Virtu Financial, Inc. (VIRT) Q3 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Virtu Financial 2020 Third Quarter Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Debbie Belevan. Please go ahead.

Thank you, operator, and good morning, everyone, and thanks for joining us. Our third quarter results were released this morning and are available on our website. On this morning's call we have Mr. Douglas Cifu, our Chief Executive Officer; Mr. Joe Molluso, our Co-President and Co-Chief Operating Officer; and Sean Galvin, our Chief Financial Officer. They will begin with some prepared remarks and then take your questions. But first a few reminders. 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. Please note that our actual results and financial condition 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 on information presently available to the Company and we do not take -- undertake or update any revised 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 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 a supplement to and not as superior to financial measures prepared in accordance with GAAP. We direct listeners to consult the Investor portion of our website where you'll find supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP term in the 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'd like to turn the call over to Doug.

Thank you, Debbie. Good morning, everyone, and thanks for joining us to review our third quarter results. While we get started, I'd like to welcome Sean Galvin back to the firm as our new Chief Financial Officer. Sean previously served as the Chief Accounting Officer of KCG back when we acquired that firm and he knows our business quite well. Sean is a unique talent and we're delighted to welcome him back to the Virtu family. I'll begin today's discussion by touching upon the highlights for the quarter, and then Joe and Sean will provide more color on our detailed results and outlook. We'll keep our comments brief so we have plenty of time for Q&A. As we look at our performance year-to-date, we've navigated the crisis well, not only delivering record results for our shareholders, but also providing over $959 million in price improvement to retail investors. We continue to serve as a key component to the financial markets providing valuable services to our clients to help them access global markets, locate liquidity, transfer risk, raise capital and analyze performance. Our performance this quarter reflects the combination of our successful efforts to increase our ability to monetize trading opportunities and highlight the enhancements made in many aspects of our business. We continue to find ourselves at the center of an incredibly efficient and robust trading environment, though obviously more subdued as compared to the frenzied first half of the year. We delivered solid results in Q3 including adjusted EPS of $0.81, total adjusted net trading income of $362 million or $5.7 million per day, adjusted EBITDA of $249 million and an adjusted EBITDA margin of 68.7%. Year-to-date, we have generated $1.8 billion of adjusted net trading income or $9.6 million per day and $4.58 of adjusted EPS, a record of performance for Virtu. The underlying fundamentals of our business model remain strong and the outlook for revenue growth and margin expansion from our strategic organic growth initiatives continues to be positive. In the fourth quarter to-date, we have achieved an average daily net trading level consistent with that of the third quarter. The elevated level of retail trading activities continues benefiting our customer market making business as we maintain our strong market share in 605 volumes in Q3. Our non-customer-facing market making business outperformed market indicators, particularly in equities, options and commodities. We continue to see great progress in our strategic growth initiatives, which have contributed 8% of adjusted net trading income year-to-date and 9% this quarter. Through the first three quarters of 2020, these organic growth initiatives contributed over $137 million of adjusted net trading income or $727,000 per day demonstrating our ability to grow as a firm. We have progressed our options growth initiative -- initiatives by enhancing our infrastructure and expanding our symbol coverage. These efforts have grown our average daily adjusted net trading income by 374% this year, albeit from a modest base as compared to all of 2019. As we continue to build out our footprint in options, we're focusing on improving our pricing and symbol coverage to create a scalable framework that we can replicate to more venues and symbols over the coming quarters. Expansion of our customer-facing ETF block desk has resulted in a 160% increase in average daily adjusted net trading income in the first nine months of 2020 versus all of 2019. Our fixed income ETF trading provides us with significant opportunities to grow as a corporate credit market maker. In our Execution Services business we've had a number of important product launches, platform enhancements and milestones as we announced throughout the quarter, which demonstrates our dedication to investing in and growing our client business through optimizing our liquidity sourcing, transparent Algos, workflow and trade analytics and data solutions. Heading into 2021, Virtu is very well positioned financially. Given the extraordinary results in 2020 and our multi-year outlook, we are poised to continue to accelerate significant equity value creation for our shareholders. To that end, we are pleased to announce that our Board of Directors has authorized a $100 million share repurchase in line with our long-term commitment of returning capital to shareholders. With our excess cash generated this year, we have substantially de-levered the balance sheet bringing our leverage ratio to 1.2 times trailing 12-month adjusted EBITDA. We are comfortable that going forward we will be able to pay our $0.24 quarterly dividend to our investors and devote a substantial portion of any excess returns directly to shareholders in the form of incremental share repurchases. As Joe will discuss shortly, our revised expense guidance reflects our significant progress integrating our acquisitions thus far and the soon to be fully realized synergies in a post-COVID normalized operating environment, further lowering our cost base. Coupled with our consistent dividend and demonstrated higher earnings capacity, we believe Virtu is a compelling investment in all market cycles. Before I turn the call over to Joe, I'd like to address our practice of providing monthly preliminary adjusted net trading income estimates which began earlier this year to see if providing more frequent updates would reduce overall volatility in our shares. However, experience has been that monthly reporting is not aligned with the long-term perspective from which our business should be measured. We remain committed to robust disclosure and transparency around our results and we'll be providing quarterly reports and commentary on earnings calls. And now Joe will take you through our revised expense guidance and outlook. Joe?

