Virtu Financial Inc
NASDAQ:VIRT
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Virtu Financial Inc
Earnings Call Analysis
Q2-2024 Analysis
Virtu Financial Inc
Virtu Financial reported a strong second quarter performance, achieving an adjusted EPS of $0.83 and an adjusted net trading income of $6.1 million per day. The company’s adjusted EBITDA was $218 million, reflecting an impressive EBITDA margin of 56.5%. This strong performance was driven by its Market Making businesses and growing Virtu execution services franchise, despite a decline in headline volume and volatility statistics.
Virtu Execution Services delivered $100 million of adjusted net trading income, marking a 3% increase over the previous quarter. This achievement is particularly notable given the decrease in U.S. notional turnover by almost 6%, Pan-European notional turnover by about 2% per day, and Tokyo Stock Exchange notional turnover by around 10%. These results underscore Virtu's ability to leverage scale in its global multi-asset class platform, making strategic investments in technology and infrastructure to meet client needs effectively.
Virtu’s strategy of forming nonexclusive strategic partnerships and making key senior hires has enabled it to elevate its offerings and expand its addressable market. By distributing scalable technology to other sell-side institutions, Virtu helps these partners benefit from its expertise in market access and trading automation, creating recurring revenue opportunities.
In the Market Making segment, Virtu achieved $286 million of adjusted net trading income or $4.5 million per day. The company made several model adjustments and enhancements, improving internalization opportunities that facilitated better pricing and attracted more flow. This led to superior results in single stocks and ETFs across various regions, despite reduced volatility and softer results in certain commodity segments.
Virtu successfully refinanced its $1.7 billion debt with a $1.25 billion term loan and a $500 million bond. This refinancing, coupled with the hedging of $1.08 billion through 2025, extended the maturities on its long-term debt by nearly three years. Additionally, Virtu repurchased 1.4 million shares at an average price of $22.34 in the second quarter, reflecting its commitment to returning capital to shareholders.
The company maintained an efficient cost structure, with adjusted cash operating expenses recorded at $168 million for the second quarter, consistent with prior guidance. Virtu reaffirmed its commitment to a $0.24 per quarter dividend, demonstrating its focus on returning value to shareholders while managing costs effectively amidst inflationary pressures.
Virtu’s growth initiatives, particularly in new asset classes like fixed income and global options, are expected to generate significant long-term value. The company has seen increased interest in its fixed income pre and post-trade analytics and cost curve offerings. These initiatives are poised to drive future revenue and further establish Virtu’s presence in areas where it previously had a minimal footprint.
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Good day, and thank you for standing by. Welcome to the Virtu Financial 2024 Second Quarter Results Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Smith, Head of Investor Relations. Please go ahead.
Thank you, Kevin, and good morning, everyone. Thank you for joining us. Our second quarter results were released this morning and are available on our website. With us today and on this morning's call, we have Mr. Douglas Cifu, our Chief Executive Officer; Mr. Joseph Molluso, our Co-President and Co-Chief Operating Officer; and Mr. Sean Galvin, our Chief Financial Officer. We 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 that are, therefore, subject to risks, assumptions and uncertainties, which may be outside the company's control. Please note that our actual results and financial conditions may vary 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 on 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 of risk factors contained in our annual report, Form 10-K and other public filings.
During today's call, in addition to GAAP measures, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. These non-GAAP measures should be considered as supplemental to and not as superior to financial measures as reported in accordance with GAAP. We direct listeners to consult the Investor portion of our website, where you'll find additional 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, and good morning, everybody. This morning, we reported our second quarter results. For the quarter ended June 30, Virtu earned $0.83 of adjusted EPS on $6.1 million per day of adjusted net trading income. We generated a 56.5% EBITDA margin and $218 million of EBITDA, both on an adjusted basis. We performed well this quarter compared to headline volume and volatility statistics thanks to strong performances from our Market Making businesses, our growing Virtu execution services franchise and meaningful contributions from our organic growth initiatives.
Beginning this quarter with Virtu Execution Services, our business performed very well. Adjusted net trading income was up 3% over the first quarter, delivering $100 million of adjusted net trading income or $1.6 million per day, the highest since the second quarter of 2022, when volumes were 5% higher and volatility was 63% higher. These results are especially impressive considering that U.S. notional turnover was down almost 6%. Pan-European notional turnover was down about 2% per day. And in Asia, Tokyo Stock Exchange notional turnover was down about 10%. Virtu's scaled operations afford us the unique ability to continually invest in our global multi-asset class platform to meet clients' needs and maintain our position as a valuable partner.
