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Edited Transcript of VIRT earnings conference call or presentation 3-May-19 11:00am GMT

Q1 2019 Virtu Financial Inc Earnings Call

NEW YORK May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Virtu Financial Inc earnings conference call or presentation Friday, May 3, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Smith

Virtu Financial, Inc. - SVP, Head of IR & Corporate Strategy

* Douglas A. Cifu

Virtu Financial, Inc. - CEO & Director

* Joseph A. Molluso

Virtu Financial, Inc. - Executive VP & CFO

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Conference Call Participants

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* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Christopher John Allen

Compass Point Research & Trading, LLC, Research Division - Analyst

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Kaimon Chung

Evercore ISI Institutional Equities, Research Division - MD & Senior Research Associate

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Richard Henry Repetto

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

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Presentation

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Operator [1]

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Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Virtu Financial 2019 First Quarter Results. (Operator Instructions) I would now like to turn the call over to Andrew Smith, Head of Investor Relations, Virtu Financial. Please go ahead.

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Andrew Smith, Virtu Financial, Inc. - SVP, Head of IR & Corporate Strategy [2]

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Thank you, Michelle. Good morning, everyone. As you know, our first quarter results for 2019 were released this morning and are available on our website. Speaking and answering your questions today are Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Chief Financial Officer. They will begin with prepared remarks and then take your questions.

Today's call may include forward-looking statements, which represent Virtu's current belief regarding future events, including the announced transaction and are, therefore, subject to risks, assumptions and uncertainties, which may be outside the company's control, and our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. We refer you to the cautionary notes regarding forward-looking statements in our press release and encourage you to review the description of risk factors contained in our annual report on Form 10-K and other filings with the Securities and Exchange Commission. 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 statement as new information becomes available. In addition to GAAP results, we may refer to certain non-GAAP measures. And you will find a reconciliation of these non-GAAP measures to GAAP terms included in the earnings materials.

Now I would like to turn the call over to Douglas Cifu, our Chief Executive Officer.

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [3]

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Thank you, Andrew. Good morning, everyone, and thank you for joining us today. This morning, we reported our first quarter 2019 results, which include the results of ITG from March 1, the date the ITG transaction closed. I want to comment on the quarter as well as highlight some things we have learned and achieved since closing ITG on March 1.

Looking at the first quarter results. Our normalized adjusted EPS was $0.34, and our adjusted net trading income was $229 million, with $178 million from Market Making and $51 million from Execution Services, respectively. This quarter's results reflect the 11% decline in U.S. equity volumes and 42% drop in realized volatility of the S&P 500 Index that occurred during the quarter. That said, our businesses performed well given the reduced opportunity set for Market Making, and our Execution Services results were quite strong relative to the market environment, helped by growth in our workflow and analytics businesses. Our adjusted EBITDA margin at 54% demonstrates our commitment to deliver superior returns in any market environment.

While it is still early, we already are seeing the powerful strategic potential of the Virtu-ITG combination beginning to come together. ITG at its core has always been a world-class product company, with an extraordinarily diverse range of products that lends itself to more recurring revenues, a sticky customer base and keen opportunities to organically grow over -- our Execution Services' revenues. As we have made very clear to our global customer base, we intend to not only retain, but to invest in this full suite of products to improve performance and expand our offerings across asset classes and geographies to better serve customers.

It is important to note that nearly 80% of legacy ITG revenues were generated by clients using workflow analytics or CSA products in addition to Execution Services. When you look at this product array and the cross-selling opportunities as well as the unique liquidity and asset-class capability that Virtu brings to the table as a global-scale, multiasset class market maker, you can begin to realize the organic growth potential of our firm. There are a number of ways in which we -- in which the combined firm is better able to serve clients.