Thank you, Doug. So our business benefits from both episodic and sustained increases of market volumes and volatility however, it is our disciplined focus on expenses and capital management that enables us to return healthy margins in the quieter times and exceptional margins and returns when conditions are more favorable. So if you turn to Slide 7 in our quarterly supplement, we wanted to highlight how we think about the value proposition of Virtu as we head into 2021 and beyond. The underpinnings of this outlook for 2021 are our out-sized performance in 2020. In 2020 in particular, we have already repaid $288 million of debt. In addition, we have announced a $100 million share buyback authorization. Further, we are providing specific operating guidance on expenses for 2021. As you can see, we're anticipating adjusted cash operating expenses of $545 million to $575 million and total operating expenses of $605 million to $645 million. This run rate reflects the substantial progress we have made in completing the integration of our acquisitions. To put this into perspective, the total annual adjusted operating expense for Virtu, KCG and ITG combined was roughly $1.1 billion, prior to our acquisition of each company. Comparing this to our 2021 guidance, you can see that we will ultimately realize roughly $480 million in total operating expense synergies, which is 25% higher than our original synergy estimates. Keep in mind, this has been accomplished while growing our business and expanding global client relationships. We've also been prudent with our excess cash flows this year. Our long-term debt is $1.6 billion, a level we feel comfortable with in any market environment. This comfort allows us to shift our focus on returning capital to shareholders and plan to dedicate any excess cash going forward to share repurchases, which we think suits our business model. Of course, this is in addition to our existing $0.96 dividend. Given our demonstrated ability to generate meaningful adjusted net trading income and cash flows across various environments as well as our planned operating expense guidance for 2021, we would look to always target at least $2 of adjusted EPS to be a baseline earnings going forward in any environment. In addition to our regular dividend we plan to dedicate excess cash flow to our shareholders in the form of share repurchases. In the earning supplement on Slide 9, you can see we've provided an illustration of estimated free cash flow available for repurchases assuming various levels of adjusted net trading income per day and our 2021 adjusted operating expense guidance. To be clear, we expect Virtu revenues to remain evolved however, as you can see, over any multi-year sample period without the noise from integrating the recent acquisitions and with current levels of our debt, we expect to be able to generate significant cash flows, which can now be dedicated to returning cash to shareholders in the form of share repurchases. As previously announced, our Board of Directors has authorized a $100 million share repurchase. Now I'd like to turn the call over to Sean, who will provide further details on our segment performance before we open up the call to Q&A.

Thanks, Joe. And thank you, Doug for the warm introduction. It is really good to be back in the team. During the third quarter, our GAAP net income was $200 million and normalized adjusted net income was $161 million. Basic and diluted GAAP EPS was $0.92 and normalized adjusted EPS was $0.81 roughly four times higher than the year-ago quarter. Income before income taxes of $252.5 million included a $56.2 million gain net of related transaction fees from the sale of MATCHNow to Cboe Global Markets. As Doug mentioned, volume and volatility have settled down compared to the first half of the year but remained well above 2019 levels and our results reflect this. During the third quarter adjusted net trading income, which represents our trading gains net of direct trading expenses totaled $362 million or $5.7 million per day, which is 45% higher than the third quarter of 2019. Market making adjusted net trading income was $257 million or $4.02 million per day, 82% higher than the year-ago quarter. Execution services adjusted net trading income was $105 million or $1.64 million per day, a 3% decline year-over-year due in part to the sale of MATCHNow. Turning to expenses. Our third quarter results reflected decrease in discretionary compensation accruals as compared to the first half of 2020. Year-to-date, our cash and overall compensation ratios were 15.4% and 17.5% of adjusted net trading income, respectively, which are in line with prior guidance. We expect our full year 2020 compensation ratios consistent with these levels and also expect our non-compensation operating expense run rate to remain around third quarter levels for the remainder of the year. Adjusted EBITDA came in at $249 million, 139% higher than the third quarter of 2019. Continue to successfully leverage our efficient cost structure and delivered an EBITDA margin of 68.7% in the third quarter. As Joe mentioned, we have been diligent in paying down our debt making $388 million in prepayments since the ITG acquisition in 2019 and have reduced our debt to $1.67 billion. Finance interest expense has decreased by $24 million to $68 million year-to-date compared to $92 million for the same period in 2019. At quarter-end, we are at $567.7 million of cash and cash equivalents. We remain committed to our $0.24 quarterly dividend, which we have consistently paid over 22 quarters in every environment since our IPO. Over this time, our cumulative payout ratio has been 55% including buybacks and our just announced $100 million share buyback authorization further demonstrates our continued commitment to return capital to shareholders. Now I will turn the call back over to Doug for closing remarks.

Thank you, Sean, very much for that wonderful review and now we will open the call up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Rich Repetto with Piper Sandler. Please go ahead.

Yes, good morning, Doug, and Joe and Sean. So my first question would be on this -- on your target of $2-plus of normalized adjusted EPS. I'm just trying to see how we should -- the consensus for 2021 is a little bit higher now. Is this -- how to view this $2 target, is it a floor and does it back into sort of what you view as normalized NTI, if you look at the wonderful chart on Slide 9, it would say...

Yes.

Somewhere around $5 million NTI per day.

