Virtu Financial Inc

NASDAQ:VIRT

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the Virtu Financial 2021 Second Quarter Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Andrew Smith. Please go ahead.

[Andrew Smith]

Thanks, Tom, and good morning. Thanks for joining us today. Our second 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; and Mr. Joseph Molluso, our Co-President and Co-Chief Operating Officer; and Mr. Sean Galvin, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. 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 is indicated in these forward-looking statements. It is 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 to update or revise any forward-looking statements as new information becomes available. We refer you to disclaimers in our press release and encourage you to review the description factors contained in our Annual Report and Form 10-K, 10-Q and other public filings.

During today's call, 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 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 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'll turn the call over to Doug.

[Douglas Cifu, Chief Executive Officer]

Good morning, and thank you, Andrew. This morning we reported our second quarter results which reflect our resilient and balanced business model as well as the continued success of our organic growth initiatives. For the quarter ended June 30, we generated $0.63 of adjusted EPS and $5.4 million per day of Adjusted Net Trading Income, bringing our results for the first half of 2021 to $2.67 per share, and an average Adjusted Net Trading Income of $8.63 million per day.

Last quarter, we announced a $300 million increase to our share repurchase program, which brought our total authorization to $470 million. We have repurchased 3.4 million shares for approximately $100 million during the second quarter and over $30 million worth since the end of the second quarter, bringing the total amount repurchased under the current authorization to approximately $230 million.

As we stated previously, we remain committed to returning capital to investors and have prioritized share repurchases for the foreseeable future. We aim to be in the market consistently buying back shares as we work to accomplish our capital management goal. Importantly, in the second quarter, our more Greenfield growth initiatives continue to shine in both relative and absolute terms, compared to historical results.

On Page 6, you'll see - you can see how these initiatives contributed meaningfully to our performance, generating $500,000 per day of Adjusted Net Trading Income, and representing 9% of our ANTI for the quarter. These initiatives are truly organic in that our ANTI from revenue sources was nascent only a few years ago, and we've achieved these results by leveraging our scaled infrastructure and distribution channel, supplemented with a handful of individual hires.

While these results are impressive, we are especially excited about the continued growth potential of these truly organic opportunities. In options market making, for example, our daily Adjusted Net Trading Income grew quarter-over-quarter despite the 13% decline in options market volume. We continue to view options market making as a key long term engine of growth that complements and enhances our existing Market Making business creating new revenue synergies across asset classes and region.

Other key initiatives include our ETF block desk and our deployment of legacy KCG quantile strategy, continued their long term growth trend in the quarter. Market volumes in US ETF declined about 13% in the quarter while our ETF block volume was down less than 1% illustrating the strength of our unique offering in various market conditions.

Our expansion into cryptocurrency market making also continues to progress with our ANTI from crypto market making doubling in Q2 versus Q1. Today, our focus has been on market making in Bitcoin and Ether in various forms, including spot instruments on a couple of the major venues as well as ETFs in futures. As a leading market maker in ETFs around the globe, crypto ETF fit naturally into our scaled market making operations leveraging our growing ETF block desk.

We're also in the early stages of developing our ability to stream cryptocurrencies over our direct to dealer streaming liquidity platform VFX. Through this platform, we will provide liquidity in cryptocurrencies to select brokers and institutions around the globe. The key takeaway here is that the growth of liquid tradable crypto-related products is yet another way that the total addressable market is growing for Virtu's scaled liquidity provisioning and execution services.

Taken together, our growth initiatives are making tremendous progress and which may help raise our baseline performance through the cycle. As Joe will detail in a few moments, we believe that this positive growth trajectory combined with our stock buyback program provides a compelling, long term story for our investors. We look forward to updating you in the future about the progress we're making on each of these opportunities, and their contribution to our growth.

Additionally, the steady growth of these initiatives as well as the continuous less volatile performance of our Execution Services segment has led us provide public guidance around where Virtu's results should be, given various levels of ANTI in a given quarter. We believe our performance this quarter is consistent with that guidance. After several quarters of elevated market activity, realized volatility fell nearly 30% in the second quarter dropping to 9% below the 2019 average. And as you know, 2019 was a historically low point for volatility.

Further, US equity volumes were down 28% overall and retail equity volumes in United States were down even more compared to Q1. Despite the steep drop in volatility which highlights sustained levels of retail engagement and general market volumes compared to historical levels. It is important to know that despite the changing operating conditions versus last quarter, our Market Making business realized $232 million and Adjusted Net Trading Income were $3.7 million per day. This quarter's performance is similar to the third quarter of 2020, where we generated $4 million in the ANTI per day, albeit realized volatility, was 34% lower this quarter than in Q3 2020.

Our Execution Services business also performed in line with the market opportunity this quarter, realizing $110 million in Adjusted Net Trading Income. We are now two full years past the acquisition of ITG. And looking at the bottom of Page 3, you can see the steady progression of this business. This continued growth reduces the quarter-to-quarter variability to our operations while still giving investors significant upside exposure from our global market making operations.

Before I turn it over to Joe, I'd like to take a few minutes to talk about the recent industry discussion around market structure, payment for order flow, and wholesale market making. As I said in the first quarter earnings call, we at Virtu welcome the robust dialogue around the regulatory framework that governs our capital markets. However, we and others are concerned that the calls for reform are based on false narratives and factually unsupportable conclusions. These misconceptions obscure the fact that we are participants in the most robust, transparent and fair marketplace in the world.

For retail investors, their experience in the United States, has never been better and by comparison, is markedly worse in Canada, the United Kingdom and Europe. Developments in market structure, advances in technology, and the introduction of intense competition have resulted in vastly expanded product offerings, low or no cost trading and importantly, superior execution quality.