We believe these investments in technology and infrastructure are essential for providing the efficiencies clients need to thrive in a fast-paced and competitive landscape. And it's clear that our multiyear investments are paying off as evidenced by third-party validation and increased client adoption. Major contributors to this are our multi-asset class capability, which makes us eligible to win more RFPs and our white label offerings or what we call Virtu technology services which allows us to distribute our scalable technology efficiently and strategically to other sell-side institutions, helping them better serve their local clients. These nonexclusive strategic partnerships create recurring and reoccurring revenue opportunities for us and allow regional and boutique brokers to benefit from Virtu's global access to markets advanced trading automation, risk management and rich data analytics platform.
Partnerships like these allow us to accelerate the efficient distribution of our offerings and to expand our addressable market by serving new clients and additional verticals. To help us realize this important opportunity, we've made several senior hires in the U.S. and abroad, industry veterans with impressive track record of building successful B2B franchises in Tier 1 global banks and exchanges. Recruiting and retaining human capital has been crucial to making enhancements to our product suite and creating the right distribution network. Our disciplined approach to staffing means we've kept a constant level while adding key talent to support important initiatives.
We've also seen interest in our new [ IRS CDS ] analytics offering as well as our fixed income pre and post-trade analytics and cost curve offerings. These are examples of how, as a result of the scaled global platform we built, we can collaborate with clients understand their needs and rapidly develop practical solutions to their problems. We are as excited about the future of this business as ever. As always, our offerings are driven by client demand and built around long-term sustainable partnerships.
Turning to Market Making. Despite the muted background, our business performed very well, including in the United States, where both our customer and noncustomer Market Making businesses delivered an exceptional quarter thanks in part to the continuous cross desk internalization improvements made by the team and an increase in the attractiveness of the flow we received offset by reduced volatility across many drivers. While we saw softer results in certain commodity segments in the second quarter, we recognized meaningful benefits from enhancements to our global equity market making operations that drove outstanding results in single stock and ETFs across the United States, Canada, Europe and Asia. These enhancements, combined with our focus on optimizing internalization opportunities helped us achieve greater results this quarter despite the reduced opportunity compared to last quarter.
This is a great example of how we're focused on investing to enhance our yield from every opportunity in any market condition. We are proud of the continued real progress in our core Market Making business as well as our success in the new areas, which we had no presence in only a few short years ago. Growth initiatives generated $670,000 per day in adjusted net trading income contributing 11% of our overall adjusted net trading income. I will highlight results from the standout performers this quarter. In ETF block, our continued growth is the result of the team's efforts to onboard new clients, broadening our distribution, develop new pricing models to win RFQs and build streamlined processes to create operational leverage as we expand our services to more clients in more asset classes and geographies.
In addition, our growing symbol and underlier coverage capabilities has opened the door for broader relationships with ETF issuers and fund managers, including facilitating their regular rebalanced execution needs. Our growing options business delivered stronger performance than the prior quarter despite lower addressable opportunities. Building our global options capability continues to be a top priority of the firm and we expect this to be a significant part of Virtu's future as our global footprint grows.
Similarly, we remain optimistic about the growth potential for us in the fixed income markets given the rapid growth rate of the accessible market opportunity moving in our direction and the pace at which we are developing technology and deploying the talent to increase our footprint in the space. The opportunity in fixed income is especially exciting when combined with the synergistic benefits from our growing ETF block desk.
Touching briefly on crypto. Our crypto Market Making business was also a meaningful contributor, albeit the opportunity this quarter was muted as spot Bitcoin ETF volumes were down over 30% compared to Q1. We are strategically expanding our crypto venue footprint in a Virtu manner that is consistent with our historical appetite for risk. Our expansion in the spot crypto markets enhances our liquidity distribution and access to desirable diverse order flow. As part of this development, we're building our cross-product internalization capabilities. which allow us to keep more of the spread we earn and reduce trading fees similar to what we have built in other asset classes across the firm.
Looking forward, we are working with ETF issuers to prepare to support spot [ Ethereum ] ETFs and with exchanges and regulators to be ready to make markets and options on spot crypto ETFs when they are approved. As we mentioned last quarter, the introduction of spot crypto ETF products has transformed Virtu's role in the crypto ecosystem and plays to Virtu strength by enabling us to leverage our scale capabilities to service clients and the markets. The recent success of the crypto ecosystem has rapidly accelerated since the launch of spot ETFs, and we are seeing more adoption from traditional investors than ever. We continue to see client demand for our unique abilities as well as demand for our liquidity from new platforms and products coming to market. Suffice to say, we are still in the early innings of tapping the growth opportunity in crypto.
Now I'll turn it over to Joe for more commentary. Joe?
