Virtu Financial Inc

NASDAQ:VIRT

Earnings Call Analysis

Virtu Financial Q4 2023 Showing Resilience

In the fourth quarter of 2023, Virtu Financial showcased resilience despite market challenges. With a disciplined focus on expense management and capital structure, the firm capitalized on organic growth opportunities and adjusted to reduced market volumes and volatility. Market Making generated $2.7 million daily in net trading income with a 4% increase to $1.5 million for Execution Services. Organic growth initiatives yielded $423,000 per day, evidencing steady progress. Execution Services gained from technology investments, achieving significant milestones, particularly in international markets. A highlight for growth was the crypto Market Making business, which thrived off the launch of the first 11 spot bitcoin ETFs, indicating promising crypto-related and retail trading opportunities.

Virtu's 2023 Performance and a Positive Outlook for 2024

The closing chapter of 2023 saw Virtu Financial performing admirably under tough market conditions. With an adjusted net trading income of $4.8 million and $4.14 million per day throughout 2023, Virtu demonstrated resilience and adaptability. The company's diverse offerings shone with its Market Making segment averaging $2.7 million per day in adjusted net trading income, while Execution Services provided a solid $1.5 million per day, reflecting a disciplined focus on expense management and the capability to leverage opportunities in any market condition.

A Firm Grip on Growth and Diversification

Virtu's incremental growth plans are bearing fruit beyond the American soil, marking key milestones, particularly in Asia and Europe. These achievements include deploying execution management systems and analytics for some of the largest asset managers globally. The productivity and profitability within the Execution Services segment have grown substantially due to these strategic initiatives, and the anticipation for continued expansion in 2024 is palpable.

Embracing Digital Assets and Expanded Offerings

Cementing its foothold in the digital asset sphere, Virtu made significant headway by embracing cryptocurrency market-making, particularly with the dawn of bitcoin ETFs. The company’s active participation in the burgeoning crypto ETF market, and its optimism for the associated options markets, underscores its strategic position to capitalize on the anticipated wave of crypto ETF approvals. This foresight places Virtu ahead of the curve, ready to harness new opportunities such as the general uptick in retail trading activity, driven by the introduction of bitcoin ETFs.

Expanding Product Offerings and Capital Market Activities

Virtu Financial’s prowess expanded with its ETF block business which now includes a range of products from crypto to fixed-income ETFs. Their efforts have aligned well with the uptick in financing activities as issuers increasingly turn to Virtu's capital markets service for primary capital raising. This clear-eyed expansion across different product lines ensures that Virtu remains a dominant player in facilitating trades and raising capital.

Financial Stability Amid Expanding Horizons

The company's calculated approach to compensation and expenses underscored its financial prudence, with the cash compensation ratio standing at 26% for 2023, and a concerted effort to control overall headcount. Despite various challenges, the adjusted EBITDA margin stood firm at 38%, maintaining an efficient cost structure and demonstrating a robust commitment to returning capital to shareholders through dividends and share repurchases.

Crypto Market-Making: A Transformational Leap

The crypto market's recovery and Virtu's expanding role as a market maker and Authorized Participant (AP) in Bitcoin ETFs symbolize a pivotal evolution for the company. This involvement provides Virtu with lucrative economic prospects, potentially outpacing other initiatives such as options, ETF blocks, and fixed income. Cryptocurrency market-making is forecasted to be an increasingly profitable venture for Virtu, meshing seamlessly with their multi-asset class and multi-geographical model, marking it as a large, regularized asset class well-suited to the firm's expertise.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the Virtu Financial 2023 Fourth Quarter Results. My name is Alex, and I will be coordinating the call today. [Operator Instructions]. I'll now hand it over to your host, Andrew Smith of Investor Relations. Please go ahead.

[Andrew Smith, executive]

Thank you, Alex, and good morning, everyone. Thank you for joining us. Our fourth quarter results were released this morning and are available on our website. With us today 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 Ms. Cindy Lee, our Deputy Chief Financial Officer. We will begin with prepared remarks and then take your questions.

First, a few reminder. 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 conditions 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 on information currently 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 and 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 importance of 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 terms in the earnings materials with an explanation of why we've seen this information to be meaningful as well as how management uses these lines.

And with that, I'd like to turn the call over to Doug.

