“If you are not growing, you are dying.” – Tony Robbins
On August 8, Virtu reported Q2 earnings and the stock (VIRT) fell 18%. Non-GAAP EPS came in lower than Street estimates. In addition to the costs of integrating the ITG acquisition, disappointing results in the market making segment were blamed on lower volatility and trading volumes.
Now, here’s what you’re never going to hear from the company:
- The Frying Pan: Both the market making and execution businesses are under significant spread and fee pressure. If there isn’t an ongoing arms race for speed – which there still is – then there’s intense competition around execution costs. Payments for order flow continue to rise as a result. And, some are exiting the equities brokerage business…
2. The Fire: They claim to be diversified. They try to become more diversified. And yet, they remain grossly over-weighted to equities and ETFs. The increased balance sheet that resulted from the KCG acquisition has not been lightened up, now 2 years later, despite the difficult landscape…
Maybe Virtu is trading, in part, with itself; moving positions from the former KCG broker dealer (now Virtu Americas, LLC) to the long-standing Virtu broker-dealer, Virtu Financial BD, LLC. This would certainly explain the lack of balance sheet shrinkage.
And, despite being designated as non-hedging income, net trading income (NTI) from futures trading produces a correlation of -0.87 with that of cash securities NTI (i.e. – equities). So, I guess this is non-non-hedging income. There is no options NTI to speak of, which is a long-term competitive disadvantage…
Yes, low volatility and low trading volumes are culprits, but the company is never going to say that other players in the market – bigger, faster and smarter players – are eating their lunch, which has now likely been twice-cooked; sautéed in a pan and seared over an open fire…
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