All right. Thank you, Doug. Overall, the market environment was mixed down compared to the prior quarter. Realized volatility of the S&P 500 were down about 6%. U.S. equity volumes, excluding sub-dollar shares were down 4%. U.S. options volumes were up about 1%. Indicators of retail activity in the U.S. were also mixed Rule 605 volumes through May were down 5%, but IBKR's equity share volume was up 17% for the quarter. In FICC markets, FX volumes were up about 5% to 10%. Energy volumes were up 1%, while high-grade credit volumes were down over 11% versus the prior quarter. I'll speak briefly about the debt refinance we did as well as our buyback program before turning it over to Sean to review the financial results.
At June 30, 2024, our total invested capital stood at over $1.8 billion. Our incremental returns on capital remain superior on a long-term basis. Our ability to generate significant returns is evidence of our broad and diverse service offerings. And as Doug explained, our growth initiatives have begun to pay dividends. Our ability to generate superior returns would be even greater as our new initiatives, particularly fixed income are the more capital-intensive businesses on a relative basis. In quarter 2, we used a portion of our free cash flow to repurchase 1.4 million shares at an average price of $22.34. To date, we have repurchased 47.3 million shares at an average price of $25.
Quarter end share count was 161.4 million outstanding, bringing our buybacks on target to fit within the ranges we have announced publicly. Since we initiated our share repurchase program, we have repurchased over 18% of the fully diluted shares of Virtu net after new issuances. Our share repurchase program year-to-date is within the guidelines we have published. This quarter, we saw an opportunity to refinance and diversify our long-term debt outstanding. We refinanced our $1.7 billion of existing debt with a $1.25 billion term loan priced at SOFR plus 275, which was tighter down from the 3% spread we had prior to this and a $500 million bond at 7.5%. All but $170 million of the loan -- of the floating portion of the loan is hedged through the end of 2025.
Together with this refinancing, we renewed our holding company liquidity facilities and extended the maturities on our long-term debt by nearly three years, so we are very happy with this outcome. While results from market-related businesses like ours will always vary with volumes and volatility and market environment Slides 5 and 6 in the supplemental materials illustrate the sustained earnings power of our business and the positive leverage we enjoy from capital management as well as our growth initiatives and the cumulative impact of our share repurchases. On the expense side, adjusted cash operating expenses were $168 million in the second quarter. Our run rate cash operating expense is up about 3% year-over-year, also consistent with prior guidance.
Our cash compensation ratio of 22% and our total compensation ratio was 27% for the quarter compared to 26% and 32%, respectively, for the full year 2023. We expect cash operating expenses to remain within the recent historical range. And as we have done in the past, we'll provide more clarity on compensation and other expense numbers as the year unfolds. Although we also expect the ratio to remain within historical norms. Regarding our total cash operating expenses going forward, we will continue to assume low single-digit overall increases in operating expenses.
So I'm going to turn it over to Sean to just go through the financials.
Thank you, Joe, and good morning, everyone. On Slide 3 of our supplemental materials, we provided a summary of our quarterly performance. The second quarter of 2024, our adjusted net trading income, which represents our trading gains net of direct trading expenses, totaled $385 million or $6.1 million per day. Market Making adjusted net trading income was $286 million or $4.5 million per day and Execution Services adjusted net trading income was $100 million or $1.6 million per day. Our second quarter 2024 normalized adjusted EPS was $0.83. Adjusted EBITDA was $218 million for the second quarter of 2024, and our adjusted EBITDA margin was 56.5%.
On Slide 9, we provided a summary of our operating expense results. The second quarter of 2024, we recorded $184 million of adjusted operating expenses. We continue to maintain a efficient cost structure and disciplined expense management, which has helped us to control our operating expenses during the inflationary environment. Financing interest expense was $23 million for the second quarter of 2024 with the benefit of our recent refinance and the interest rate swap contracts that we entered in the prior years, our blended interest rate was approximately 7.3% for our long-term debt in aggregate. We remain committed to our $0.24 per quarter dividend and combined with our share repurchase program, this demonstrates our continued commitment to return capital to our shareholders.
Now I would like to turn the call over to the operator for the Q&A.
[Operator Instructions] Our first question comes from Patrick Moley with Piper Sandler.
Congrats on a strong quarter. Doug, congrats on the Panthers victory. It's pretty cool to see you and Vinnie get your names immortalized on the Stanley Cup. It's fun to watch. So if we back out organic initiatives, ANTI was up 9% sequentially this quarter. I know we only have two months of 605 data, but those reports implied that the opportunity or quoted spreads have contracted 11% quarter-to-date. So could you just help us understand and maybe elaborate on what drove that disconnect this quarter? And then just maybe looking at first quarter versus second quarter, what were some of the notable changes in the overall environment that drove a sequential strengthening.