In summary, the benefits of today's market structure to retail investors are quantifiable, and the supporting factual evidence is striking. In the current high profile debate about US equity market structure, many folks including regulators, politicians and critics are looking at the available data to draw conclusion. However, the data being used to assess execution quality for retail investors comes from Rule 605, which most agree, has significant shortcomings and provides an incomplete view of execution quality.

Current Rule 605 significantly underestimate, the benefits that regulation, competition transparency, and the current market structure, have created for retail investors. We recently published a report which we furnished to the SEC that addresses many of 605's shortcomings, and proposes updates to enhance the Rule. The biggest hole in Rule 605 is that it measures price improvement by comparing an order's execution price to the prevailing NBBO without regard for the number of shares being executed.

This means, for example, that when we fill a retail order for 9000 shares of a stock, execution quality is measured based on the NBO price level, no matter how many, or how few shares are available at the NBBO price. When we fill in order for more size and is available at the NBBO, that provides the retail investor with size improvement, and it happens a lot. In fact, in 2020 45% of the shares we filled were on orders that outsize the entire NBBO, that's 45%.

If Rule 605 was updated to measure this benefit, as many folks have requested, including numerous retail brokers and exchanges like NASDAQ, regulators and brokers would see that in 2020, Virtu provided over $3 billion in price and size improvement to retail investors. That's three times the amount report reported on Rule 605 today. It defies logic to conclude that this price and size improvement retail investors receive today would exist if, as some critics suggest, retail orders were all sent to exchanges.

Thankfully, in part due to the request from Virtu, and many other brokers and exchanges, the SEC is now reviewing Rule 605. In addition to having a complete view of all available data which means actual trade, not theoretical model, having an accurate understanding of our current market structure is imperative to conducting a thorough review and proposing changes that help, not hurt retail investors. To this end, we have had multiple meetings with regulators and politicians to help correct various myths and misconceptions that cloud the existing debate.

In our report that I just mentioned, which is included in the Appendix of today's Investor Presentation, and in our discussions with the staff and commissioners at the SEC, as well as folks on Capitol Hill, we use data to address their concerns, and we will be releasing a follow up paper to provide even further important detail. At Virtu, we serve as a trusted counterparty to nearly every retail broker and wealth manager in the United States, but also to all of the top broker dealers and hundreds of institutional buy-side firms, including the top 10 asset managers in the United States.

We are confident that in the end, the data and - that data and reason will win the day and regulators, politicians and critics will continue to see the massive benefits of the ecosystem which regulation, competition and transparency have created for retail investors.

With that, Joe will now provide more details on our quarter and our growth initiatives. Joseph?

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

Hi, thanks, Doug. I will review some thoughts on Virtu's ability to generate growth through both organic initiatives, through the excess cash flow we generate and how this all translates into revenue and earnings growth rates over time. If you look at Slide 5 in our supplemental materials, we try to show what a good strong growth rate for Virtu looks like. We have published this slide previously and we are reproducing it here.

Understanding that our results will be volatile on a quarter-to-quarter basis, on this slide we have distilled the historical pro form median ANTI for Virtu. So I'm assuming Virtu, KCG and ITG were one company from the time of working on PFOF. So you can see that this is the $5.5 million per day. Using the current operating expense projections, this translates into $2.69 of EPS and using the current capital structure, this has EBITDA of $831 million. This is an extraordinary median performance over a six-year period that excludes any of the growth initiatives that profit them.

In net, if we look at the parameters around the growth initiatives, yes, these amounts may be themselves volatile. The near term set of organic initiatives will generate between $0.5 million per day to $1.5 million. We can apply the marginal cost figures to be used and now arrive at the 18% revenue and 26% growth rate you see on this slot. And that is assuming no share repurchases. We understand this growth is difficult to determine on a streamlined basis, I wanted to point out this real underlying significant growth in Virtu's [profit].

Layering on top of this growth is our ability to generate significant cash flow. Virtu generates significant amounts of free cash flow across any environment, including an environment like this one. And in the quarter, it's worth noting that even in this more subdued environment, our business generated $0.63 of EPS, almost 58% EBITDA margins, and we were able to buy back approximately $100 million worth of our shares.

With our current overall debt levels now at a long term sustainable notional amount of $1.6 million, our quarterly dividend of $0.24 more than secure and no immediate plans for any major acquisitions, our ability to focus substantial cash return through repurchases will continue. We view this cash flow is substantial in relation to our current market capitalization, and allows us over time, in any sample time periods through cycle to acquire open market repurchases a meaningful percentage of our company.

Importantly, if you look at the chart at the bottom of the page of Slide 5, you see the annual amount of free cash flow expected to be generated by Virtu at various hypothetical ANTI amounts. Corresponding percentages represent, based on shares outstanding, the amount that can be purchased in any one year. It is important know that these are annual amounts. So even if you factor in a full year, the lower end of the chart in any given time period, we should be able to repurchase a significant amount [indiscernible]. For example, in the first half of this year, we have average $8.6 million per day in NTI. We purchased 195 million of our shares year-to-date, representing approximately 4% of total shares outstanding and this is consistent with the guidance we provide.

Finally, our organic growth initiatives, while again themselves volatile quarter-to-quarter, are real and accrue our bottom line, has significant [runway]. These organic initiatives together with this substantial cash flow to appropriate levels of debt going forward enhance, are evidence of Virtu's ability to thrive in any environment while producing significant returns to shareholders. Sean?

[Sean Galvin, Chief Financial Officer]

Thanks, Joe. In the second quarter as presented on Slide 3 of our supplemental materials, our Adjusted Net Trading Income represents our trading gains, net of direct trading expenses, totaled $342 million or $5.4 million per day, is 49% lower than Q2 of 2020 and 55% below first quarter.

