow what we were seeing in FX. And we put in some of the volatility metrics in there. And so certainly, in the second part of March, we saw a significant just unprecedented level of volumes and volatility across all segments. That continued in April and still in levels that certainly compared to all of 2019 and, indeed, large parts of 2018 and all of 2017. We're still significantly elevated, right? So it's -- we're -- I guess, where you stand depends upon where you sit, right? So we're looking at realized volatilities in the 30s and 40s and kind of saying, well, they're depressed. Whereas a year ago, we were looking at single-digit realized volatility, right? So the marketplace is still incredibly volatile, incredibly active, and it's not just obviously a lot of press and a lot of TV was taken up by -- in April around crude. But again, we're seeing this in marketplaces around the world. So certainly, is it as high as the end of March? No. And so the only -- my only point in the comments was that, while we don't have realized volatility of 90, we're still in the 30s and 40s. And it's not just headed in one direction. We've seen spikes up and down in realized volatility as well. So look, I mean, the second quarter started off very well, and realized volatility was up about 228% or so as compared to 2019. FX volatility, which actually I talked about in the last call, was as low as we've ever seen. That's up 30%, right? So all of these proxies globally are significantly elevated as compared to 2019. And I have no reason to believe, given the uncertainty of the world we live in, that we're all facing, that any of that's going to change for the remainder of 2020 and maybe beyond.

And just a follow-up question. You talked about getting to the targeted leverage ratio kind of how you're thinking about things longer term. I'm just wondering how you're thinking -- I mean, obviously, strong results right now the way the flu is continuing. How are you thinking about capital deployment longer term? Are you seeing any opportunities in terms of inorganic growth? Is that opportunity set changed at all in the current environment for the reasons you cited before, in terms of the competitive pressures?

Yes. That's a great question. So obviously, I'm a big believer in you borrow money, you pay it back. In my personal life, I don't have any debt, right? So that's how I kind of look at the firm. And when Vinnie and I started, we said, that was kind of the mantra we always applied. Let's keep -- let's put in cash and keep our debt very, very low. So I'm very much committed, as we did in '18 and '19, to amortize our debt. We're going to pay $200 million back this quarter, parenthetically, every $100 million saves roughly $4 million of interest rates, so there's an income statement effect to doing that. After that, we have bought back stock in the past, essentially to kind of keep up with the stock that we're issuing to employees. So we'll look at that as we go forward. And then with regard to acquisitions, I've always said we want to be very, very strategic about what we do. I think the 2 transactions we undertook, KCG and ITG, were both very, very strategic in that they expanded our opportunity set. Now that we're a big -- a larger, broader firm, a larger, broader financial services firm, I still am of the view that there are things that could be important strategically to us, either an area or an asset class where we are not, but they have to add that scale or complete a product suite, right? So if it's on the institutional side, we have a really nice EMS product. We've got some analytics products. We're trying to make those multi-asset class. We've got an RFQ platform. We have all those products, right? We're making them better. Are there products or services on the institutional side where we could kind of fill in a hole that we don't have or an asset class we don't have, those are the types of things we're going to look at. In terms of how has the marketplace for M&A changed, I would think it's incredibly difficult right now, given the fact that the world is remote, to contemplate a transaction. I'm a big believer, when we make acquisitions, that I like to go to the target and do kind of my own due diligence by walking around and digging into things. And obviously, that's impossible right now. So I don't know how you get a feel for a company. So I think M&A is going to be very, very tempered just purely due to the logistics. And then obviously, sellers -- we're not the only firm, I'm sure, financial services firm that probably had a nice quarter and are continuing. So people's expectations will probably be elevated. And that's typically, as a former M&A lawyer, I can tell you that's typically not a good thing for acquisitions. So look, I'm very comfortable where we are, Chris. We have all types of organic initiatives going on. We've got a lot of systems still from the ITG transaction that we need to decommission and a lot of work to do. So that's really what I'm internally focused on. We listen to people. We continue to get phone calls from things like that. And it is a part of our longer-term focus. But right now, when we can get organic contribution of 8% in a quarter like this, that's pretty cool. That's pretty cool. So that's what we're going to continue to focus on for the remainder of 2020, just getting a lot more efficient, a lot scaled. Because, as I've said a couple of times when I answer the questions, I don't see this market and these conditions changing significantly for the near future because there's just so much uncertainty in the world and so much risk that needs to be priced.

Thanks.

Thank you.

[Operator Instructions] The next question comes from Kaimon Chung of Evercore. Please go ahead.

Hi. Thanks for taking my question. I saw the revised operating guidance for this year on the onetime COVID-related assistance payments and deferral of any headcount-reduction decisions. I'm just wondering how you're thinking about the expenses going into next year and whether you have maybe [ph] guidance on that?

Yes. Thanks. Good question. So look, I mean, if you put aside cash compensation, and you look at the other areas of running this firm, I mean we have been very, very disciplined about -- and we've met all of our synergy targets, and we will continue to meet those. So the guidance for '20, what you see right there, is consistent with what we had put out before ex our employees. And I see no reason why that would change in 2021 and beyond as long as I'm running this firm, and I intend to run it for a long time. So that is just how we will always run this firm. With regard to cash compensation, I've articulated the reasons why I'm a big believer in our people. I'm a big believer that you don't put people before profits. I think the 2 of them work hand in hand. And so this is a situation where this firm can and is doing important things for 1,000 people and all of their families and then the greater communities. And so we will be very focused on that in 2020. Assuming the world returns to normalcy, then we'll obviously address that in '21 and '22 and beyond. But for right now, we're doing what we think is the right thing. And certainly, in my conversations with Vinnie and the Board, I have everybody's buy-in and support for that, because this firm can and will continue to be an important part of a lot of people's lives internally and externally, and that's why we elevated our guidance for that.