Yes, and thank you very much for the kind words. I greatly appreciate it. Yes, as I said in my prepared remarks, I was very, very pleased with our performance during the quarter. As you know, a lot of the metrics that we look at and frankly, that we point you guys to around quoted spread and realized volatility were down quarter-over-quarter. I think there was some increase in the S&P intraday volatility, which definitely helps when there's price level changes in the S&P during the day as opposed to realized volatility, measuring volatility at the end of the day. But put that to the side. I do think, look, I mean as I've indicated on these calls before, we are very much always investing and working on our models on the customer Market Making side to make sure that we are providing the best service, the best execution quality to our clients, while at the same time, monetizing the flow as best that we possibly can.
So we've made a number of model adjustments for lack of a better word and enhancements that were that contributed during the quarter. And as I indicated in my prepared remarks, one of the things that I'm most proud about this firm is that it really is a single unitary firm. We don't have trading pods, we [ know ] trading debt, which means that our opportunities to internalize within our Market Making businesses, certainly, easily on the noncustomer side, but even within the customer and the noncustomer Market Making business are tremendous. And so that does a couple of things. Obviously, it minimizes external costs, both exchange costs, SEC fees and et cetera, but it also enables you to be more confident about your market making and to tighten your spread, which, therefore, thereby attracts more flow. So better pricing to get more flow, more flow begets more opportunity. And this firm has historically been very good at that.
I should also point out, and there's a reason I started our remarks -- my remarks rather with Virtu Execution Services. It had a really, really good quarter. We have -- and I give Steve Cavoli and the folks in the Virtu Execution Services part of our business, a great deal of credit. They have spent the last 4-plus years since the amalgamation, I'll call it, Knight and ITG into the Virtu world, essentially changing the tires on a car as it was going down the highway at 70 miles an hour. We don't stop here at Virtu and replatforming and reconstituting a broad suite of financial products and then rolling that out to clients in an embedded client base that was comfortable with a lot of ITG and Knight products. but now it looks at what we've accomplished and says, "Man, this is really, really impressive." And so we've always competed on execution, quality and customer service.
The execution quality has demonstrably improved and we have a product that we rolled out using machine learning techniques called [ Switcher ], which essentially is the guys internally and I'm a golfer. I love this analogy, it's kind of like the [ Uber catty ] that you wish you had when you play golf. You get to a shot, and it tells you this is exactly the club you should hit and here's what it's going to do, and this is what we strongly suggest that you do. And so our switcher product does that for our buy side and our sell-side clients. And then it says, here's the current market condition, here is what we think the right set of tools you should use in order to have superior execution quality and clients -- that resonates with clients. And that's really the value proposition of Virtu.
The last piece on Virtu Execution Services, which I mentioned in my prepared remarks, it's Virtu technology services or think of it as kind of broker in a box as the world has gotten a lot more competitive and as commission rates have skinnied and have commission dollars are more scarce, smaller-scale players and even scale players are taking advantage of our ability to produce superior technology and execution, and we are more than happy, more than happy to white label that to firms that otherwise people would view as competitors. They're not. There's a great symbiosis on the sell side, and we're there to provide technology services, and that really has resonated with folks on the sell side. So I think, Patrick, to answer your question, it really is a combination of all of the aforementioned a lot of singles, and you could score runs.
And then as a follow-up, on the organic growth, ANTI, it was up almost 70% year-over-year. So I don't want to throw any shade on it, but it did contract 33% sequentially. Can you help us just parse out how much of that was driven by a contraction in the crypto environment versus something like ETF block which you called out and then as we think about the crypto business going forward, how do you expect to drive revenues there in the absence of new ETF approvals, which it appears can drive outsized results in the quarter in which they're issued and launched given kind of the contraction that it appears like occurred in that industry this quarter.
And as we've said on prior calls, the organic growth initiatives are not immune to market forces. And so like, for example, [ SPY ] option volumes were down 9% quarter-over-quarter. Obviously, the crypto I mentioned in my prepared remarks, spot Bitcoin ETF volumes were down roughly 30% quarter-over-quarter after the exuberant to the launch. Same thing with opportunities in global block ETFs as volumes were down compared to quarter-over-quarter. Look, I'm very, very pleased with our continued efforts in those areas. We continue to expand and to grow and to get better but we're obviously subject to lack of a better word, to know what the marketplace and what the overall macro volumes are.
So we're sitting here today. If you had said to me three years ago, like, hey, you're going to have $600,000 plus of adjusted net trading nearly $700,000 from these three categories, which effectively provided 0 P&L three years ago, I would have been like ecstatic and accepted right away. In crypto, in particular, look, we're onboarding new venues and creating a liquidity distribution network similar to what we have in FX. I think there's going to be a growing demand from counterparties, you haven't yet seen full institutional adoption, obviously. There's been some very notable firms that have not embraced crypto or digital assets, but there's been a ton of RIAs and other institutions that are now allocating a portion of their investable assets, if you will, to digital assets and to crypto.