Market Making's Adjusted Net Trading Income was $232 million, or $3.7 million per day, 58% lower than a year ago quarter and 61% below the first quarter. Execution Services' Adjusted Net Trading Income was $110 million, or $1.7 million per day, which is a 6% decrease year-over-year. Our adjusted EPS was $0.63 for the second quarter. In second quarter, our overall compensation expense was $84 million, or 20% less than Q1.

Our cash and overall compensation ratios were 21% and 25% of Adjusted Net Trading Income respectively. As I previously said about our compensation ratio, consistent with past practice, we [accrued year-end] churn compensation to a range percentages earlier in the year. And as the remainder of the year unfolds, this may result in adjustments to our compensation ratio in later quarters this year as we refine our specific compensation targets.

Overall, we believe that our full year cost results are consistent with the specific cost guidance we previously provided for 2021. Adjusted EBITDA was $197 million in Q2, 59% lower than the prior year quarter and 65% below the first quarter. Our adjusted EBITDA margin was 57.6% for the second quarter which is down 20 points from the first quarter that continues to be reflective of our efficient cost structure and disciplined expense management.

As Joe mentioned, our capitalization remains adequate. Our long term debt was $1.6 billion at quarter end, reflecting a $35 million repayment in the second quarter. Finance interest expense, $20 million for the second quarter of 2021 compared to $22 million for the prior year second quarter which has decreased primarily due to the repayment of $289 million of long term debt in 2020.

We remain committed to our $0.24 quarterly dividend, which is - which we have consistently paid over 24 quarters in every environment since our IPO, and approximately $100 million share repurchase in second quarter demonstrate our continued commitment to returning capital to our shareholders.

I'll now turn the call back over to the operator for Q&A.

[Operator]

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

[Rich Repetto, Piper Sandler]

Good morning Doug, good morning, Joe and team. I guess the first question is a follow up on the on the size improvement. Doug, we got a chance to go through the deck and see the deck again. On it, I guess the question is about the reception that you're getting with regulators. You said you brought it to them, and they're reviewing the Rule 605 reports. But are you getting any, what you call, indications that this is actually sinking in, they're absorbing and getting this? And that they may - it may factor into whatever evaluation of the market structure that they come up with in the next - in the coming months?

[Douglas Cifu, Chief Executive Officer]

Yeah. Good morning, Rich and thanks for the question. Yeah, I think it has been very, very impactful. The response from, I'll talk about the regulators in a second. From the industry, as well and we recognize that 605 was outdated, and that there was need for reform. And frankly, the primary driving force behind our report was, there was this narrative myth out there that somehow odd lots are skewing the data. And a lot of the critics were saying it's just about odd lots on Robinhood, blah, blah, blah, whatever, complete bunk. We knew it was complete bunk, and we debunked it. We just showed the data and said, when you actually include odd lots and assume their quotes, then it actually improves the 605 statistics.

So we kind of flipped the script, if you will, on the critics there. And so we're all about myth busting here and providing facts and data. And so when we brought this to the regulators, I think they were frankly shocked, and in a positive way. I don't think they recognized the value. And it's not just Virtu, it's the entire wholesaling ecosystem. It's, pretty robust behind the other six or seven competitors that provide this price and size that are meaningful.

When you segment the order flow, it permits the wholesaler to the great benefit of the retail investor to have meaningful size and price improvement. I said it in my script, and let me reiterate it, 45% of the shares that we sell, the orders that we get exceed the liquidity that is at the top of the book on National Securities Exchange is 45%, 54% of the notional size. So there we are, providing real liquidity to small and mid cap-ish. Well it's exactly what the regulators and the critics want. And this is what helps capital formation.

And it was of intense focus at the SEC, in the last 10 years, in terms of how do you get liquidity to small and mid-cap names? Well, there it is folks, well that's what we do. And so if the wholesalers weren't there, you would have enormous widening in bid offer exchanges and the capital markets would suffer. So the evidence is compelling. And at the end of the day, the SEC has always been driven by facts and data. I mean, that's what they're there for, right? Analyze the facts and datas available to them, and then propose rules and regulations that enhanced the marketplace.

So every one of the proposals I've heard thus far bandied around in the Twitter sphere, if you will, would have the opposite effect. So we're going to continue to be, forceful advocates for what we think is right. We're going to be - continue to be very, very transparent and positive in how we present this information, and we'll continue to be responsive to request for data.

And as I said in my prepared remarks, we're going to - we're updating our reports to include some supplemental questions we've got to address, the narratives on how that execution quality in Canada and Europe is better because of - because they've banned or they've limited PFOS. The actually the opposite is exactly the case that there's lack of competition out there. The opposite is exactly the case, price improvement is increased 750% since 2013. So the facts and data don't lie.

And when regulators look at that and this is the country of laws and rules, right? And so, the Administrative Procedures Act is very, very clear. If you're going to start changing rules and regulations, you better have the facts and data support. And this isn't about politics. This is about impacting marketplaces. And we take our responsibilities very, very seriously in the market, right? Again, we know that regulators will do the right thing. And we're here to assist in that process.

[Rich Repetto, Piper Sandler]

Thanks Doug. That's very helpful. And the follow up [audio gap] maybe, if you could do it simple so like the most of us can understand it. But it's a lot has been said about payment for order flow not being accepted in Canada and Europe. And could you explain, why that is in sort of simple term, brief term so a lot of us can follow along and that's been used as a big comparison, I guess.

[Douglas Cifu, Chief Executive Officer]

Yeah. And I understand the appeal in the headline of saying, 'Well, payment order flow is banned in Canada,' for example. Well in Canada, there's - and I want to be very careful about how I describe it, because I don't want to disparage anybody's motivations, but there's no price improvement in Canada. And the retail brokers, which in large measure are the large financial institutions, because of the market structure in Canada, which provides for price broker time, right? Like, so if you are a broker, and you're posting the market maker an order, you're able to have priority over other market participants. So if you're a retail broker that has the order, your order gets sent to a National Securities Exchange, and so the dealers can selectively internalize, right? Because of the price broker time preference and firms like Virtu, Citadel, and others are effectively excluded, even if we have the ability to match or even improve that price. And so you have selective internalization in Canada.