Yes. Rich, it's Joe. Look I think at least $2, it's a target. We chose the levels on Page 9, if you look at where the combined ITG, KCG and Virtu would have come out over the past five years, so that's why we started with $5 million there, $5 million a day and you can see that produces $2.15 and we're comfortable with that. So look, $2 is the round number target that we're comfortable with but I'm glad you like Slide 9 because we chose those numbers. We chose the lowest number there based on historical data, which would -- if you owned ITG, KCG and Virtu on the first day of five years ago, we're pretty comfortable that that's where it would come out.

Yes, I think, Rich, the bigger point we're trying to make is, we made these large acquisitions. They were difficult, they were significantly larger than the legacy Virtu firm, there was an enormous amount of wood to chop both on an operational basis, on a technical basis and just getting it right even from a footprint perspective and then obviously a lot of work to do on the balance sheet. We borrowed and repaid billions of dollars and now we're at the point where we have a normalized footprint going forward, we have an operating expense base that frankly is incredibly compelling given the legacy companies that we acquired and the amount of expense that we've extracted. And this company has always, always since we started in 2008, Vinnie and myself, been a cash machine and will continue to be a cash machine and we provided these illustrations of well, if you look at historically where our adjusted net trading income has come in, what it generates in terms of EPS in this very clear expense guidance and then a very clear direction from my Board and from this management team that excess cash has always been and will continue to be returned to shareholders in the form of our dividend and now in the form of incremental buyback. And we think that's an attractive story over the next few years, which is how we look at the firm.

Okay, very helpful. Thanks, Doug and Joe. The follow-up question would be on expenses. And I know this is unusual, quarterly expenses in the quarter were a little bit unusual because it looks like the compensation, you were trying to sort of level out the compensation for the year, but if you take that $130 million in comp and you annualize that, you are still well below -- you're well below the guidance range for next year. And even if you use and I sort of missed the comp ratio guide, but used 15%, you'd still be well below. If you would have had a rather than the 9%, a 15% comp expense ratio in the quarter you'd still be well below. So I'm just trying to understand the guidance for next year. Is there anymore synergies to come out compared to the run rate of this quarter?

Yes Rich, it's Joe. I'll take a shot at that. The guidance for 2021 does reflect additional synergies, both in compensation and communications and data processing and option, right. So it does reflect further synergies and I think that's the point. When I went through in the script that when you compare this to the synergy targets we were -- we're exceeding those and I think next year is the year where we would sort of stop counting the synergies because we would say okay, the firms are substantially fully integrated. But yes, it does reflect further synergies. I think we've made clear on prior calls that this year we paused some things in terms of the synergies given the coronavirus situation but yes, the FY 2021 guidance in there does include further synergies.

But I guess, the question is, if you take the $130 million this quarter, annualized you get $520 million and again it was a low comp ratio. But I'm just trying to make the jump to the expense guidance for next year being in the $620 million range around the midpoint.

You answered it when you asked the question, Rich. The comp accrual is obviously much lower this quarter given where we -- given what happened in the first two quarters of the year. In the first two quarters of the year we accrue to a ratio pretty much and in the last two quarters of the year we generally accrue from a bottoms up as we go through our comp cycle. So the difference there as you can see in our cash comp ratio this year -- this quarter is 10.4%. Total comp ratio is 9%. I think that's the lowest we've ever done. Year-to-date, we're at 15.4% and 17.5%. I think on the last call, I mentioned that we would end up in the mid-teens on a quarterly -- on an annual basis this year for cash comp and so that's kind of where we're headed. But the answer to your question is, it is in a lower third quarter compensation accrual.

Got it. Got it.

I wouldn't annualize the third quarter number. Now I understand what you're asking. No.

Understood. Thank you. Thanks.

Thank you, Rich.

The next question comes from Ken Worthington with J.P. Morgan. Please go ahead.

Hi, good morning. Thank you for taking my questions. Maybe bigger picture, I believe your retail business works with more than a 100 brokers and I know we focus on the bigger ones, the trend over the last year has been the migration to zero commissions. So the question is, how many of the 100 or so brokers that you deal with have gone to zero, and do you get the sense that more are willing to migrate in this direction to the benefit of traded volumes for Virtu? Or is this trend really all played out at this point?

Yes, it's a great question and thanks for asking. I think if you look at the universe of firms that we receive wholesale 605-eligible order flow, really sort of dividing into kind of two buckets, if you will and there is the, what I'll call the, for lack of a better word, the discount -- old discount brokerage model. And clearly you're right, the what was E-Trade now merged into Morgan Stanley, etcetera, they have all gone to the zero commissions model. There's about a dozen or so of those, the Robinhoods, the TradeStations, great clients of ours. And then there is a whole range of, what I'll call, more kind of full service wealth management style firms, Kenneth, is probably the way to describe it. And their commission rates are probably all over the map, and some of it may be blended with asset advisory fees and whatnot, etcetera, etcetera. You know very well because J.P. Morgan would be one of those. And so there is literally hundreds of those globally that we deal with. It's not just U.S. based firms, it's firms in Canada and Europe and in Asia that have U.S.-bound retail eligible flow that we have relationships with and so looking at both of those buckets, it's sort divided that way. So again, we're agnostic as to the form of the client that sends it. Obviously we look at the flow and measure its toxicity and its attractiveness and then we can determine what level of price improvement we provide it and whatnot. So it's a very nuanced business on a customer-by-customer basis, and we're always looking for that next new entrant, that new wealth manager over in Europe that may not have a relationship. It's really a service business we're in as much as a price improvement business.