So we will continue to do that. There's a plethora of new venues that want our liquidity provisioning services, including, obviously, as I always do, and my public service announcement for EDX Markets, which we own a piece of with our friends at Citadel and Fidelity and Schwab and others. And so we think there's going to continue to be an evolution of both the distribution channels in digital, but also the products. As you alluded to, it appears like there will be a puff of white smoke from the SEC on July 23 and [ cerium ] products. [ Genser ] will open up the [ pearly ] gates and allow them to be traded on July 23, which we're very excited about because it's a whole new class of products. And then as I mentioned in my prepared remarks, there'll be options and leverage products and this, that and the other thing, as market participants generate new ideas and market investors want new ideas. And we'll be there in the midst of that ecosystem, providing the Market Making services.
Patrick, the other way to look at it as well is -- as Doug said, the growth initiatives are not immune to market forces, but in the second quarter, $670,000 a day. If you look at that slide, in the supplement in 2020 and 2021, we were $641,000 a day and $540,000 a day in much more robust markets, right? So there's real growth there on an apples-to-apples basis and fixed income hasn't even really taken off yet. So we're really happy with that.
Our next question comes from Craig Siegenthaler with Bank of America.
So we know it's early days, but how should we size up the tailwind from three ETF approvals? Because I think you mentioned last quarter you were seeing a couple of hundred thousand dollars a day around the Bitcoin ETF approvals. So if either ETFs gather about half the assets that Bitcoin did, does this mean about $100,000 a day. Just curious on how we should size up this opportunity.
I'm always somewhat reluctant to prognosticate like what the take-up is going to be from these new products. I mean I think there have been -- I think the key takeaways have been -- there have been significant ETF inflows as a result of the spot Bitcoin ETF approval. So I would imagine that there will be a similar circumstance here. There's going to be folks that are obviously transitioned from Ethereum to Bitcoin. So I think they'll be the initial surge of activity for lack of a better word. I don't know how many issuers ultimately will get approved on July 23, and subsequently, there's 11-ish or so, I think, spot Bitcoin ETFs. So I think the ETF -- I'm sorry, the spot Ethereum market has been growing. So whether it's 1/2 in size or 1/3 in size, I think it's probably closer to 1/3 than 1/2 is how I would kind of scope it out.
So look, it's -- and the marginal dollars on that effectively flowing to the bottom line of Virtu after we pay exchange fees and the SEC fees and all that other kind of stuff, it's essentially 100% because it's not like we're adding new servers and personnel to monetize that opportunity. And again, I'm excited as more products are sort of regularized as ETFs I think you'll continue to see more -- certainly, there's been a significant amount of retail interest, but I think you'll have more institutional adoption. And that's really the exciting part for us, right, because that's where we can play a key role as a liquidity provider.
And then our follow-up is on the fixed income bill out. So based on your organic growth revenue, it looks like ETF blocks revenues were probably down overall, but how did the fixed income ETF component at trend relative to the rest of that number? And then on the VS side, what are you seeing in fixed income?
So let me handle the second part first because it's very exciting. I mean, I think one of the key thoughts we had when we decided that ITG would be a good partner for us to amalgamate with was we saw their global distribution. We saw that the standing that they frankly had with global asset managers and pension funds, which is really outstanding, 30 years of goodwill. But what they really lack because they didn't have the DNA of a Virtu as a multi-asset class market maker was they were fabulous in global equities, and I would say they were struggling in other asset classes. And as the world and the functionality that is required by -- certainly by the buy side, and also by the sell side, but really by the buy side has screened out from multi-asset class capability. That's where the combination of Virtu and ITG has been incredibly [ comer ].
So may be a specific example, like our EMS product, Triton, which has had a great brand in global equities and had struggled candidly in FX and other asset classes. Now today, sitting here today, we are legitimate multi-asset class EMS solution for the global buy side. We incredibly respond to requests for proposals from significant global asset managers, pension plans, sell-side firms. And so we're a real competitor to be reckoned with. We have an ability to harmonize the firehoses of information, i.e., market data that I believe is superior to our competitors because that's what we do on the Market Making side. We have robust and scalable technology that we can offer to clients because, candidly, that's what we do on the Market Making side. So that value proposition as a fully scaled multi-asset class technology broker-neutral provider.
