“As you think, so shall you become.” – Bruce Lee
Like a one-legged man in an ass kicking contest, sometimes the scenario is grim. And yet sometimes, the tailwinds converge in your favor – like a three-legged man in an ass kicking contest – and the scenario presents itself very much to the contrary…
Historically, Alphacution has not been shy about pointing out the former. Who can forget “Virtu Financial: The Frying Pan and the Fire” from August 2019; a favorite of @Dougielarge, for sure? But, to give credit where credit is due, this story is quintessentially about the latter scenario: Today (May 7), Virtu Financial reported Q1 2020 earnings and, given an extra appetizer of preview from the company on March 20, it was – to borrow a riff from Tenacious D – “The. Best. Quarter. Ever. Period!”
Now, it’s no secret to anybody on the planet why a strong Q1 was to be expected from Virtu because nearly everyone on the planet is directly impacted by the disruption from the same catalyst. Plus, of course, the banks have already highlighted the bright spots from their market making units. And, the only other public proprietary market making group, Flow Traders (FT), reported their Q1 earnings on April 21. In a corner of the ecosystem historically plagued by intensifying competitive pressures – and a future outlook that had looked at least as challenging for many just a couple months ago – it’s no wonder that market makers of various configurations have been behaving as if they’d all found the pick of destiny…
As a result, we have spent the last several weeks with an intense research focus on volatility, as illustrated here, here, and here. And, on the back of FT’s release, Alphacution published the Feed post, “Blast Off: First Look at Q1 First Responders,” wherein we highlighted, among other fascinating clues, what an unprecedented 11-sigma move looks like in the form of FT’s Q1 earnings. Here’s a visual refresher for that performance:
Now, in that piece, we go on to characterize Virtu’s pre-release net trading income estimate of $487 – $497 million as “barely a 1-sigma“ move relative to quarterly NTI reports from Q1 2014 thru Q4 2019 based on the idea that this was the company’s estimate of NTI for the entire quarter (which did seem odd at the time given what we know about the impacts of historic volatility levels). In other words, this was taken as preliminary Q1 guidance, the relevant component of which read as follows:
“On a preliminary basis, the Company expects its results of operations for the quarter to date through March 19, 2020 to reflect:
- Trading Income, net between $489 and $497 million; Adjusted Net Trading Income between $509 and $519 million
- Average Daily Adjusted Net Trading Income between $9.43 and $9.61 million per day”
And, even though we expected a strong quarter, nothing beats the clarity of the official release. Anyway, whether you share in our confusion from that wording or not – as well as see the benefit in knowing the key figures for the first 14 trading days of March vs. the last 8 – without further dancing around, here is Alphacution’s version of what key Q1 2020 revenue figures look like in the context of a rebuilt Virtu+GETCO+Knight+ITG going back to Q1 2014, and it’s a doozy:
Talk about flattening a tough curve, this quarterly performance – nearly $1 billion in trading and execution revenue – is truly unprecedented, and more on the order of a rare 3.6 sigma move relative to reported history.
Now, as is the case with all Virtu earnings releases (which include useful information about market conditions), there is additional regulatory data that typically comes out a week or two after earnings. For those of us who thrive in the weeds, this additional data not only helps us better understand the details of Virtu’s latest quarter – and prospects for the future – but also helps us better understand the market conditions within which all the other – mostly proprietary – trading firms that we care about were operating.
We know – anecdotally and otherwise – that many market makers and other agile trading firms and hedge funds did well in Q1. But, we also know that there have been some negative surprises in the listed trading arena (SocGen). So, there’s much more puzzle-solving to be done on Virtu and others, which is one way of saying that we will keep that powder dry until Part II, with the following exception:
On March 12, Alphacution published “Virtu’s Optionality? Some Good News…” (Apparently, there had been some lingering unprocessed remorse for the frying pan incident.) In that piece, we commented on company guidance for January and February 2020 where payments for order flow (PFOF) was estimated to be in the range of $28-29 million, which led us to a full Q1 estimate of $42.75 million – and the following updated chart:
Well, I guess we now know what PFOF was in March – more than all of Q4 2019’s formerly all-time high $30.4 million – along with the early impacts of zero-commission retail trading during periods of high volatility. From the Q1 release:
One more thing: If you still don’t understand the title to this one, here’s your last (NSFW) chance…
Until next time, stay safe out there…
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