Got it. So has -- is it -- is there more benefits still to come from zero commissions as -- do you think these other firms are going to migrate lower and lower either in the U.S. or globally?

Yes.

Does that benefit you or has it really just played out?

I don't think it played out. I think the theme of price compression and everything in the financial services market is -- we're not -- the game is not over, right. So if you have a full service broker that is still charging you, heaven forbid, $300 a trade or something like that I think that's going the way of the dodo bird. But again, I think those firms -- and again this is not my business model, you know this better than I do, if they're trying to sell a full range of services, if you will, to their investors, which is very different than the approach that some maybe more online firms take. So I think overall, it's going to continue to be price compression. I think that is a very significant tailwind for us. I think those firms will be more and more dependent on the expertise and the service of a firm like a Virtu and our competitors to provide the necessary best execution, order routing and, in the case of Virtu and our competitors, meaningful price execution and therefore value to their customers. You are really seeing that effectively that function of maintaining best execution, guaranteeing price improvement, in fact, has essentially been outsourced to Virtu and a handful of other firms that are very, very capable of doing that whereas the online brokerage community and the wealth managers obviously are performing a very different function. So as you see the pie kind of shrinking on that side, they're going to be forced to not invest in the spend millions and millions of dollars that we do to be connected to now the 15 National Securities exchanges and the 16 or so Options Exchanges in the United States and the rest. So I think that trend is a positive for a firm like ours.

Great. And then maybe just for Joe. Joe, now that we are in the more normalized trading environment, can you talk about how you've positioned Virtu to more efficiently get capital when you need it? You secured a pretty expensive line during the peak of the crisis, the balance sheet's in great shape right now but you're making it more efficient, we've got the buyback announced. Can you talk about your ability to more efficiently borrow if the opportunity arises again where market volatility is up, activity is up, your participation is up and you want to drive more business?

Yes, look, I think we've done a number of things. First of all, I'd say on Slide 9, the target range available for share repurchases accounts for not only adequate capital but a cushion, all right. So we feel like in our cash and capital management going forward, we've adequately allowed for -- not just adequate but cushion, so that we can take advantage of opportunities where needed. The expensive line you referred to is gone, right. We don't have that anymore, we don't need it. We have substantial borrowing capability and with our settlement bank on a self-clearing basis and access to the balance sheet of great institutions like J.P. Morgan through prime brokerage relationships, we've -- importantly, we've consolidated all of the legacy broker dealers, which I think is kind of one of the most important things. We entered this year, we hadn't done that and that work -- that hard work has been done. So we feel very, very good about where we are from not only a day-to-day standpoint but should we be in a position to take advantage of opportunities or need more capital, we have it. Just in the past several days with some of the volatility post-election, we've been more than fine in terms of capital.

Okay, great. Thank you very much.

Thanks.

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

Good morning. Great. Thanks for the question. I wanted to touch on some of this organic growth. Some of these organic growth initiatives you guys highlighted on Slide 6. Maybe help me understand the trends this year and I understand that might be a little difficult to completely kind of separate the two, but obviously we had incredibly kind of robust trading backdrop in the first part of the year. I'm assuming that kind of boosted some of these revenue initiatives, the organic growth initiatives. If you were to kind of think about what these would have been without the boost in volumes and volatility we saw in the kind of early part of the year, I don't know if third quarter number the way, if you guys could provide that might be a better run rate and then more importantly, how should we think about building on these organic growth initiatives into '21? So I don't know if it's a Q3 annualized and off of that level maybe is the way to frame it?

Yes, I think that's a very, very fair way to look at it. I mean I think as with many things you have to slice and dice the various initiatives. So like in this environment had we not invested in re-calibrating, if you will, our Options infrastructure and taken that initiative starting in 2018, we likely would have had -- you wouldn't have seen -- we wouldn't have been able to capitalize on any of the opportunities this year in 2020, Alex. So I think that's one thing. As well on the ETF desk, we've made significant advancements and beefed up that desk but certainly the marketplace dislocation, particularly in the fixed income arena in the first and parts of the second quarter were very, very significant and obviously the same thing with the KCG strategies. So yes, it probably would be an interesting way to look at what this looks like in a quite -- a more normalized environment to look at what we did in Q3 and maybe annualize that number. So it's -- I think that's probably the right way to approach it. It is always hard in our business to kind of separate out the options from the data, if you will, but I think the bigger point here is, we are very capable of continuing to grow this firm and these are marketplaces where the total addressable market is very, very significant, right. I mean, you obviously know what the options world is like here and around the world and the same thing with block ETF trading. So these present really significant opportunities for us to continue to grow the firm.

Got it. And so, what is the number in Q3?

Joe, you have the number?

Yes. We could give it, yes, sure. We have that number at 9% in Q3 of our adjusted net trading income.

Right. So just do the math. $362 million...

Got it.

9% of $362 million is.

Okay, got it, thanks. That's good to know. We can probably do that. The other question I had for you guys back to Rich's question around the $2 earnings number as kind of the floor. So clearly you have the benefit of history of these companies combined on a pro forma basis to kind of run the analysis much longer kind of term that we can, but since the ITG deal closed clearly, you guys were at around $4 million for the majority per day in trading income, for the majority of 2019 and obviously, they've got a pretty big boost this year given everything that happened. So in the event that you guys do slip below $5 million per day on a, call it, an annual average basis, is the takeaway from the conversation should be like look there is enough things on the expense front, you still are willing to do to get you to the $2 number in EPS?