I mentioned also some of the new analytics products that the folks in our analytics group have rolled out, has, for the first time, really given this firm credibility as a multi-asset class technology provider. And that's what I'm most excited about on the execution side. To answer your question on the Market Making side, certainly, as I've indicated, we're a broad ETF block market maker. We obviously do all the equities products. We're great in commodities. But in order to be credible, as I've said on prior calls, we needed to be in the fixed income space as well. And because that's more opaque and more bespoke, the baskets aren't as precise as they would be in equities, there's both an art and science to being an ETF market maker and certainly, our competitors have the great firms that you know Jane Street, Citadel, et cetera, are expert in that. Now we are as well. And there's certainly more opportunity with those instruments than there are with more kind of plain vanilla global ETF.
That's not to say that there's not P&L opportunities there, and there's not risky take and there aren't large transitions where clients need services. But certainly, in the fixed income subpart of block ETF there's more opportunity. And your intuition is correct, that continued to be a meaningful contributor. I think the growth drivers there in terms of -- and you all know this very well, the continued electronification of credit, and obviously, rates is going to be very, very important. The adoption of TCA tools, both from Virtu and from other firms will allow buy-side traders to trade with more alacrity around and to make better decisions around how they transition and then obviously, mandated clearing of U.S. treasuries is another tailwind. So all of these tailwinds are sort of circling around us. And I think ultimately, we're patient business builders, and we're excited about building those businesses.
Just to add specifically on the quarter, I mean we don't break out the growth initiatives, as you know, let alone the subcomponents of the ETF block but fixed income volumes, high-grade fixed income volumes in the first quarter were down 11%. TRACE volumes were down that much.
Our next question comes from Ken Worthington with JPMorgan.
Really to follow up on fixed income, [ FMX ] is expected to launch in the not-so-distant future. you're not a partner, but is there still an opportunity to grow with them and rates? And are you planning on participating on that new platform? And then as we think about sizing the rates opportunity. So clearly, the fixed income markets are big and amongst the biggest, but volatility is generally much lower how does that opportunity set look over time for Virtu in the fixed income asset classes versus something like ETF block or even options, which are much smaller markets, but much more volatile markets.
Look, on FMX, I want to be very, very careful of what I say. I think the world of [ Cantor ]. And I think they have really done some amazing things. We partner with them and we're trading on [ Fenics ] today, and we're going to be incredibly support of FMX as a market maker. We're the Switzerland, as I've always said, of liquidity provisioning. We don't pick winners and losers. Certainly, we've made key strategic investments in various platforms where it felt like, hey, having Virtu in the mix might move the dial, the members exchange, certainly, we were driving force behind that EDX as I mentioned, and there are unbelievably credible partners behind FMX and I wish them nothing but success. And it's a great thing for Virtu, right? We encourage competition it tends to drive down prices and make exchanges better.
Certainly, if there was one exchange in the U.S. I think cost would be significantly higher and spreads would be larger and all that kind of stuff, and we know the history of the last 30 years. So we wish them well, and we're going to be a [ day one ] liquidity provider and excited about the opportunities there. Fixed income is, as we've said, largely a greenfield space for us. And as markets continue to move in our direction, and there tends to be -- and there's more efficiency in centralized clearing, that's just more opportunity for us. What we have done, as I've said on previous calls, is partner with our great friends at Tradeweb and MarketAxess. Again, we're Switzerland. I love Billy, I love Chris. They're both terrific world-class CEOs, I wish them nothing but success. And they are great distribution partners for us.
I mean, candidly, to use the auspices of Tradeweb and MarketAxess to reach rates and credit end users can is seminal for Virtu, right? We don't have the distribution network. We don't have 20 to 30 years of credibility with a lot of firms. And so having them effectively stamp the good housekeeping seal of market-making approval on top of Virtu means the world to us. And so we are lit up now with hundreds of counterparties. Hundreds of counterparties in both credit and rates. As I've said in prior calls, we've cracked the top 10 in market access for investment-grade bonds, which is exciting. On Tradeweb, I would screw it up, and you should probably ask Billy, but we're like top 5 and like in small tickets for treasuries and things that are kind of more Virtulian in the rates world.
So we're getting there. We're getting there. It's very, very early innings for us, and we see it as a huge opportunity much like global options where here to for, it has not been -- forget about a key Virtu strength has essentially been nonexistent in the firm. So as -- and that asset class is very different than equities, and it's very different from options and whatnot. So we've learned a great deal. We've partnered with great firms, including that TrueMid and some of these other firms as well. I don't want to leave anybody out we're Switzerland. We love everybody. Sometimes not the regulators, but all the market participants we try to get along with. And so I'm excited about that as a medium to long-term growth initiative for the firm.
Our next question comes from Chris Allen from Citi.