So talk about conflicts, right? There is this concern that payment order flow creates a conflict between the broker. How about a marketplace where the retail broker is the market maker? And people's hair would be on fire here in the United States, if they saw that level of conflict. And as well in Canada, there's the taker-maker venues. So if you're a retail broker, and you choose not to internalize an order, you can route that order to a taker-maker venue, and you have a firm like Virtu, Citadel, etc., that they're making prices, like we're paying to make, and then the retail broker effectively route it to an Exchange, and get what's known as a rebate provided by Virtu. Well, that's just payment of order flow by another name, right?

Again, I have no problem with that, right? I think that's part of what makes markets function. But let's not mischaracterize a marketplace. So you're mischaracterizing a marketplace, through material omission by suggesting some kind of payments order flows and then they can assure that. But if you look at the entire ecosystem, the experience is just materially worse. So yes, I'm a very proud American. I'm very proud of everything that we've accomplished here at Virtu, and I'm very proud of the ecosystem because it's just much better. I'm happy to go through Europe, I don't want to belabor it. There effectively the bid offer is just widened out. So rather than having a direct rebate, the retail investor gets the worst experience.

So really, at the end of the day, Rich, when regulators ultimately look at the facts, and understand how marketplaces work in the United States and other places. I think, categorically, I have no concern that the level of competition and transparency is just markedly better and the experience is markedly better than any other jurisdiction. So, the facts and data don't lie, we'll continue to be front footed about that. And we're very, very confident that at the end of the day, sense and sensibility will prevail.

[Rich Repetto, Piper Sandler]

Got it. Thank you very much.

[Douglas Cifu, Chief Executive Officer]

Thank you, Rich.

[Operator]

The next question comes from Ken Worthington, with JP Morgan. Please go ahead.

[Ken Worthington, JP Morgan]

Hi, good morning. When thinking about new initiatives, it seems to me like Virtu is well positioned to further expand into the 606 or 605 versions of market making for both equity options and crypto. And both seem like big businesses and potentially big opportunities. So I guess, is it logical to extend your current presence in options and crypto to the equivalent of the 605 business? And is this where you ultimately expect to take these asset classes for Virtu? And then if so, what are the challenges you see an expanding your market making there? And then what is a reasonable timeframe to build up these businesses to scale in those asset classes?

[Douglas Cifu, Chief Executive Officer]

Great question, Ken. Thank you and good morning to you. So let me let me address options first and categorically that's the plan. I mean we have all of the infrastructure in place. That's a nice way of saying, we have the relationships with the Robinhood, the Fidelity's, the Schwab's, the

E-Trade and all of the other aggregators of retail options flow in this country. I've said many times on these calls, and in my conversations with investors, that we began our path toward being an options market maker by taking on the most challenging of challenges, which is to be a market maker in index products on lead exchanges in the United States, right? That is what I would call, the knife fight and you got to bring a big machete for that knife fight if you want to be successful.

Well, we have seen success, we built the infrastructure, where we have a very robust, low latency infrastructure that we were able to leverage off of. We built the technology in order to become a firm that could quote in options, and to be competitive in options. So we have all of the tools to compete, and we've got significant resources to do that. Now we have the relationships on the other side and candidly, all of our counterparties which trust us, and which have gotten great service and experience from us in cash equities have asked us to be a competitor. They want more competition. I mean, there are two firms today that are very significant players, they're great firms. We're not suggesting we're going to overtake them tomorrow. We're not. It would be wonderful to be number three, at some point. That would be - that would be success in the first instance.

In terms of when that will launch, we will launch that in sometime in 2022. Only in the first half and we hope to see meaningful runway. I'm excited about it. This is just a similar feeling to I had back in 2008 and 2009, when we were starting Virtu. We had nothing. It was Vinnie and myself and another partner, a bunch of capital, and some great ideas. And we grew Virtu really from nothing to something that I think is very meaningful. So it's the same kind of feeling, we have in options. We have a wonderful team, which is both an internal team, and we've supplemented with some wonderful people from the outside. So we're excited. There's a ton of runway there, and you can make your own estimates on the total addressable market.

With respect to crypto, it's a similar story. And obviously, we want to make sure that the regulation sort of catches up to the marketplace. We've taken great strides in Canada and Europe, where there have been ETF avalanche. The Chairman was on television this morning, talking about regulation of crypto exchanges and how that's so important. I couldn't agree more with him. We think that's incredibly sensible. And so again, it's - we have all of the accoutrements, if you will, to manage the counterparty risk. To be a meaningful participant in crypto, its spot future, an ETF it's kind of right in our wheelhouse. And so that's the beauty and the scale of the model that we've created.

And we've always said we wanted to be a ubiquitous market maker that could be at the bid and the offer as much as possible for as long as possible during the day. And that's the Virtu's DNA. We've supplemented that with customer market making through the acquisition of Knight. So we've expanded our reach. And these two initiatives are indicative of that expansion.

[Ken Worthington, JP Morgan]

Okay, great. And then just following up on that, as you expand into the 605 business, how should we think about capital requirements or even other risks to further building out those businesses?

[Douglas Cifu, Chief Executive Officer]

Yeah, it's a great question. I'll just - the risk first. I mean, obviously, when you're making markets in single names, there's idiosyncratic risks, both from a dividend and a corporate action perspective with regard to those names. I feel there is clearly more risk, no different than the risk we took on when we bought Knight and we became a market maker in 8000 names. Very different from what we did in legacy Virtu. Options are a different breed, right? I can - I don't speak degrees, particularly well, we have people here that do. And so clearly in terms of idiosyncratic and volatility curve risk, there's more exposure, and we will manage those in Virtu kind of way. We have, our global risk management framework can cover that, we'll supplement it with subject matter experts in options which we already have.