[Douglas Cifu, executive]

Thank you, Andrew, and good morning, everyone. Thank you for joining us this morning. In my remarks today, I will focus on Virtu's fourth quarter 2023 financial and business performance and strategic initiatives. Following my remarks, Joe and Cindy will provide additional details on our results. Looking at our full year and fourth quarter 2023 results, which are summarized on Slide 2 of the supplemental material, we generated $4.8 million and $4.14 million of adjusted net trading income per day for the full year 2023 and the fourth quarter of 2023, respectively. We reported normalized adjusted EPS of $0.27 for the fourth quarter and $1.84 for the full year of 2023.

Slide 3 highlights that our Market Making segment earned an average of $2.7 million per day of adjusted net trading income in the quarter, while our Execution Services business delivered $1.5 million per day, an increase of 4% per day over the prior quarter. This quarter's performance reflects the significant reduction in opportunity, particularly for our customer Market Making business compared to the prior quarter, driven by a combination of reduced addressable volumes and spreads as evidenced by especially weak 2-month stretch of volatility to the end of the year. We have seen episodic periods of softer volumes and volatility in the past, most recently in the fourth quarter of 2022 and today, we are better positioned than ever from an expense, capital structure and trading capabilities perspective to convert opportunity in any environment.

As we have said before, our disciplined focus on expense management and building operating leverage we Virtu remains uniquely ready to deliver results to any environment. While we remain very early in 2024 we have seen improvement in the overall market conditions in Market Making opportunities so far in January, particularly around crypto products, as I will address later in my remarks. As we've said previously, while market share alone is limited as a gain of performance, we would like to note that our market share in the wholesale Market Making business remains within historic ranges. We are confident that our growth initiatives, combined with our efforts to enhance our spread capture rate through greater [ internalization ], thanks to our global scale and diversity will yield benefits in any environment.

Our noncustomer Market Making business, which provides liquidity across asset classes globally, performed well in the quarter relative to the opportunity. Our organic growth initiatives, including our expansion to [ opposite ] Market Making continue to expand and perform well, making meaningful progress every quarter. In the fourth quarter, we generated $423,000 per day of organic growth which represents 10% of NT in the period. We remain very optimistic about the opportunities across all our growth initiatives, and we are excited for these initiatives to reach new heights in 2024. On the Execution Services side, our adjusted net trading income averaged $1.5 million per day in the fourth quarter, which was up by about 4% from the third quarter. We continue to see incremental and impressive results despite the general softening in the market opportunity for VES.

In addition to general wallet compression, institutional activity remains slow as investors reacted and adjusted to the sustained higher rate environment. Despite these challenges, VES performed in line with its opportunity quarter-over-quarter as well as for the full year 2023. We have incremental growth plans outside the United States, which are materializing as we transition resources from a multiyear integration of technology across a long tail of clients towards expanding our footprint. To this end, in 2023, VES leveraged our investments and enhancements to accomplish key growth milestones, including winning the remit to be the fixed income EMS or a world-class asset manager in Europe as well successfully deploying Virtu's Triton Valor execution management system, training analytics, positive work and global equity execution authors of one of the largest asset managers in Asia.

Most important overall productivity and profitability within the VES segment has grown significantly since we began the technology rebuild and monetization and streamlining the business. We are very excited about the growth opportunities in 2024 for VES. Taking a step back and look at our 2023 results. And despite the recent softness we believe our strategic focus in areas of growth aligned for long-term success as we expand our addressable market by adding more asset classes and offerings to our suite of products. Our focus on enhancing our core businesses and the continued success of our growth initiatives positions us well for any macro environment, including significant spikes in volatility and volumes that typically accompany increase in global tension and economic uncertainty, change in monetary policy and elections. We continue to hire and make investments in our business.

It is worth noting that of our current employees only 36% of them were at Virtu prior to 2019. This means that we have made significant multiyear investment in new traders, developers and quant, which we expect to continue to bear fruit in the near to medium term. And as you would expect, we remain disciplined as ever around costs throughout the year, which enabled us to realize a 47% adjusted EBITDA margins. Touching briefly on our growth initiatives and options for 2023 was another impressive year for us as we continue to expand our capabilities despite the declining opportunity set in general. In 2023, the occupancy team exceeded expectations as its capability and capacity to address opportunities increase globally.