If you turn to Slide 5, you will see we have tried to depict what we believe to be the unique aspects of our new combined firm. We are the only firm positioned to serve a global diversified customer base with world-class products, enhanced by unique sources of liquidity. Here, you can see our comprehensive suite of products and services to help clients with our free trade tools like portfolio optimization, agency cost estimator, fair value and risk models, cost curves; or our trading solutions, including transparent algos and smart order routers tailored to client trading needs and market conditions, Best Market Server for trading inter-listed equities,

Prism, our real-time trade monitoring tool kit; or our workflow technology, including our Triton EMS and OMS, ITG Net, Algo Wheel; or our liquidity offerings, such as POSIT ATS and MTF, POSIT Alert, MatchIt, MATCHNow, RFQ-hub; customized liquidity from our own ETF, OTC and block desks; as well as our IOI, vEQ, vFX and vFI offerings; and our post-trade analysis and post-trade processing, including multiasset class TCA, global peer database, trade surveillance, Single Ticket Clearing, index analysis, Trade Ops; and finally, commission management.

Turning to Slide 6. We believe that we can accommodate uniquely our customers by offering them end-to-end solutions throughout the trading cycle, from pre-trade analytics, Execution Services, order management and post-trade services. Since closing, our teams have been focused primarily on 3 things: first and foremost, clients; second, integration; and third, opportunities. As a client-facing business, it should be no surprise that our clients are our primary focus. In the 2 months since we have closed the transaction, I had visited or spoken with hundreds of clients globally, most of whom are legacy ITG clients. And I know our sales, client coverage, compliance and onboarding teams have seen even more. And the response from our global client base has been overwhelmingly positive.

This recent opportunity for increased engagement with clients has already yielded new revenue opportunities from natural cross-selling of products and solutions. For example, in April, the number of unique POSIT Alert users increased 6% in the United States, 13% in Europe and 1% in APAC versus first quarter 2019. These cross-selling opportunities will only increase as we integrate and are able to leverage Virtu's first-hand experience globally and in different asset classes where ITG's clients have incumbent execution needs.

Also, as you may recall, when the deal was announced, we promised to provide unparalleled transparency into how we protect client information. I'm pleased to report that on April 9 and April 30, we held our first client information security forums in New York and London, respectively. We had over 100 clients and prospective clients attend in person or participate via telephone and Webex. These forums are one element of our continuous commitment to our clients, and we look forward to similar engagements in other regions.

Naturally, integration is also a major focus at this moment. The complementary nature of legacy Virtu and ITG's businesses, especially on the technology front, creates significant potential expense synergies for us to realize as we complete this integration. Our teams are engaged in leveraging Virtu's scalable, firm-wide technology infrastructure to enhance the combined Execution Services to offer Virtu's uniquely transparent algos and order routing to the legacy ITG client base.

Similar to the KCG integration, we will begin integrating the multiple technology platforms into a common global platform on the trading as well as the post-trading side, allowing us to reduce duplicate processes, infrastructure and market data licenses. To this end, I'm excited to report that we expect to realize almost 90% of the publicly stated gross operating expense synergies by the end of 2019.

We believe that we are building the only truly scale global market making and institutional agency firm that combine deep customer relationships and quantitative trading skills with world-class technology and market structure expertise. Virtu's technological overhaul of Execution Services platform, which began when we acquired KCG, has enhanced the customer experience and borne significant fruit as we have seen increased uptake from the existing Virtu customer base on the new Algo suite. We expect this trend to continue with the ITG acquisition.

Since well before the closing, our combined teams have been thinking of opportunities that could benefit our products and services, and this is the area I'm most excited about. The addition of workflow technology and analytics products allows Virtu to offer its clients a complete suite of agency services, including opportunities that leverage legacy Virtu's global multiasset class capabilities. We can expand the capabilities market-leading Triton to accommodate multiasset classes. Efforts are now underway to roll out FX trading in Triton for our clients to trade spot forwards and swap tenors with their existing bank counterparts. The natural next step in this offering is to integrate the bank's algos into Triton to enable clients to utilize or develop EMS tools, including the Virtu Algo Wheel. We are enhancing legacy ITG standard TCA offering with multiasset class support, including a new Virtu Fair Value index benchmark, which we are first deploying to FX with other products to follow. We are productizing our eNAV product, which we already manufacture for ourselves every day, that will be distributed through our previously announced partnership with MarketAxess.