Yes.

Is that the fair point?

Yes, I think you've articulated it very well. Obviously there is a lever around incentive compensation, which is pretty significant, right. And we accrue, as Joe said, to a percentage and into a number later. In the year, you've seen the ebbs and flows of our comp accrual this year. So certainly I don't like to think of a number of less than $5 million per day. But you're right, 2019 was kind of an extraordinary year in terms of just lack of market opportunity, in terms of volumes and volatility. So again, I would like to stay away from trying to prognosticate around what marketplaces will look like and I'm a very optimistic guy as you know. And going back, as Joe mentioned in his remarks, to our 2015 -- from 2015 IPO forward, more of the quarters and certainly more of the years that not have been above $2 if you pro forma this expense base. That's kind of the point we're trying to make, which is we've done -- it's not really pretty when you make the sausage I've been told, not that I've ever made sausage, I've eaten a lot in my life and I really like when the sausage comes out, right. So we've been making sausage for the last three years and now we've got this beautiful kolbassa that we're all going to enjoy for the next numbers of years.

I'd add one thing to that as well is that the premise of the question is that in any one year, right. The point that we're trying to make on the dedication of excess cash flows, just share buybacks is that we can continually reset that bar higher, right. In any year if you look at the outcomes over the past five years, and as Doug said, use this cost base and then take the net trading income of the firms together, you get a year where there's a trough but you also get a year like this and you get some other years that we're well above $5 million. And if we're going to be able to take the substantial cash flows in any one year buyback stock in any kind of two, three, four, five year period, that's going to add up when you look at those numbers on Slide 9 and you're going to be able to reset that bar so that even if you are in a trough year, hopefully you're above $2 at that point.

Yes.

Great. Thanks very much.

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

Thanks, good morning. So wanted to talk about the retail and these elevated levels of engagement that's been happening and if you think about the profitability of that order flow and how that's changed or have there been any changes in some of the requirements of price improvement that you have to provide or want to just discuss the kind of competitive backdrop there and maybe how the economics are shifting as a result?

Yes, it's a great question. And obviously, Dan, we monitor it. It's not hourly but for sure daily, weekly and monthly. And I've discussed this before on prior calls with regard to the vast preponderance of the benefit, if you will, and the clinical payment we're providing is in the form of price improvement. And every counter party broker we deal with direct order flow to us or to the competitors, the Citadels and Susquehannas of the world based on price improvement. That's the first and the most important thing. And so obviously, think of that is kind of cost of goods sold and there's a little bit of a game theory right between us and our competitors as to the more price improvement i.e., the more we pay, put that in quotes, for the order improving off of the national best bid or best offer than the more order flow we're going to get. However, not all flow is the same by broker and certainly even by symbol and by time of year and etcetera, and clients of the brokers kind of move around and around. So we're always constantly measuring the various toxicities, if you will, the sharpness of the flow. Not all retail flow, put that in quotes, is retail. Some of it is professional trading flow or RIA flow that tends to be a little more correlated with other market participants and harder to handle and some of it is larger size, etcetera, you get all those metrics. I would say overall, and since we have bought Knight Capital, the business has had periods where it's more competitive where competitors decide to ratchet up, if you will, the execution quality they're prepared to give and then they struggle with profitability and they come back down. So I take a very long prosaic look at this which is why I strongly have urged all of you guys not to focus on basis point moves and market share. They don't really mean anything. They don't really mean anything. What really -- at the end of the day what I focus on is do we have happy clients, are we providing good service, right. Do we have market share from all of our customers that is meaningful to us and to them so we're a meaningful partner of theirs. And then obviously, is the net after paying this price improvement and in some cases payment for order flow, are we a positive -- is it a positive net experience otherwise we're providing guaranteed execution and not getting paid for it and that's silly. So there is a back and forth here and all of the other players that we compete with, they are also economic animals. They don't have any magic elixir or magic algorithm that we don't have, right. We all kind of are doing the same thing and we're all providing great service and value for the marketplace. So I know this a little handy way to give an answer but there is an ebbs and flows around competition. The business continues to be very profitable for us on a net basis. On a gross basis it's incredibly profitable but as I said in my remarks, we have paid, put that in quotes, not in our financials we've provided back to our retail customers about $950 million of price improvement this year. So think about how powerful the predictors and the algorithms, if you will, that were in the Knight firm that we acquired are. That number doesn't appear in our financial statements. I wish we were able to keep all of it but that's not the deal we have with our customers and that's the service that we provide and that's why this structure is fully embedded in the ecosystem of the financial markets and is there to stay. Exchanges can't do what we do and that's why these orders get sent to us.

Okay, that's helpful and a couple more clarifications on just expenses. So for 4Q, I believe you said the comp ratio is going to be flat, but I assume that's what the year-to-date comp ratio. And then next year, Joe, you mentioned more synergies, so is there a way to put a number around the synergies that you still have to take out of the business? I assume some of that is just delayed because of the COVID stuff that you didn't do this year. But talk about that. And then also what is kind of a normal baseline level of growth for your expenses in kind of a inflation. Is there a percentage we should think about or is there always some level of decline that we should be thinking about on the opposite side?