As I mentioned on our last call, we saw a meaningful uptick in our crypto Market Making business at the end of the third quarter, which persisted into the fourth quarter. It's probably no surprise that our crypto Market Making is off to a record start in 2024 as a result of the elevated interest in new opportunities related to the recently approved spot bitcoin ETF in the United States. As I'm sure you well know, on January 10, the SEC approved 11 spot [ bitcoin ] ETF for trading and as a global 24/7 market maker, Virtu was among the first trades in these products when they began trading at 4 A.M. on the first day. We proudly acted and authorized participants for all the live issuers. While it's only been a few weeks since the spot [ bitcoin ] ETFs were approved, the ETFs have presented significant Market Making opportunities.

It's worth noting that these initial 11 [ bitcoin ] yet are just the first wave of crypto EPS that the market expects to be approved. So we expect there will be many more coming. Issuers have already filed application with the SEC to list spot [ bitcoin ] ETF as well as the number of novel crypto-related ETFs. Additionally, what crypto ETF may not interest all investors, we're also seeing an uptick in general retail trading activity across all NMS securities, coinciding with the launch of spot [ bitcoin ] ETF, which suggests that retail investors are curious. To bring it full circle, I highlight how the ETFs benefit several of our organic growth initiatives. We're raising significant opportunities for our ETF block business and new existing clients approach us to transact in bitcoin ETF and we are optimistic about the optum Market-making opportunities that await once options are listed on ETF.

Our ETF block business had a respectable year as well, and we continue to expand our offer to cover more products and more recently, including crypto ETF, as I just mentioned, at fixed income ETFs, which is especially helpful our rates trading where we continue to make key hires as well as in corporate credit. And last, but certainly not least, our Virtu Capital Markets business saw increased activity in the fourth quarter as financing activity began to return to the market and a number of issuers use our [ action ] service to raise primary capital. I'll now turn it over to Joe and Cindy, who will provide additional details about the quarter. Joe?

[Joseph Molluso, executive]

Thank you, Doug. Just briefly turning to capital and expenses. On expenses, we ended the year with cash operating expense was $643 million, and that's 5.4% ahead of last year. We think this is a solid performance in this environment and given the investments we are making to grow the business. Our cash compensation ratio is 26% for 2023. This is at the upper end of our historical range. Consistent with Virtu's history, we will manage discretionary compensation and headcount to drive profitability while retaining and recruiting world-class talent. We believe we have achieved this outcome on expenses, particularly on compensation by being prudently aggressive in hiring and maintaining compensation at levels that are best-in-class, while keeping overall headcount relatively flat.

Other non-compensation expenses were up slightly in line with our expectations. So on communications and data processing, we were up 5% in 2023 going to investment in building out new businesses and price increases for infrastructure in market data. Our other expenses in 2023 were up a bit due to favorable FX adjustments in the prior year and a little bit of increase professional fees. On the capital management side, in the supplement on Slide 12, you can see that our trading capital has remained within a range of $1.7 billion to $2 billion for this year. We remain very well capitalized from a trade capital and long-term debt standpoint as well as from a liquidity standpoint. Meaning, we possess adequate resources necessary to capitalize on upside revenue opportunities from increased volumes and volatility as and when they appear.

In fact, we were able to enter the crypto ETF market in early 2024 without a material increase to our overall capital base because of our operational efficiency and available liquidity. We maintain our public 96 annual dividend, which we have paid steadily now for 8 years despite variable results over the long term. We believe overall that our dividend is quite sustainable over the long term as it has been for the past 8 years, and we do not anticipate changes to the status quo, including our continued buyback program. In addition, we repurchased 2.4 million shares in the fourth quarter for approximately $44 million. Our period-end share count is now down to 162.7 million shares. And at this point, we have repurchased net of new issuances, 17.7% of our company in the 3-plus years beginning our program.

And with that, I will turn it over to Cindy to review the financial details briefly before we open up the call to your questions.