And we will continue to market making in the Virtu style. This is not going to be a firm that is betting on vol curve. That's just not what we do. We don't bet on direction to market. We certainly don't bet on the direction of volatility. We need to understand the vol curve and we've built models to price it. But at the end of the day, that's not really what we're about. We're not a hedge fund that makes that something. So managing risk there will be meaningful. In terms of capital, I actually asked Joe to address that because he'll do a much better job than I will.

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

Okay. There's nothing, it's a market that is suited to Virtu style market making record setters. It's actually clear. And we will use a prime broker, we have a - anything that we put out there in terms of a capital plan for share buy backs and different amounts of cash flow with different levels of ANTI contemplates required capital for expansion. And it doesn't matter whether its options, block or even crypto. Crypto's - if you ask, that crypto, it's a little bit different than in that, we're managing different counterparties. But we are very conservative initially here in terms of how we access counterparties, and how we get about - how we just manage our account.

[Douglas Cifu, Chief Executive Officer]

The last thing I should have mentioned it, Joe, if you were finished, which is with regard to options. I mean, the thing that's obviously not stated, again, is that we have the delta hedge in all these products, Ken. Right? So we're really, really well positioned. I mean, we're obviously a large market maker in US equities, but also commodity products. And then internationally, we're going to be launching an Asian options business in the fourth quarter of this year. Right? And we're already there. So that's just in terms of adding some subject matter experts. We have connectivity, we have the delta hedge. So the growth in options just enables us to achieve more synergies within our equities business globally and within our commodities business. We're excited about it going forward.

[Ken Worthington, JP Morgan]

Okay. Great, thank you.

[Douglas Cifu, Chief Executive Officer]

Thank you.

[Operator]

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

[Dan Fannon, Jefferies]

Thanks, and good morning. And I guess the follow up is just on, when you think about options market making and you obviously saw a strong quarter-over-quarter growth, despite industry volumes coming down. As you look at the capabilities and what you've built out, is there anything that you're lacking and just trying to think about the potential of this business and kind of the growth from here? Are there - is there anything on your end from either a capability technology functionality that is still need to be built out? Or is it now just more kind of the blocking and tackling of normal competition?

[Douglas Cifu, Chief Executive Officer]

Yeah, no. Dan, it's a great question, and good morning. I look at it really as blocking and tackling. Like I said, in answer to the last question, it feels to me, like it's 2009 and I'm a younger man, and we're at Virtu and we're starting to launch US equities, and then we launched FX, and then we launched energy products. It is a laborious time, time taking, if you will, activity to grow a business. It's what we have done exceptionally well here. And you grow in step functionality. I remember when we launched Virtu, the first day we traded. We had spent a year getting this thing ready and we made $24,000, the first day. And Vinnie said to me, don't worry, the next time it'll be - you'll get excited when it's $100,000 and then you'll get excited when it's $ 1 million.

And you know what? He was right and he was right about a lot of different things. It's the same thing with options. We started two years ago, we were making a pittance. And we're banging our head against the wall and all of a sudden you have a good day. And you get connectivity and you add new venues and you learn about the micro market structure of each venue, it is a very difficult thing to build a market making business. The good news is, we've done it before. We have all the blocking pieces and all the credibility and all the capital that we need to do it. It's just a question of doing the hard work to build the business. And we've done it before at Virtu and we will be successful in it because that's what we do.

So there's no impediments, the only impediment is, the frustration of time and of having the right personnel to do it. We have all of those things. And so it's just going to take putting our heads down and doing the hard work, which we like doing here at Virtu.

[Dan Fannon, Jefferies]

Got it, and then obviously, the environment is much different in 2Q versus the previous several quarters. Could you maybe talk about the progression of ANTI throughout on a monthly basis to kind of throughout the quarter and I know you don't - you've gone away from kind of the shorter term stuff, but maybe some context for how Q3 has started and just from kind of a run rate perspective.

[Douglas Cifu, Chief Executive Officer]

Yeah, yeah, that's fine. Obviously, we've gone away from monthly. But yeah, I mean, the quarter was, I don't recall each of the months, I could probably look them up here. I mean, it doesn't. I have no recollection that there was a big uptake and then a downtime. It was kind of around the same feeling for the entire quarter. It felt like a little bit and like the market was just taken a deep breath between the election and all the events, choices surrounding that. New administration, COVID spending bills, potential changes to tax policy, opening, reopening. You know, what's going to happen? Vaccine rollouts, all those kind of stuff. It was clear that the marketplace was taking a deep breath. Volumes overall were down and volatility was markedly down, payment flow for equities, for example, was down 41% from Q2 to Q1, and obviously a significant [indiscernible] about retail engagement. There was just a lot in our ring of spreads. During the quarter, you could see because of realized volatility being down, almost 40%. So look, we were very, very competitive during the quarter. We gained market share in our 605 business. Our options business continued to grow. So it's a constant fight here, if you will, to continue to maintain and grow our market share and to improve our growth initiatives. And that's what we continue to do. So, was I satisfied with the quarter? No, I'm never satisfied with the quarter. If we had, if we had made $0.68, I would have said we should have made $0.72. So that's what you want out of it.

See, I've never been satisfied with any quarter we've ever had, even when we've made $2.05. So I know we can do better, we will continue to do better. The most important thing, though, is that the plan that we lay out, a year and a half ago, whenever it was, where we said, listen, this is what we're going to do, we're going to grow this firm organically, we're going to continue to fight to maintain and to grow same-store sale, we're going to manage our expenses the way we've always managed our expenses and we're going to be incredibly judicious about capital management. That's a nice way of saying, if a penny - every penny here that we don't need for market making that's not nailed down, we're going to return to our investors in the form of our $0.96 dividend and buying stock back. And that's my game plan for the foreseeable future.