I wanted to dig in a little bit more on Execution Services. Doug, you mentioned that you're seeing growth in kind of recurring or reoccurring revenues. I wonder if you could give any framework in terms of what level of revenues are generally recurring as a percentage of the overall base? And then on the sell-side opportunity, how penetrated are you there? What's the opportunity set moving forward?
I'm going to be a little snarky on the first one and say not enough that you guys would increase our multiple in terms of recurring revenue. And that was one of the thesis I'm joking a little bit, Chris. That was one of the thesis behind buying ITG, which was more of a stable sort of revenue base and a significant portion of the old ITG revenues were subscription like, and we certainly have encourage clients to move more to that model with regard to our Triton products and our analytics product. So we don't separately break it out. It's not material in the overall Virtu world, but it's certainly within the [ VES ] segment, it's not an insignificant amount, and we are making every effort with our existing and new clients to move them to more subscription models with an upside for more transactional revenue. So that's an exciting part of what we're doing there. And what was the second question? I'm blanking because I get so into the subscription question.
VES overall.
VES overall in terms of like?
In terms of the sale side.
Yes, on the sell side. So Virtu Technology Services, look, there are -- I don't want to say the United States is overbroked, but there's 3,000 or so broker-dealers in this country that are really chasing. If you exclude the big boys that have prime and research and calendar, all the large money center banks. I guess we used to call them, the Citis, the JPMorgan, the Barclays, the UBSs, the Goldman Sachs, the Morgan Stanleys of the world, fabulous institutions, very different value proposition. If you carve out all of their commission dollars. There's a pool of commission dollars left that has certainly shrunk in the last 10 years and 5 years and it goes up and down and fluctuate. So there's a lot of people chasing those dollars, including the Virtu firm. And there's firms that are just frankly subscale and don't have the resources to invest in technology.
And so what we offer them is what I loosely refer to as broker in a box, Cavoli is a better marketer than me, I guess he calls it Virtu technology services. And essentially, what we're saying to broker-dealer firms is, listen, we don't need the market share. We're agnostic as to using our own pit. You face the client and you have the full interaction with them. What we want to provide to you is we're going to give you our full algo suite. We're going to give you switcher, which is like this machine learning protocol. We're going to give you, if you want, an EMS system that can even have your name on it. We're going to give you the ITG Net connections to the world. And we're going to give you a price for that. So that enables you to focus on what you think you're good at, which is research, relationship management and all the other things at these 2,998 other brokers are specialized in and they're really good.
Let us deal with the hassle, if you will, of interconnecting the U.S. equities market and doing it with such clarity and with such precision that you can probably say to your clients. Listen, here's the pills you got. This is great execution quality. You more than satisfied your best execution capabilities. And we're going to charge you a very, very fair commercial rate for that because, frankly, we have the scale, and we've already invested in that suite of products. So essentially, every one of those sales that the guys are doing is 100% march in dollars, right, because we've already invested in that. We have the personnel here. So that's a key initiative and driver for us. And I think as the world continues to get more competitive, technology is getting more expensive and not cheaper and the cost of human capital certainly has increased because inflationary trends in this country and around the world. I think more sell-side firms will recognize the value proposition that we provide.
Our next question comes from Alex Kramm with UBS.
First off, maybe just a little bit of a follow-up in terms of the second quarter and what drove the strength. And a lot has been said. And I know there's always a lot of micro stories every quarter, but two things I think that stood out to where I think there was a short period of the mean stock phenomenon coming back. And then I think the other thing we noted was there was a higher percentage of sub dollar trading in the quarter. So can you just remind us as specific as you want to, how these things impact you in the quarter? And how should we be thinking about them in general?
Look, I mean, the mean stock thing was, I think, overblown in sort of, I don't want to say like over reported. But at the end of the day, it was fairly ephemeral and didn't have any material effect on what we do. In fact, if I could live my life without Hello Kitty, whatever his name is and the [ mean stock ] explosion, again, I'd be a very happy guy because all it does is it creates more questions about how the market works and chatter and it's a risk management issue for us. And at the end of the day, if that kind of went the way of the dodo bird, I wouldn't be an unhappy guy. So was short-lived and narrow and didn't have any material impact. Same thing with the sub-dollar symbols.
In fact, we submitted today's Thursday. On Tuesday, a rulemaking proposal to the SEC, where we've asked the exchanges on Nasdaq in particular, to tighten up their listing standards to eliminate some of these sub dollar names that just kind of I'll be nice and say do securities offerings go below $1 and then do reverse splits, wash, rinse, repeat and do it over and over again. Frankly, they shouldn't be public companies and it's really a distraction. And frankly, it's an operational risk to the ecosystem, not just us but to our retail broker-dealer partners. And so that's why we think we can make the markets better and we affirmatively asked the SEC to take action in this regard to kind of push the exchanges, more Nasdaq than New York. New York does a really good job of policing but more NASDAQ to make the markets better. So you can tell, I wouldn't have done that if it was a significant opportunity for us. If anything, it's a risk management challenge for us.