[Cindy Lee, executive]

Thank you, Joe. Good morning, everyone. On Slide 3 of our supplemental materials, we combine a summary of our quarterly performance. For the fourth quarter of 2023, our adjusted net trading income or ENT, which represents our trend gain net of direct trading expenses, totaled $261 million or $4.1 million per day. Market Making adjusted net trading income was $168 million or $2.7 million per day Execution Services adjusted net trading income was $93 million or $1.9 million per day. Our fourth quarter 2013 normalized adjusted EPS was $0.27. Adjusted EBITDA was $99 million for the fourth quarter of 2023 and our adjusted EBITDA margin was 38%.

On Slide 8, we provide a summary of our operating expenses results. For the fourth quarter 2023, we recorded $178 million of adjusted operating expenses. We continue to maintain an efficient cost structure and so supply and expense publishment which has helped us to control our operating expenses during the inflationary environment. We remain committed to our $0.24 per quarter dividend and combined with our share repurchase program 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]

[Operator Instructions] Our first question for today comes from Ken Worthington of JPMorgan.

[Kenneth Worthington, analyst]

I guess I wanted to kick off the call with more questions around the cryptocurrency opportunity. So first, the cryptocurrency market has rebounded, rebounded in 4Q significantly, a bit more at 1Q at the same time, role has expanded with the AP on the Bitcoin ETFs. So how do the economics change for Virtu as the number of activities participate in expands? So you started with like being a market maker in crypto spot and a market maker in crypto companies and miners. And now you're both the market maker and Bitcoin ETFs as well as the AP on the same crypto ETS. So does your position in one area make the other areas more profitable. And I guess the ultimate punch line here is how much bigger is the crypto revenue opportunity for Virtu today versus other initiatives like options, ETF block and fixed income in the near term. growth in crypto broadly?

[Douglas Cifu, executive]

Yes. Thank you. It's a great question. And to give you credit, you've been asking about crypto for 2 years, I'll have a great answer for you, and thanks in large message of some of these forced regulatory changes in the United States. I mean this has become -- I don't want to be too dramatic, but a bit of a transformational moment for Virtu with regard to this asset class, certainly. And we've seen the results already in the first quarter where we're generating meaningful 6-figure daily P&L from this asset class. And I think you kind of really hit the nail on the head. It really is the perfect type of asset class in the perfect storm, if you will, for Virtu because it combines a lot of our skills around being a multi-asset class regardless of form of a product and a multi-geographic market.

So what I mean by that is you know, we have been, as you noted, historically, in market maker spot deploying and future of bitcoin, but throwing in ETFs and creating all of the volume and all the transactions and transformation, if you will, that people are making -- moving from the great scale ETF over to the other 10 products, et cetera, means that somebody needs to price and take the risk with regard to that transfer. And so that provides a significant Market Making opportunity for us. But as you know, because we are a spot bitcoin market maker, not only are we acting as an AP with regard to the cash creation and redemption of the ETF, but we can also act as a dealer, if you will, through one of our affiliates in Singapore where we can provide the point directly to the issuers to the extent they need to satisfy their obligations to have pulling in their trust.

We're also excited, Ken, because there's going to be, as I mentioned in my prepared remarks, there's going to be a gearing ETFs. There's going to be short and long and leveraged in other products, and there's going to be all kinds of different manifestations around people's interest and we're really in the early innings here because you have a marketplace where you have some of our large clients who think you know very well, and we're saying, we're not going to actually allow clients to trade [indiscernible] securities. And then we have other of our clients that are at the forefront of it. And I'm not going to name names, but you can kind of figure out who they are. And then we have other institutions like the one you work for where the CEO is saying very negative things. But then on the other hand, you're acting as an authorized participant, right? So there's all kinds of confusion in the marketplace as to what this asset class means.

To bring it full circle, I think what we really need is a coherent regulatory framework in the United States. We have not had that because this current SEC and the legislative body have not been able to get their act together. Once that happens, we will have a regularized system where you have global platforms that provide access to spot. You'll have ETFs around the world, you have futures exchange, you'll have a custody, you'll clearing you'll have analytics, and it will look and feel an awful lot like prime brokers, deploying basis of the world and hidden road and others. And then you'll have great platforms like [ EEX ], the one that we started with Citadel and Fidelity and Schwab, which has now recently announced that it's going to go international and whatnot.