[Dan Fannon, Jefferies]

Thanks for answering my questions.

[Douglas Cifu, Chief Executive Officer]

Thank you.

[Operator]

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

[Alex Blostein, Goldman Sachs]

Hey, guys, good morning. Thanks for the question. So I mean, look, so market making business continues to be volatile, as we know, quarter-to-quarter. But I was hoping we could take maybe a little bit of a step back. And Doug or Joe - Joe, if you could talk about the confidence level around sort of the lower end of the range of NTI per day, so call it about $6 per day, in your slides. As you look out, this year, next year, the year beyond that, right? So maybe help us frame how much in your budget and plans and your growth initiatives is expected to come from things that are smaller today, like options that might scale that could compensate for any of the volatility in some of the legacy businesses. So just trying to get a better framework of how to think about the kind of the minimum revenue levels for the company?

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

Hey, Alex. It's Joe. And the answer really isn't any different than, over the past year, when you look at Slide 5, those illustrative ranges of outcomes where the chart starts with $6 million. I think from the first time we put this chart out, every time I've talked about it, we emphasized this annual range, right? This is an annual sort of range and that quarter-to-quarter which would be blowing. Looking at the first half to-date, we're at $8.6 million. Right? So and why are we confident kind of starting to try to stick again with Slide 5. Look historically, stripping out all of the initiatives, stripping out the organic growth of options block where we also talked about, the three companies together, and starkly $5.5 million average ANTI we have under growth initiatives, via on an annual basis.

I think we're very confident, we're putting out this chart and say, that's the low end but quarter-to-quarter, these things are going to continue to be volatile. And we take a step back on this quarter, looking at kind of levels of volatility, look at where we are, where we're pinning this to the second quarter, a pretty environment and buying back $100 million worth of stock, 4% of the company. I think [yourself said], right? They are just going to keep hammering on that year-to-date growth versus truly meaningful guidance, all the numbers put out in terms of share repurchases, in terms of where it should come in. Yes, we're spot-on in terms of that guidance. So we feel pretty good about it. Feel pretty good about kind of simplifying the story that way.

[Alex Blostein, Goldman Sachs]

Okay, and I guess just around the new initiatives again like options, when you look out the next let's say year to two, what percentage do you think of, of ANTI could come from things that are much smaller today?

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

But again, I'd look at it, if you look at the new initiatives chart, you can see, like there's in 2018 its $160,000 a day, and in a muted quarter, nearly $0.5 million a day. First quarter 2021, they're almost $1 million. If we put that range $0.5 million to $1.5 million, that I think they'll continue to grow through the cycle and options are an up scaler. And then just look at it, versus the median, I think it's hard to pinpoint on a straight line basis, Alex, but just looking at this quarter 9%, it's been consistently between 7%, 8%, 9% over the past couple of quarters and in past year I expected it to uptick a little bit, as we continue to - as we hopefully get closer to that $1.5 million today, I'd expect it to come.

[Alex Blostein, Goldman Sachs]

All right, cool. Thanks very much.

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

Thanks.

[Operator]

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

[Chris Allen, Compass Point]

Good morning, guys. Maybe just a follow up on Alex's question on the new initiatives, there was the - we saw year-over-year decline from 2Q20 to 2Q21. Assuming most of that decline was driven by lower contribution from the strategies from KCG. Maybe you could just give us some color there. What's your year-over-year growth? And what businesses within the new industries feel better in near term basis versus others right now?

[Douglas Cifu, Chief Executive Officer]

Yeah, I think I'll take that one. Yeah, you hit it right on the head, Chris, which is, there's going to be volatility within the growth initiatives, because there's more marketplace opportunity. I mean, so for example, ETF block in the second quarter of last year, maybe, and kind of wish that would happen again today, because we be in better position for it but you probably couldn't have a better environment for like fixed income ETF block market making than you have in the second quarter of 2020. So it's kind of hard to compare Q2 2022 to this period, because realized volatility is down 65%. So a lot of what we're doing there, options block ETF, is susceptible, right, to the whims of volatility. And you're going to see that. Capital markets, which is more of a commission based business now, but the lion's share of what we're doing in the growth area will be impacted by volatility. So, the way to look at it is, if you now look at it over the longer cycle, as Joe indicated, you look at where the CAGR is, and it's meaningful.

So there's nothing really to read into there, other than they are parts of our Market Making business. They will continue to grow organically as they have, but there will be periods where volatility ramps up and ramps down. And as Joe said, it is consistent. It will be somewhat somewhere between, 7%, 8%, 9% of our Adjusted Net Trading Income and our expectation and hope is that, that as a contributor to the overall firm P&L, that they continue throughout the cycle to grow.

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

I think your question is, we break out, we bucket the initiatives into existing markets growth versus new market. If you go back to the earlier periods, if look at 2018 on that Slide, most of those amounts of 2019, most of that was from the existing markets, right? So in a volatile business, where you have a quarter like a second quarter of 2020, which is a great environment, the growth in the existing markets, the legacy cases, strategies and [FX] business are going to perform better, right? So you're starting from a much smaller base in the options market making versus block market, and some of the other stuff. And those are continuing to grow. It's got a smaller base. So that's another reason why your intuition is correct. Doug?

[Chris Allen, Compass Point]

And then ultimately, it's about Execution Services. Last quarter for a call correctly, you talked about some of the growth in the recurring elements of the business, have been taking market share from other players. Maybe you can give us an update on both of those angles and maybe talk about where you're from customer penetration perspective?