Yes. Look in terms of the expenses and the expense guidance the -- if you look at the original synergy targets, if you add up the synergy guidance I think on KCG was $250 million round numbers and ITG was $133 million in terms of midpoint. So we're guiding total expenses next year $605 million to $645 million. So I don't know what the difference is in terms of the last up to be achieved but it's going to mean that we're instead of achieving $384 million, we're going to achieve $479 million using kind of midpoints. And I hope you go through the mechanics offline on that but the synergy guidance in terms of run rate just in the next quarter just to be clear, I'm glad you brought that up, we would expect cash comp to be flat quarter-over-quarter, third quarter to fourth quarter so not quarter-to-date. And then long-term we've always -- as Doug said, in a down year we do have the incentive comp lever, a substantial portion of our compensation both cash comp and share-based comp is incentive comp. So we do have that lever. So we would -- and we have in the past and will in the future flex it if need be. In terms of communications data processing or other expenses, we've always guided those to grow in kind of low single-digits, low to mid-single-digits really and I wouldn't expect that to change.

Great. Thank you.

The next question is from Chris Allen with Compass Point. Please go ahead.

Good morning, everyone. I wanted to ask a little bit on Execution Services. I'm just trying to think about why that would be down year-over-year just given a little bit of the volume backdrop we see?

Yes, good question, Chris. A couple of reasons, one is you have to adjust about $2 million a quarter for MATCHNow, which we disposed -- we sold, I wouldn't say disposed, a bit harsh-- we sold as you know to Cboe, right, so that's a '19 to '20 comparison. And then, with this business in particular, and you can look at the old ITG filings, more than half of this business is outside the United States. So you have to look at other than U.S. equity market volumes. U.S. equity market volumes were down 21% quarter-over-quarter, Europe was down 22%, Canada down 13%, all right. And we outperformed each of those metrics in each of those sub regions, but unlike our Market Making business where as you know we're more of a global equity firm than a fixed firm, number one, and then obviously more of a U.S equity firm thanks to the legacy Knight businesses. Our institutional business is much more regionally bound. I'm sure somewhere I think in our financial statements, in the 10-Q footnote we go through the kind of the regional breakout of our P&L, a lot of that is from the institutional business. So when you look at Europe where volumes are down 22%, if you go look at like block volumes in Europe, in particular, they were way down and the same way if you look at the FINRA data on block volumes in the third quarter in the United States, block volumes were down significantly. So that really have been -- disproportionately hurts our POSIT Alert business, which is our block business. So a lot of -- the group actually had a really solid nice quarter but given the marketplace, obviously, on a comparison basis it certainly looked like it was down significantly.

Yes. And then just on the timing and pace of buybacks, should we expect those to start immediately, and I mean you expressed the $5, kind of $4 -- sort of $40 million to $60 million range, should we be assuming that the minimum for next year will be roughly $10 million per quarter?

Yes, Joe would you?

Yes look, we would get started right away. The authorization will be opened for a year that doesn't preclude us from kind of doing more in the next year as results come in. But we -- there is no reason for us to kind of time them out quarter-to-quarter. We would be as aggressive as we think prudent depending on where the share price is.

Got it. And just a quick question. The other revenues $70 million less than MATCHNow's $58 million, it's about $12 million much higher than normal spending volumes within this quarter?

We had to mark up one of our investments. We have an investment in a PTS in Japan that is doing very well and the accounting rules require us to mark to market. So that's not a cash gain but it's a nice investment for us.

Yes, that business...

Thank you.

The PTS over there is doing exceptionally well. We're very happy and proud to be a partner with SBI in it. Operator?

Yes. Mr. Allen, are you done with your questions?

I believe he is done.

Yes, sorry.

Okay, thank you. The next question comes from Ken Hill with Loop Capital. Please go ahead.

Hey, good morning. Just had a quick one on open technologies saw your data at the service platform. I was hoping you can give an update there it seemed like it had a lot of potential given all the data you guys have and interact with, so I'm just kind of curious if you could give an update on how sales might be progressing there, what client uptake looks like and how you're investing in data kind of longer term there?

Yes, thanks. It's a great question. Yes, I mean we're very excited about it. We think that the future of the delivery of all the wonderful services that we have on the analytics side. We don't separately break out workflow in our VES segment but it's a -- the response to the marketplace, let me put it this way, Ken, has been very, very positive because we are giving client what they want, which is access to their own data, our analytics tools and our platform under which to undertake that rather than sending them some non-manipulatable flat PDF file or something like that, right. So it has the advantage of obviously, giving the clients what they want and it also reduces the manual functionality, if you will, of the analytics business. I mean, that's the vision that we have for that business. So it is -- the client response has been great. We've had client wins because of it. Obviously, given what happened in the market maker this side, it tends to get to worst by the market making returns but I'm very, very happy with the performance of that segment.

Okay, I appreciate the details there. Thanks for taking the question.

Thank you.

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

Hey, good morning. Thanks for taking the question. Maybe just going back to some of the points you were making earlier about pricing compressing across financial services across the industry, as you spoke about earlier and firms may become more dependent on market makers like Virtu. So I guess how do you see industry structure potentially evolving and could it make sense strategically for a firm like Virtu to be part of a financial services firm to help them better capture more rents across the overall ecosystem as the ecosystem compresses? Or do you think there could be any conflicts there that could preclude any such combination, how do you think about that?