And so you'll have this large regularized asset class that fits very, very well into our model of being across order and multi-asset class, if you will, a market-making firm. So we're very, very excited about where we are in terms of the scope of the opportunity in the addressable market, I think we'll just continue to grow as the asset class becomes more regularized and more institutionalized and you see more institutional money flow into it. And again, I'm very, very excited that we made the investments we did a couple of years ago to be prepared for this moment in time. So I hope that answers your question, but the first couple of weeks have been very exciting within the firm.

[Operator]

Our next question comes from Patrick Moley of Piper Sandler.

[Patrick Moley, analyst]

So I think this quarter, there was obviously a disconnect between what the industry volume and volatility metrics showed in your results. But I think at least in the fourth quarter, if we looked at the 605 reports, it did show that the opportunity in the fourth quarter was the lowest that had been in a while. So I appreciate the comments on the crypto opportunity. But I guess just as we sit here today, I guess my question is, how do you think analysts and investors can do a better job of tracking your overall opportunity quarter-to-quarter?

[Douglas Cifu, executive]

Yes. It's a great question. And obviously, we have continued to frustrate you all and investors for the last 8 years, and it's really a challenge to try to explain the various parts of our business. I mean really the best way to do it is to look at the 605 reports and the 605 metrics. As a footnote, we have been on the forefront of asking for, we actually submitted a request. I think it was 4 years ago for the SEC to update and [ modernize ] to 605 reporting to permit exactly this type of granular review and granular understanding of what exactly we see within the segment, if you will, of the U.S. equities market. But if you track our 605 reports and look at like what quoted spread was during the period. You'll see that there was meaningful contraction in COVID spread.

COVID spread effectively is that the theoretical, if you will, maximum opportunity we have to collect the offer and were for 605 orders that come through to Virtu Financial. And you can look at it by broker, you can look at it by wholesalers. So during the quarter, there was meaningful contraction. So this quarter's results, as I made it very clear in my remarks, are really attributable to that performance by our customer Market Making business during the quarter. The noncustomer Market Making business and virtual Execution Services, outperformed metrics and certainly performed in line with your overall expectation. That is the yin and the yang of that business. It tends to be less predictable and certainly not always correlated with marketplace volumes and volatility.

The other comment I will make is that you did see within this quarter, if you look on a more granular level at the marketplace TCV, there was a significant increase in sub dollar stock trading in the quarter, I think it was roughly about 18% in December, for example. And it was a soft-dollar name that on a particular day, traded over 1 billion shares, just anecdotally. That tends to distort overall market volumes. Clearly, those stocks tend to be [ mid ] less opportunities. The spread is dramatically smaller and they tend to be a lot more toxic in the way that they're trained. As a footnote, a lot of those companies, in our view, shouldn't be listed public companies. We've talked to FINRA and the SEC about it.

Frankly, I think Nasdaq could do a better job in policing some of those companies that shouldn't be listed public companies and frankly, should be trading of TC. So I do think that, that distorts some of the marketplace on. I'm not using that as excuses trying to provide a little more granularity, but it really does come back down to within our 605 business, what would the opportunity expressed as COVID spread at the moment in time when we receive those words. And so that's probably a good way for you guys to kind of slice and dice it. I think it will get better when the 605 perform happens, which should be the first proposal that comes out of the SEC and for what it's worth going spread is up over 10% in January thus far from the 605 plus. And some of that, I think, is correlated to, as I mentioned in my prepared remarks, some of the excitement and enthusiasm around the bitcoin ETFs. So wrangling answer, I hope I give you enough clarity around what you all look at in the future.

[Operator]

Our next question for today comes from Chris Allen of Citi.

[Christopher Allen, analyst]

I wanted to dig in a little bit on the organic growth initiatives. A little surprised to see a sequential decline in the fourth quarter. Crypto activity was much better in 4Q relative to 3Q index options, activities up sequentially. And you noted the capital markets activity was stronger after I think you had a decent 3Q as well. So maybe you could just give us some color just in terms of the different moving parts where you're seeing -- I mean, obviously, you're seeing tails in crypto and maybe allow for options and capital markets activity from here?