[Douglas Cifu, Chief Executive Officer]

Yeah, sure, great question. So look, I mean it that is, I love that business, right? We obviously, we've grown it organically from inorganic start, because we combined the Knight and the ITG businesses together. We extracted a meaningful amount of synergies. And let's be candid, like we, when you drive a customer business, and you affect with it every customer. We're migrating, everything you've been using for the last umpteen years is terrific, but guess what, we're migrating on to this new technology and new platform called Frontier, which is the Virtu system. Trust us, it'll be better, you'll have a better experience.

And so that's been a bit of a process. I am very grateful and thankful to our customers who took the time to do the AB testing. And they have seen that the Virtu system is highly performing. And so as a result, we are winning, share and winning wallet. Our market share in Q2 was higher than it was this time last year. We are adding new asset classes, to our Triton, right? Triton executed at first fixed income trades and then its FX trade. During the quarter, we've added new asset class to CDS and Swaptions to our RFQ-hub products.

So we're doing things that we talked about when we bought ITG. We merged with ITG rather, that we thought would be impactful to our customer base and will help us grow. And that's what we're doing. So we're focusing on leveraging our core technology to do more for our clients, and addressing opportunities that we find in the marketplace. And we will continue to grow.

In terms of the - the capital markets business can be a little more up and down. Right? A little more lumpy is probably the right way to describe it. And yeah, similar to, I guess what you'd see in a large investment bank. And so, capital markets is a fantastic business. First, the guys that run it are wonderful and have vastly exceeded even my own aggressive expectations as to performance. And but it was down from Q2 to Q1, not by any fault of their own, just because the market was less robust. And so, I continue to be excited about the trajectory of our execution services business led by Steve Cavoli, who's done a great job - great job.

And the last thing I'll say with regard to some of our subscription business is, we really launched these big data offerings, I guess you would call it. Our open intelligence and our open python products, out of our analytics business, which clients and customers really like a lot, so again, a lot of really, really good tailwinds in that business. Again, it's still going to be driven a lot by volumes and what the marketplace offers, but excited about that business, going forward.

[Chris Allen, Compass Point]

Thanks guys.

[Operator]

The next question comes from Sean Horgan with Rosenblatt Securities. Please go ahead.

[Sean Horgan, Rosenblatt Securities]

Hey, guys, good morning. I hate to continue to harp on payment for order flow. But I do have one question, maybe for you, Doug. It seems there's some misperception of wholesaler's dependence on PFOF. So I was just wondering if you could explain, in your own words, what the impact of a ban putting aside, but the chances of that happening would be on Virtu or wholesalers in general.

[Douglas Cifu, Chief Executive Officer]

Yeah, I mean, thanks. Thank you, Sean. It's actually a great question. I should have actually, in my little diatribe before, I should have actually mentioned this. I mean, payment for order flow was an expensive diverter, a pickup in our [PPV] line in our GAAP financial statements. So it's an expense stuff, it's not revenue diverter, obviously, we're paying it, right? Every single retail broker, wealth manager, whatever you want to call them globally, that sends us 605 eligible order flow, that is based on the amount of price improvement we are providing to that broker. Let me repeat that, every single broker we get routed to us based on price improvement, not payment order flow. There is a small subset of retail brokers, and we all know who they are, all public. It's all transparent, it's all out there yes, it's a conflict, but yes, it's fully disclosed, that is part of our arrangement with them, asked us to pay them a rebate. And that's fine, it's been going on for 30 years, this is not some new nefarious, market structure, niche to the market and somehow some people are uncovered, right?

So, the ecosystem works. So, if payment order flow rebate were to be banned, which it will not be because that is nonsensical. It is fostered in initiation in this country. So, I cannot believe in a rational world that that would happen but putting that aside, it would have no net effect on Virtu at all. They might ask, why am I doing this and why am I so strident about it? Because one my customers like it, and two, I think it's just the right thing to do. I think this, the ecosystem, I'm very, very proud of it. So at the end of the day, there are brokers, including a very big one in Boston, that everybody knows that doesn't take payment for order flow for cash equities, and that's fine and they route 99% of their marketable orders to wholesalers. Why? Not because they're getting any payment order flow, they don't take a nickel of it in cash equities.

They route because we provide superior execution quality and a guaranteed execution and so they've effectively outsourced that service to Virtu and to the six or seven other wholesalers that they deal with. And these are really, really smart and really, really successful people with access to every piece of technology understanding of the market that they possibly could. So in what universe is that wrong? And in what universe is that not good for the retail investor. And again, that's why I will continue to be front-footed on this, positive and strident and very transparent, because I know that the wholesaling ecosystem is, has provided an enormous amount of value, and it has enabled an enormous amount of innovation.

And people talk about lack of access to this and that and equality and whatnot, we should all be very proud that in this marketplace, anybody that has an iPhone or some type of device can download an application from, I don't care what broker it is and for no dollars, zero dollar commission can buy not only just the share, but $5 worth of some stock that they may have interested in. That's empowering. That's democratization of a marketplace. And so for an order route, that's what competition and regulation has brought to this country. We should all be very, very, very proud of that.

[Sean Horgan, Rosenblatt Securities]

Great, thanks. And then sort of along those same lines, we've heard talks of vertical integration from the retail brokers and things like that. So I just wanted to get your thoughts on that or just an update on, what you're seeing on the M&A front in general?

[Douglas Cifu, Chief Executive Officer]

Yeah, yeah. So, it's a great question. Look, I mean, I think when people say, look, I'm not trying to talk about any particular broker, or anybody what anyone else that I - they're all my customers. I - we love them all, okay? I am the Switzerland here of customers. At the end of the day, people are concerned about conflict. So the notion that a retail broker would somehow start up a market making unit and try to internalize its own flow. I mean, if there is concern about payment for order flow, where you have a third party, multiple third parties, in a fully transparent, regulated way, providing a rebate. Can you imagine what the regulator's down in Washington and at FINRA would say about a retail broker starting up with its own wholesale unit, that's the first thing.