Well, here's what I would say obviously, I love running this firm. We're a great independent firm, we've got the whole -- all types of leverage and growth initiatives and whatnot and I don't worry about that end game. I keep my head down and we run this firm with intensity and operating discipline, etcetera, etcetera. The comments I made before I think are just a natural evolution of the markets towards efficiency, what this firm has always been about. When my partner Vinnie and I started this firm it was always about -- people used to ask us, what's your secret sauce, HFT and all of that stuff and I used to say that oh bunk, it's really about operating discipline and scale and efficiency. You have to be the best bid and best offer. How do you do that? Everything that isn't geared towards producing that best bid and best offer is a waste of time. So offices, all that kind of -- all the accoutrements are a waste of time. Focus on the technology and innovation to be the best bid and best offer and that's the ethos of this firm and will continue to be the ethos of this firm. As marketplaces have gotten more competitive, as commission rates have gone to zero, as spreads have compressed that's a positive trend for our firm, right, because we can be the most efficient and always will be the most efficient provider of that price either as a principal and now as an agent, right, that was the strategic evolution of our firm as an agent. And so I think larger financial institutions who we have wonderful relationships with, I never -- Morgan Stanley is not a competitor of Virtu in any form at all. J.P. Morgan etcetera. And Goldman, we work exceptionally well with each of those firms. We provide a service and a function to them and they provide a 1,000 more services and functions, both to us and to the ecosystem. At some point in time could a large financial institution look at us and say wow, these guys do all of that globally across asset classes, geographies, as a principal, as an agent and they've really have built a hell of a mouse trap here and the run rate expense of that is X and we're spending 100 times X to do kind of the same thing, sure. That -- I could see some very, very, very smart person in the C-Suite somewhere saying that at some point in time. I don't worry about that. I got a day job to do. Someone smart like you at a big institutional like Morgan Stanley can write a great paper about that and maybe it will happen someday.

Okay, maybe just changing gears as a follow-up question. Thanks for the color there. On Execution Services maybe you could just remind us of what portion is transactional that's driven by volume and activity versus what portion of the Execution Services revenue would you say is more recurring in nature?

I'm looking at Joe to see if we break that out. I don't believe that we do.

No, we don't break that out. I mean there is -- a good portion of it is volume-driven. I would call-- if you look at it over time, Michael, the comment I'd make is that when we bought ITG and really scaled up this business, the thesis was that it was going to be volatile and it was going to be driven by volumes but that it would be less volatile in the market making business. And I think that's been proven out. I would describe the entire revenue base not necessarily, there are recurring elements of it, but I'd describe the whole revenue base as reoccurring as opposed to Market Making, which is really kind of driven by volumes of volatilities.

And if I could just sneak in another one follow up there on just that point. Any sense on how you expect that revenue pool to grow on the Execution Services side as you look out over the next couple of years?

Yes. So obviously the volume element to it, as I mentioned in response to Chris Allen's question and even Triton, which is a workflow solution for which we get a subscription fee, there is a transactional element to that, right. The more, we just let that go through our EMS than what we get paid by the street. So you will see we did disclose in our update that we have a volume-driven percentage, if you will, to some of our workflow business. So I think that the wave of the future frankly is towards more of a subscription, financial technology style model. We've looked at each of our customers and said if the commission dollars we're getting are not significant to justify the spend in order to maintain it, we're going to need to put you on a subscription type of model and the street is accepting of that. The buy side is accepting of that globally. So there is more of a trend there. Again it's a longer sales cycle there. We're also engaged with a number of folks on the sell side, smaller broker-dealers and some mid-sized tier 2 broker-dealers that need more of a holistic sell-side solution as an EMS element to complement it. And so that would be again subscription-driven. So that's something we're very bullish on longer term but right now, the mix of the business is -- still the vast preponderance of it is transaction-driven.

Great. Thank you.

Thank you.

The next question comes from Alex Kramm with UBS. Please go ahead.

Yes. Hey, good morning, everyone. Sorry if this was already asked but on the expenses for next year, can you give us a little bit of a quarterly flavor? I guess the reason why I ask is, you mentioned earlier that there is still some synergies to go through, I think a lot of that is the -- I guess the layoffs that you -- that you didn't do this year. So is this one of those situations where January 1st those layoffs happen and then the cost base is fully reset or is it going to be a process over 2021?

Thanks, Alex. No, this is going to be a process. Again we can talk about the mechanics offline but I think the way I would lay this out is just kind of scaling down. Our -- I mentioned, I answered somewhere else in this call on comp. I would just -- to quarter-ize the comp I think that's the best way to do it. And then some of the other things may start higher particularly overhead and then scale down as we abandoned leases and kind of continue to clean up in some of the acquisition, excess offices and things like that. But I'd quarter-ize comp and I'd scale down the other thing starting a little higher and ending up with a lower run rate.

Okay, fair enough. And then just quickly obviously, you decided to no longer give monthly NTI if I heard this correctly. But you made some quarter-to-date comments. So if I think through what we've seen so far, is it fair to assume that October was running below and the election then made up for it and some of the trading activity around that or any other flavors you would give us to what you've seen so far this quarter to give us a better idea of where and how you're making money right now?