Thank you. And then just one quick follow-up. I wanted to get maybe an update on MEMEX. I saw they got the green light from the SEC. Is there any change there given the environment and just given the consolidation in discount brokerage in this [ph]

No. I mean -- I think, look, I mean, again, I'm not speaking for MEMEX. I always get in trouble when I speak for MEMEX because people comment I don't speak for MEMEX. So I'm just a board member and an investor, but I couldn't be more excited about it, right? I mean, Jonathan Kellner is an awesome CEO, great management team. I think they're going to, when they launch in September, as they've announced, and then we've got SEC approval, I think the determinism and the efficiency and the transparency and the simpleness of that exchange is really what I envisioned when we helped put this syndicate together. The fact that we got Goldman Sachs and Jane Street and JPMorgan and Wells Fargo now to come in as well, it just -- to me, it's just complete validation of why we wanted to start this. I've lost track of how many banks, brokers and market makers we have, I think it's 10, 11 or 12, but it literally is a who's who -- excuse me, of American capitalism and American financial markets. So if there's not a better indication that people are excited about this initiative and that it's going to work than that, I don't know what else we could demonstrate right now. So I couldn't be more excited to be part of it and continue to support Jonathan and the great management team over there.

Thank you.

The next question comes from Michael Cyprys of Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking questions. Just wanted to circle back on the capital markets business. Saw you had some ATM offerings in the quarter. I was just hoping you could talk a little bit more about that, the initiatives that you're putting in place. And what sort of aspirations do you have there? How meaningful could this be to Virtu over the next couple of years?

Yes, yes. I mean, timing is everything in life, as they say, right? So as I said on a couple of calls ago, I didn't really even know what an ATM business was, didn't know it existed. I mean obviously, I used to be a corporate lawyer, so I get it. When I met the guys that had really were the godfathers of this business, if you will, I was just blown away by their passion, intensity and how strategically that fit into Virtu and how we could offer that as a solution to our clients. What do I mean? Well, we've got great order routing capability and really understand capital markets. And more importantly, we have unique liquidity, right? We've got unique liquidity within the firm that we could offer not only our institutional clients, but now corporate clients that want to sell securities. So timing is everything. The guys got ramped up at the end of 2019 and in the first quarter. And then in April of 2020, they really just rolled it out in earnest. And there's great need out there right now from a capital markets perspective. And a good chunk of what they do is unique liquidity, where effectively we're able to internalize, if you will, a corporate against either internal flow that we're getting on the market making side from our retail clients or other institutional clients. So effectively, we're able to satisfy those needs internally. And then also, obviously, we're good at routing it out. So we did this with virtually no incremental cost. It's an example of our scale. All of the accoutrements were there. It complements our existing clients and our existing capabilities. We think we can grow it up to Canada as well, where we've got a fantastic franchise thanks to the ITG acquisition, we can do very easily MJDS cross-border offerings down into the United States. And so very excited to grow this business. We've got a bunch of programs in place and a couple of guys running that business that are just world-class and hungry to grow it. So a great example of how we can grow businesses organically here with literally 0 or very little incremental investment.

Great. And just as a follow-up question, maybe just on the quant-style strategies that you have brought in from KCG. If you could just talk about some of the initiatives there. What's been done so far? And what sort of next on your to-do list in terms of rolling that out more broadly?

Yes. That's a great question. So I've talked about this on other calls. When we acquired KCG, we opened up the cupboard, right? Obviously, we knew about this U.S. customer base retail business. But boy, they had built a great infrastructure for rolling out more quant-style strategies that had application outside of only U.S. equities. And for reasons that are important, that really hadn't been physicalized upon, if you will, in the KCG environment. Well, Virtu has got technology. And if there's something we're very good at, it's physicalizing, getting things done, right? And so we took the great team that they had there, paired them with Virtu-style technologists and Virtu market makers and said, okay. let's see if what we're doing in the United States works in Canada, works in Asia, works in Europe, works across other asset classes. And so that's not without a lot of hard work, a lot of testing, a lot of having a great simulation environment and some really, really smart people, paired with people that really understood the nuances of each of the market structures and each of the marketplaces in where we were rolling those out. So when you are a market maker in Japanese equities already and you have connectivity to the Japanese equities market, it is easier -- still, it's a lot of hard work -- to take that style of trading and then roll that out in Japanese equities, for example. And then in Australia, and then in Europe, and you kind of get the rest and in Brazil. So I'm always asked like what inning is that in and or where are we at in that. So I'll use the baseball analogy. It feels like we're in like the second, third or fourth inning with that. The guys have a whole road map as to where that could go. We're just starting really to touch it in other asset classes, in FX, in fixed income, for example, where we're trying to quantize, if you will, more of that. And we've had some really, really good positive early results. And again, it's really - this is not like we're running a hedge fund. This is Virtu-style market making, just being a little bit smarter where we place our bids and our offers. So I'm really excited about that.

Great. Thank you.

Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Cifu for any closing remarks.

Well, thank you, everyone, for your particular - particularly, excuse me, in this time of unbelievable stress, for taking a good hour-plus, for your interest in Virtu. I wish everybody continued safety, continued health and continued cooperation as we try to get through this crisis. We will talk to you sometime in late July or early August. Thank you, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.