[Douglas Cifu, executive]

Yes. Yes. Very fair question. And obviously, we track the internal metrics with regard to options and ETF block, which were the major in which are and were during the fourth quarter, certainly the major components of our growth initiative. Without crypto, contributed, but we haven't seen the explosion which obviously, we've seen, as I mentioned, with the launch of the bitcoin ETF as of January 11 and I think it was in this quarter. The short answer is that with regard, particularly to options Market Making the opportunity in terms of like [indiscernible] The spread was per contract declined significantly in the fourth quarter. And so that really explains a lot of what you're seeing in terms of the sequential decline. Internally, we track all of these metrics. And as I said in my prepared remarks, we were very, very happy with the performance of the [ option desk ] and the block ETF during the quarter.

One of the highlights of the year was our expansion into Asia, where we are now actively and profitable as an options market maker in both the Japanese and the Indian markets, and we think there's only an opportunity to grow there. So I get your frustration, which we share around the absolute dollar value, if you will. But in terms of what our market share was in the addressable index products for the options business, it continues to grow and continue to be competitive. It's just, again, those organic growth initiatives are subject to the same market forces, if you roll around volumes, much more importantly, volatility and effectively quoting spread with regard to the options contracts as all of our other asset classes.

[Operator]

Our next question for today comes from Dan at Fannon of Jefferies.

[Daniel Fannon, analyst]

My question is on kind of expenses and leverage in the model. I think, Joe, you've talked about managing to a comp ratio and then to the dollar amount as the year progressed, starting out with the ratio? And then to a dollar amount for the full year. And if I look at the full year, comp is modestly up when revenues were down. And so I just want to understand, but I think going forward in an environment, is this kind of the floor if revenues don't get better. We can see this is kind of a floor for cash compensation and just also just any outlook for expenses as we think about next year more broadly.

[Joseph Molluso, executive]

Yes. Sure, Dan, it's Joe. I don't know if I call it for, I'd say, I kind of go back to Doug's remarks around the overhaul of our employee based in terms of upgrading the talent, in terms of something like 60% of the people who are here today were not here when we acquired ITG. So we've been upgrading and investing and we're always asked for what are you investing in, in terms of the growth initiatives. I mean this is our investment. And I think if you look at comp going from [ 315 to 320 ] in a year like 2023 overall with a significant upgrade in talent, we're happy with that outcome. We don't worry about the ratio of being 26% on a cash basis. So there's no religion around that. I wouldn't expect it to get too high -- too much higher than that over the long term, but I think we are happy where it came out in terms of what it means about the talent that's available will be hired. It's a much better recruiting environment over the past 6 months to a year than it has been in the past few years.

[Daniel Fannon, analyst]

Prospectively, just thinking about the other expenses?

[Joseph Molluso, executive]

Yes, sure. But on other expense the media, communications and data processing, again, we've had some build-outs that we've had to do. We have experienced price increases on market data and infrastructure ended up. I've always guided low to mid-single-digit expense fixed cost decreases I think we're right there. So in communications and data processing, again, when you think about the global infrastructure that we manage and the market data plant that we are subject to. Again, I think we're really pleased with this outcome. We actively -- we realized [ deploy ] on the price increases and investments we need to make. So we actively manage market data, especially to make sure we prune where we can. And then operations and administrative stuff, I think 2022 was low because we have some favorable foreign exchange adjustments in terms of euro in terms of pound sterling in terms of the expenses in our non-U.S. subsidiary. So I think that kind of reverted on us in 2023. But I would expect that number to be the run rate going forward for [ process ] and admin.

[Operator]

Our next question comes from Alex Blostein of Goldman Sachs.

[Alexander Blostein, analyst]

I wanted to just dig into the capital structure a little bit and similar to the question I had for you last quarter, I think. But the debt-to-EBITDA continues to creep up a little bit, and it's a function, obviously, some challenges on the EBITDA front. But it also looks like the debt costs have increased this quarter I guess, with the new swap. So I guess, a, maybe just confirm that and kind of talk through the impact on P&L from that. But also as you think about the uses of cash flow, if interest expense is higher going forward, what are the thoughts about deleveraging and paying down debt versus buybacks?

[Joseph Molluso, executive]

Yes. Dan, just to take those in order, the new swap that we put on will be from a P&L standpoint, accretive, right? So we did not do that from a GAAP P&L standpoint, it will be accretive. All we did was kind of pull forward some of the built-in gain that we had in a very attractive swap instrument that was put out several years ago. That was an enormous benefit to Virtu, and that was going to unwind in a few months. So what we did is we just pulled that forward and use that to reduce debt and the cash interest expense run rate was going to go up anyway, right? So we kind of were able to do an accretive deal, reduce debt by a little bit and then also kind of cap the interest expense going forward. The instrument -- the underlying instrument that we have is our outstanding loan is so close to À .

