Virtu Financial: Musical Chairs

No good opera plot can be sensible, for people do not sing when they are feeling sensible.” – Frank Zappa


On Tuesday, February 11, Virtu reported Q4 and full-year 2019 financials. What follows are a few thoughts and charts on the latest data:

Net trading income came in at $228.7 million for Q4 – not great, not terrible – based on a QoQ uptick in core equities; some weakness in global FICC, options and other (whatever that is) relative to Q3 2019; and, flat execution services revenue relative to Q3 and Q2 2019 (basically since the ITG acquisition closed last March). The chart below visualizes an historical quarterly decomposition of net trading revenue components relative to the ratio of SPX realized to implied volatility for the 24 quarters beginning Q1 2014 and ending Q4 2019 to emphasize the importance of unexpected volatility spikes in the grand scheme of profitability for market making and execution firms. When the other components of Q4 2019 NTI became available, we will circle back with an update of this one…

Now, given that volatility did not cooperate all that much in Q4 – as it has so rarely done over the past several years – we notice that Virtu has had to work a little harder and a little harder, quarter by quarter, to harvest the trading gains that it ultimately earns. In Q4 2019, somewhat to our surprise (given overall expectations that total order routing revenue among the main retail players would be flat for 2019), Virtu printed $30.4 million in (net) payments for order flow (PFOF), an all-time high for the 32 quarters we have been tracking that figure.  BTW, we emphasize “net” PFOF because we are in the process of modeling liquidity rebates, which represent the difference between net and gross PFOF. Stay tuned for that analysis…

With this all-time high quarterly PFOF figure, Virtu surpasses $100 million in net PFOF for 2019; its second consecutive all-time high year since the KCG acquisition in Q3 2017 (wherein the PFOF lineage begins with GETCO).

On top of this, something fascinating has emerged from some deeper 13F modeling: Recall that the optimal position for market makers is to go home flat each day. Generally, accumulation of (overnight) positions results from scaling the trading operation to balance profitability goals with available liquidity. So, it used to be that firms like Virtu could achieve performance goals without carrying very many overnight positions. In other words, there was a lot of “structural alpha” in the market microstructure as a result of fatter spreads, easier-to-extract liquidity fragmentation arbitrages and high-decay cross-product mis-pricings.

In the chart, below, Alphacution presents total 13F positions segmented between stocks and ETFs (the main product classes within Virtu’s US broker-dealer entity, and the home to its core trading strategy) for the full 49-quarter record beginning Q4 2007 (going all the way back to the pre-Virtu, Madison Tyler days) and ending with the freshly minted report for Q4 2019.

Here, one key point is to notice the plateau of ETF positions and the increase in stocks positions, both since about Q1 2015. Now, just spit-balling here, but it appears from this picture that Virtu has needed to trade more and more stock against ETFs (resulting in more positions being held) in order to extract a base level of core trading revenue over the past 5 years (unpredictable volatility spikes, notwithstanding). And, this all while increasing PFOF to subsequent new highs over the past two years. In other words, to no one’s surprise, it is getting tougher and tougher to extract structural alpha in the current market environment.

Finally, just in case you noticed that the past 2 quarters seem to represent a de-risking of Virtu’s core market making book with notable declines in both ETF and stock positions: First, kudos to you for paying attention; and second, that doesn’t mean Virtu isn’t still pedal to the metal to squeeze an acceptable level of structural alpha out of this punishingly competitive market. Because, even in de-risking mode, Virtu is still trading more and more stock relative to its favorite ETFs…

Until next time…

By | 2020-03-12T17:25:33-04:00 February 13th, 2020|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact:; Follow: @alphacution.