We have identified opportunities for technology enhancements, including POSIT Alert. We've recently rolled out an upgrade to POSIT Alert that has improved customer latency by over 50% in the U.S., and we plan to employ these enhancements globally. This improvement has more than doubled the rate of successful executions when counterparty conditional liquidity is present, which we expect to drive client trading and engagement.

Our critical mass of buy side to buy side trading opportunities within POSIT Alert continues to grow with each client onboarded. We provide unique liquidity offerings, including opportunities for clients to opt-in to accessing Virtu's principal liquidity. Legacy ITG clients will now have the choice to transparently interact with Virtu's unique liquidity offerings, which can improve their execution quality in global equities, ETFs, blocks, FX, fixed income and commodities. We now have the ability to offer deeper ETF liquidity to ITG's client base. And we can truly compete as a global ETF provider, both on screen and in block size.

Workflow technology products bolster Virtu's ability to distribute this unique combination of liquidity, and we have the technology to provide clients with the transparency they deserve when trading with the dealer's principal liquidity. Virtu is the only firm that give clients the option to access liquidity from institutional, retail and principal sources. These and other enhancements will drive deep liquidity provisioning and improve execution quality for clients as well as additional scale and higher operating margins.

I would let Joe go into the details on the expense base, expense guidance for the remainder of the year and capitalization of the firm, but I wanted to point out a few highlights. Global head count today is 1,241 employees. As a point of reference, head count at year-end at legacy Virtu was 507 and 883 at legacy ITG. So head count is down by 11% globally. These head count reductions have not and will not adversely impact revenues. Many of the departed employees work in redundant cost centers or offices that generated little or no revenues. We have consolidated office locations in New York, Chicago, London, Boston, Singapore and San Francisco. We will further reduce operating costs as we consolidate operations and migrate to a single, efficient Virtu-quality process and common infrastructure.

We also note an increased interest in examining the market data and technology costs among industry participants. These trends align us with our clients and help us as we attempt to make our business ever more efficient. With regard to the capital structure, we anticipate deleveraging consistent with what we have outlined at the time of the acquisition.

I'm going to turn the call over to Joe. But before I do that, I would be remiss if I fail to express my gratitude to the combined Virtu teams globally. Our ability to make the early progress I have outlined is a credit to the professionals in this organization and the committed culture of excellence that we have created together. Joe?

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Joseph A. Molluso, Virtu Financial, Inc. - Executive VP & CFO [4]

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Thank you, Doug. Virtu reported this morning adjusted EPS of $0.34 on adjusted net trading income of $229 million. We recorded $124.2 million of adjusted EBITDA for the quarter, representing a 53% EBITDA margin. GAAP results, which show a net loss of $13.6 million, is the result of onetime costs as a result of the closing of the ITG acquisition, including transaction fees, financing fees, severance and amortization of intangibles. These results include the results of ITG from March 1 through the end of the quarter.

Going forward, Virtu will maintain the same 3 operating segments for reporting purposes that we have had in the past, namely Virtu Market Making, Virtu Execution Services and Corporate and other. Virtu Market Making and Corporate and other will not be affected by the ITG transaction. The results from legacy ITG's full suite of products and services, including execution services, workflow and analytics, will be included in the Virtu Execution Services operating segment.

On a supplemental basis, you can see that we will provide similar information as we have in the past. We will provide results for global equities market making, global FICC and other market making and global Execution Services. This supplemental information gives the public the best presentation of how we as a management team run the respective businesses and is the best way to interpret the environment within the context of our results.

Looking at the adjusted net trading income figures for this quarter, it's important to note that the market opportunity had decreased as compared to 4Q 2018, specifically: consolidated U.S. ADV was down 11% from 4Q 2018 to this quarter. Realized volatility was down 42% versus the fourth quarter. The S&P averaged a daily move of less than 80 basis points in 14 consecutive weeks in Q1. The average mix was down 22% on the same sequential period. And EU consolidated notional volumes were down 10%, and realized volatility was down 19% versus 4Q.

Other global equity markets and asset classes saw similar abrupt declines in volatility, where Japan's Nikkei index realized volatility was down 32% versus the fourth quarter and volume in Japanese equities and futures were both down 22% and 21%, respectively. Commodity and FX indices showed a decline in realized volatility of 29% to 50% versus 4Q 2018. Given the environment, we feel the performance, particularly in Execution Services, held up well. Our Market Making business saw the biggest reduction in opportunities this quarter and was down 34% versus the prior quarter.