We expect in a Fed easing environment, and we expect with the loan market coming back, that we will have opportunity to reduce cost on that over the next couple of years. So we're really happy with that. We price this in a way that we anticipate some Fed easing and we anticipate being able to take the spread as well. So yes, the run rate looks like it's a little bit higher that was going to happen anyway. We're going to be able to reduce it and we were able to kind of monetize the swap to tribute debt. So we're very comfortable with the [ 37.50 ], and we're happy with the deal we did.

[Alexander Blostein, analyst]

Got you. So no change in terms of the paydown of the loan versus buybacks kind of same trajectory?

[Joseph Molluso, executive]

No, that's right. That's right. We trade it a little bit here with the monetization of swap. We felt that was appropriate. But in terms of the cash flow we generate at different levels of net trading income, we've got that sharp here as we do almost every quarter, so you should expect that to continue.

[Operator]

Our next question comes from Michael Cyprys of Morgan Stanley.

[Michael Cyprys, analyst]

I was hoping you could maybe update us on your fixed income Market Making initiatives. Maybe elaborate how much that contributing today? How would you sort of size your participation and presence in fixed income markets today? Maybe you could talk about some of the steps that you're taking in corporate credit and treasuries for that to become more meaningful over time versus, say, fixed income ETFs.

[Douglas Cifu, executive]

Yes, great question. The analogy I would make is the trajectory, I hope, is going to be similar to what we experienced in options. So as I said on prior calls, we've done a lot of loosely, just call it groundwork around technology and integration with the various [indiscernible] Vendors, you have traded market access, Bloomberg, et cetera, Trumid. We've developed the internal ability to quote extensively, and we have an ongoing sales flat distribution efforts in order to give us rent categories. I think the thing in terms of like priorities and kind of where I see Virtu being able to add value where I'll be able to see growth in the same way we did an options where we spent a year or 2 developing the infrastructure and technology. We use internal people. We hire folks on the outside. We're in the process of doing that and an option as we went to the big index family.

If I look at the marketplace, and I say to myself, okay, where can Virtu add value, what looks and feels more like what we do. The obvious [ enter ] is rates, particularly with what the SEC has done with regard to centralized clearing of treasuries, which is going to come online in 2025, and we already see significant interest and cross margining between treasury in the futures and et cetera. And so that will look more like a Virtu style business, the plus CUSIPs and certainly, the further electronification of fixed income in general. So I think we're going to focused more on rates initially, while at the same time, we continue to put emphasis on to our credit business, where we have categories and we are actively quoting mostly investment-grade products and whatnot that tie very nicely into our fixed income ETF desk and the custom creation redemptions that we'll need to do on that debt.

So very, very early stage in terms of contribution, de minimis at this point. But in the same way, develop the awareness optimistic, as I always am, that we'll see that business take off. I'm particularly enthused about some of the market structure issues or considerations that we've seen in rates again with regard to centralized clearing and prime brokers being more willing to deal with firms of origin provides leverage and a lot of access. So I think that's just going to become a much more competitive marketplace where the domination, if you will, by the big dealers, we'll continue to weigh nontraditional liquidity providers like the [ James treats ] and the Citadels and hopefully the flow traders and us can garner significant market share.

So again, it's a growth initiative for us is de minimis contribution in 2023 will it be meaningful in 2024, probably not really meaningful, given kind of the competitive mix of the market and the size of the rest of the firm, but it's certainly an investment that we're very focused on, Michael. So thank you for the question.

[Operator]

We have another question from Craig Siegenthaler of Bank of America.

[Douglas Cifu, executive]

Operator, maybe he dropped off.

[Operator]

My apologies. [Operator Instructions]

[Douglas Cifu, executive]

Okay. Well, it sounds like we have no further questions. Obviously, Craig, if you do have a question you follow up with me, Joe or Andrew after the call. I want to thank everybody for joining us today, and we look forward to speaking with you in some point in mid-April. Thank you, everybody. Have a great day.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.