The second thing is, it lack the fundamental understanding of how wholesaling works. The reason the ecosystem works for Virtu, Citadel, Susquehanna, Two Sigma, UBS and everybody else is because we have 200 relationships. If we were solely a market maker for picking your name of ABC broker, we would not be in business today, it doesn't work that way. You need a full cornucopia of these orders that balance against themselves. We have had many periods of time, days, weeks, months, this will surprise people where we are losing a meaningful amount of money from large retail brokers, individuals, right? And we adjust our execution quality. And sometimes it gets better, sometimes it gets worse. But if we were solely trying to provide market making services to a single retail broker, it would not work.

So the notion that a retail broker, which has no ability to do this today would somehow wave a magic wand and throw some fairy dust on a situation and become a wholesaler with regard to its own order flow. I mean, candidly, is almost naive, I guess is the right way to describe it. I mean, Schwab sold its market making unity to UBS years ago, E-TRADE got into the business, that is what Susquehanna, is today. So that that ship has sailed. I don't think it's getting back into port anytime soon. Because in the intervening 10 years, since those firms got out of the business, it's just gotten more competitive, and execution quality, thanks to the competition, and the fine efforts of all of our retail broker partners, has improved 750%. So the margins in this business have shrunk dramatically. So it just doesn't make sense to try to do it for an individual broker.

So anyhow, I've talked too long on that answer. I think it's kind of counterfactual to suggest otherwise. And I'm happy to answer any questions you've got.

[Sean Horgan, Rosenblatt Securities]

Thanks, Doug. Appreciate the answers.

[Operator]

[Operator Instructions]. The next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

[Michael Cyprys, Morgan Stanley]

Hey, thanks for taking the question. I just wanted to ask about buybacks in the sensitivity table that you guys show on Page 8. I'm just looking at the scenario of $8 a day of daily trading net income, which is like $2 billion of adjusted trading net income for the for the year. And then I kind of offset that with the expense guidance, say at the high end of $645 million. But to just that your cash generation is called about $1.4 billion or about a $1 billion after tax, yet the range you show for buybacks is about $300 to $400. So that's like a 30% to 40% payout ratio, then you think about the dividend on top, that's another 10%. So all in, it looks like what you're showing on the page is a 40%, 50%, sort of capital return payout ratio on that $8. It would just seem that you have a lot more capacity to potentially return more than that, particularly since you stopped paying down debt. And I just wonder why that's not the case to pay out substantially more, and maybe you could walk us through the different uses of your free cash flow. Sorry, for the long question.

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

Well you have the interest, you have taxes, you have dividends. You have - we do model in here, excess cash flow suite, because we have that in the terms of our debt. So you've got to factor those things in as well. So I think the nominal amount that is appropriate, going forward, and obviously, if we had an outsized quarter where we were called on the debt that we're going to repay, for a chunk of it, we would obviously look for an opportunity to refinance and kind of get that back to the nominal level that we are at today, right? So have the right capital structure today, I guess, to the extent that you want a modeling like we're seeing a very kind of, reduction, because it requires repayments in your items.

[Michael Cyprys, Morgan Stanley]

Got it. Okay, thanks. And then apologies if I have missed this earlier, I hopped on late but just hoping to talk a little bit about the monthly progression of the adjusted trading net income throughout the second quarter. And maybe you could also touch upon the mix and composition within the different strategies, how that sort of evolved? And then how you see the environment shaping up in July for the environment relative to those three months of the second quarter. Thanks.

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

Yeah, sure, good question. I did - Dan Fannon I think about this before. Obviously, we've kind of way from monthly results but what I did say is, there was, to my recollection, there wasn't a material swing, from April, May, June, and it was kind of a consistent month. I said earlier, and I'll repeat, which is that it felt like the wind kind of came out of the market a little bit, and people kind of took a deep breath. Volumes were down on the 30% and realized vol was down 30% to 40%. All the metrics I know you have access to and you're aware of, so that kind of combined for the type of quarter that we had which again is, it's just the new normal in terms of volume volatility. We'll take it - it's obviously - it provided a reduced market making opportunity but we gained 605 market share options that they did better relative our ETF block lines were roughly flat relative to the marketplace being down.

So, we continue to march forward. Again, we're not, I've kind of gotten away from the monthly financial and I've gotten away from prognosticating about like the next quarter. So I'm not going to really comment on July other than to note that it looks like some of the volumes and volatility numbers were coming back in July. August, has always been either kind of a feast or famine kind of month, Michael. Sometimes when the S&P downgraded the United States in 2012, it was a, it was a great month for a market maker, and then other years, everybody's in the Hampton. So it's, maybe they're in the Hampton already, because they've been there for a long time. So it's kind of hard to look forward beyond that.

Again, we were running this firm for the long term and trying to get away from kind of, forget about quarter-to-quarter fluctuations, but certainly month-to-month, because I just don't think that they're really meaningful in the longer story that we're trying to lay out here.

[Michael Cyprys, Morgan Stanley]

Great, thanks so much.

[Douglas Cifu, Chief Executive Officer]

Thank you.

[Operator]

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

[Douglas Cifu, Chief Executive Officer]

I just want to thank everybody for taking the time and I would be remiss if I did not note and comment as Chris and Ken really hope about Rich Repetto's running style. Rich, we're proud of the fact that you're after exercising and we assure you that you are much faster than Joe and myself. We are not a running management team. So -

[Joseph Molluso, Co-President and Co-Chief Operating Officer]

Even shot-put.

[Douglas Cifu, Chief Executive Officer]

We would beat you in the shot-put. Anyhow, we look very much forward to engaging with our investors and talking to you all next quarter. Thank you.

[Operator]

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