And then secondarily, this may be a minor thing, but I just want to get an update on this. Section 31 fees went up a ton in the quarter, I think May 22, I think 3.5x or something like that. Can you just remind us how that impacts your business and profitability? I mean, obviously, it happened during the quarter and doesn't look like it had a bad impact. But just wondering, given the big increase, how that actually impacts the different businesses and profitability.
Actually it's a great question, and I'm glad you brought it up. We don't talk about it because the ebbs and flows of Section 31 fees, and it's very dramatic swings. It's statutory. It's kind of idiotic the way that and I'm not playing in the SEC because it's statutory, but it's kind of idiotic, you think they could smooth it out a little more. And you're right. We're a very significant payer of Section 31 fees, because we sell a lot of securities, and that's how it's calculated. So it certainly had an impact from May. I think it was 23 when it changed from May 23 through June 30. And so we had a -- effectively, it's a transaction tax. So when the left wing crazy talk about the markets and we need an FTT I nicely try to remind people that we have a very meaningful FTT of about $1 billion.
And so it affects everybody that gets passed along as best as we can pass it along. It widens spreads. It gets passed along to institutional investors. And so yes, it's an unfortunate part of the marketplace. I wish the SEC ran their business more efficiently like we did and didn't have to jack it up as high. We've been in conversations with the SEC to see how it affects spreads in some of the very popular instruments like SPY, for example, right? It has an impact on bid offer spreads and investors end up paying it from wider bid offer spreads. We do the best we can, Alex, to absorb it, but then where appropriate to pass it along. I mean we had some starting conversations with regulators about how Section 31 fees, impacts very popular instruments like the SPY family. And so at the end of the day, I'll very intellectually say it sucks. Nothing we can do with statutory, and it's kind of part of the table stakes of being a market maker.
So nothing we should be thinking about as we think about profitability going forward to the recent change.
It shows up in gross to net. But just to take your question back to the original point, these are good detailed questions and they all have some impact. None of them this quarter would explain sort of outperformance. But as we said earlier, it is a lot of little things, right? We have a diversified market making business that we get better at. We get better at monetizing the flow. We have an execution services business poised to grow with a revamped product set. And we have growth metrics that have kicked in and done measurably better. So it is just a lot of little things kind of coming together.
Our next question comes from Alex Blostein with Goldman Sachs.
This is actually [indiscernible] filling in for Alex. So a question on capital return and management. The pace of buybacks was a little lower than what's implied by the strong EPS this quarter. So how are you thinking about it for the rest of the year? And lastly, where does M&A fit in your capital management thought process? And what's the outlook from you?
We actually changed the presentation of the slide because we thought based on some feedback we got, we thought we were being a little hard on ourselves in terms of Slide 7 where we just showed kind of an EBITDA return. So this is a cash-on-cash return. And you can see it's sort of even in a more muted environment, we're earning 65% plus this quarter, 71% on average on our invested capital, and we do generate a lot of cash. The buybacks will ebb and flow depending on market opportunity, capital deployment and just some other things that are difficult to predict. We did have republished, and I think we republished this quarter on Slide 6. Here is the target for buybacks at different levels of net trading income. So in the first two quarters, we were at $67 million, which would -- if you annualize that, it would be right in the middle of the range that we put for $6 million a day.
I'll give you the number through July '17. There's been another $6.8 million. So we've continued to maybe pick up the pace a little bit. So I don't read anything into that. It's just the ebbs and flows, and we are going to be squarely within the range that we indicated. Just in terms of M&A, we look at ourselves as we are shareholders. We look at value creation and we look at the incremental dollar and where we can best deploy it. And we see everything. We're presented with a lot of opportunities. But I think as we said, there's nothing that competes with buying back our own stock, and that's how we look at things. We like our leverage. We like our capitalization right now. We just refinanced our debt stack.
Hopefully, that's kind of set it and forget it but we do look at everything in terms of value creation. If there were an opportunity out there, that created more value in our minds than buying back stock, we would do it. But right now, we've been able to get a lot of these growth initiatives off the ground, all of them, in fact, without a third-party transaction. So that's kind of how we look at it.
I'm not showing any further questions at this time. I'd like to turn the call back over to Doug for any closing remarks.
I'd like to thank everybody for their attention and for their participation today. We look forward to speaking you -- speaking with you in November when we announce our third quarter results. Thank you.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.