Yes, sure. I'm happy to address it. I mean, I think and as I said in my prepared remarks, we tried to be responsive and frankly all it did was, in my view, in general more volatility in the stock, particularly around the August results, which I thought was not helpful to building long-term value around our stockholder base, frankly. I talked to a number of our long-term partners investors have been with us frankly some of them since the IPO and my conclusion was this is just encouraging more, shall I say, in day trading or a quarter-to-quarter style trading and that's not -- again, it obviously that's -- we're part of the ecosystem but that's not really what I do on a day-to-day, why I am here day-to-day. We're trying to build long-term value as we've laid out here. So that was the idea behind that and certainly, we will continue to give color. Yes, I mean October was more of a muted month when it came to survive volatility but we are still performed, I thought, exceptionally well. And obviously, these last few days around the election, I saw some comments from Head of Global Trading at JPMorgan and I would echo exactly what he said, I thought it was very, very well-articulated, which is it was a really, really busy period for us but it wasn't chaotic and crazy. So obviously there is a good deal of uncertainty still around the election results and -- both at the White House and the Senate and whatnot, so there will continue to be some volatility. But as the market gets more conviction around that I'm excited that we're seeing increased volumes and obviously, we've seen enough market the last couple of days. I think the market was down today. So I'm continue to be very optimistic about what the fourth quarter would look like just given the marketplace but more importantly all of the investments that we have made and the growth initiatives are really, really bearing fruit. And I think that has come through in the first half of the year and in particular in the third quarter.

All right. Very good, thanks.

Thank you.

The next question comes from Kaimon Chung with Evercore ISI. Please go ahead.

Hi, thanks. Most of my questions has been answered but maybe just looking for a little more color just on the progress on the Virtu Capital Markets that maybe the pipeline of activity there? Thanks.

Yes. Thank you very much. I mean I'm very, very happy with that initiative. The guys that run it are just super, super talented and really have outperformed even my lofty expectations for how that would integrate with the rest of the firm. So I'm very, very excited about it. As we put in our investor presentation, it's really across industries. I think what we've successfully done is leverage two things. One is -- well, three things. One is, the market share that we have, right, which is really compelling to companies because they see that hey, we're number one in their stock and we're number one in their industry, so there has to be a lot of natural crossing flow, that's the first thing. The second thing is, we obviously have a tool kit in terms of Algos, in terms of Alert so that the guys running the ATM business and trading on behalf of our clients can effectively internalize and give a great outcome as measured by analytics tools to the company. And then the third thing is, obviously we've got a great group of guys running that business that have long-term relationships with issuers of all sizes and stripes that can -- that want to use our services. We've also undertaken, for the first time, going up to Canadian issuers that are issuing in the United States as well, that's another growth opportunity and that having a scaled very, very well regarded office up in Toronto helps that. So it truly is a firm-wide endeavor that has really borne fruit this year and I'm excited about how it's going to grow. Again, it's just part of the theme around efficiency and technology making markets better.

Thank you.

The next question is a follow-up from Dan Fannon with Jefferies. Please go ahead.

Hey, thanks for taking my follow-up. Just wanted to ask about debt pay down going forward here. You obviously have a lot of flexibility with where the balance sheet is, so from a modeling perspective just kind of assume you're comfortable with these levels. And then also, M&A where you guys have been so successful, obviously the buyback is new but how do you think about M&A in this type of environment? Is that less of a focus or less of a priority given what you're seeing from some of your organic initiatives?

Yes, I'll take the first part there. Good question. We've decided that as we came up with target cash flows available those only reflect what we'd be required to pay back from our -- according to our debt covenants, right. So when we acquired ITG, we entered into a new credit agreement and there is basically guard rails around the amount of leverage and if we have a great quarter we are required to offer a repayment to our debt holders. So we've modeled that in. But you're right, we shouldn't model any voluntary debt repayment because we are very comfortable with $1.6 billion notional. In terms of our M&A strategy going forward, I'll let our CEO answer that.

Yes, I mean look, Dan, we obviously strategically grew this firm through a lot of hard work and two wonderful acquisitions that were -- have been very successful from a product and a growth standpoint, obviously from an expense integration standpoint. They definitely were very, very accretive to our shareholders. That's the number one priority. Now that we have this fully scaled firm, I've said on prior calls, we're going to be -- the bar has been raised, we're going to be very opportunistic around M&A. We've got something really special here because we're a large scale player with a public currency. And so I -- we will continue to look at things, examine and see what's strategic, see what's not. But a lot of the targets that we looked at this year, looked at their 2020 or even the first quat -- half of 2020 in annualized does that give me a multiple based on that and I said well, I'll give you a historic multiple based on that, well I'm not trading out my historic multiple. So I think the marketplace needs to kind of calm down in terms of -- from an M&A perspective. I think people -- I need to look at companies on a normalized basis and then conclude whether or not strategically they fit in. And then I've said every time I've answered this question, I will not do a transaction that is not accretive to my shareholders because I'm a big shareholder, we've got something special here. There is not a company that I can think of that has a product or a service that we can't -- that we're not doing right now or that we can't build on our own, all right, that's the key. We are a fully scaled financial services firm, so we will be opportunistic, we'll try to be good partners with folks but we're going to do what's in the best interest ultimately of our shareholders and my Board with Joe, Sean and I, big encouragement concluded that right now using the extra cash on our balance sheet to buyback stock is the best way to provide value to our shareholders and that's going to be our MO for the foreseeable future.

Great. Thank you.

Thank you very much. Operator, I believe we have no more questions in the queue. I'd like to thank everybody for their time and attention today. And we look forward to speaking with you in early -- I guess it would be April, March, yes something like that; we will give the earnings date. I wish everybody a happy and healthy conclusion to 2020. We will talk to you then. Thank you.

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