Within Market Making, our customer-facing Market Making results were most impacted by a decline in flow quality and market volumes, including retail activity, which was atypically muted in the first quarter. These results are generally in line with historical performances and environments similar to this quarter. Our Execution Services business performed well given the opportunity set. We reported $51 million of Execution Services this quarter -- Execution Services ANTI this quarter, up dramatically given the ITG acquisition in March.

Both the legacy Virtu and ITG businesses performed well this quarter given the opportunity set. Results were solidified by the less sensitive nature of the workflow technology and analytics businesses embedded in the ITG product offering. On the expense side, we are off to a very fast start in realizing synergies from the combination of the 2 firms. As we have in the past, we are providing specific guidance on cash and overall operating expenses.

You can see on Slide 9 that the baseline combined operating expenses for Virtu plus ITG in 2018 were $802 million. As Doug mentioned, we have achieved these results on the expense side by reducing head count-redundant areas and consolidating office space. In addition, we have begun the process of eliminating costs from duplicate technology buildouts and market data infrastructure.

On a run-rate basis, for 2019, as in the past, we are guiding total operating expenses to be $614 million to $649 million for the full year 2019. At the midpoint of these ranges, realized synergies would be $114 million for total operating expenses, adjusting for the partial year ownership of ITG. This amount would be 85% of the gross synergy target that we stated when we announced the acquisition of ITG in November.

At that time, we stated that we expected to earn $133 million of gross synergies within 18 to 24 months of closing the transaction, which occurred on March 1, 2 months ago. Given that we are already expecting to realize 85% of these synergies based on a full year guidance, we are confident we will ultimately meet or exceed those initial targets. Consistent with past practice, we will provide full year guidance for 2020 as the year progresses.

On the capitalization front, as part of the closing of the ITG transaction, we refinanced our existing debt. You can see on Page 10, we had a $1.5 billion term loan outstanding at LIBOR plus 350 basis points, and our existing $500 million bond is 6.75%. We announced that the excess capital estimated at $125 million from the ITG acquisition would be used in part to fund the acquisition and in part to reduce indebtedness going forward. You will note the call option on the existing 6.75% bond. We are currently evaluating opportunities to refinance our existing bond and lower our overall cost of debt.

On Page 11, you will see that our historical return on capital is well within our goal of returning at least 75% of our earnings. Note that even in a quarter with reduced opportunities due to the environment, such as this quarter, we remain committed to returning capital to our shareholders through dividends and share repurchases. In fact, since our IPO, we have returned over $680 million to our shareholders in the form of dividends and share repurchases.

Now we will turn the call back to the operator to begin the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Dan Fannon from Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [2]

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I guess, Doug, to start, just in terms of the environment in the quarter, it seems like obviously realized vol got softened throughout the quarter. Can you talk about other factors that were either positive or negative in the quarter that drove the results? And maybe talk about kind of April and kind of what's happened starting here in the second quarter?

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [3]

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Sure. Thank you. Good question. Yes. I mean it's -- and you guys have all the data we provided supplementally. Obviously, Q1 started -- actually January started and felt similar than to Q4. It was definitely a drop off from December where there was, as has been well reported, a real volatility. But then there was a real decline, if you will, from February and March in volatility. And I think you have a marketplace that's going in a single direction from January through March. And that means you don't have a lot of level transitions and big indices. And obviously, the Fed hasn't been doing anything. So that just stifles trading, if you will.

And again, we see that globally. It's not just in U.S. equities. Obviously, that's our biggest segment, and people tend to focus on that. But it's also the same. We saw the same thing in FX and whatnot. And so as a result, it obviously impacts our results. April appears to be -- it was much -- was very similar. Realized volatility from April -- in April from the first quarter was down roughly 48%. I think realized volatility is about a little under 8 right now, which is again a pretty low number, so pretty muted environment.

Again, as I've said on these calls for the last 3-plus years, we've built the firm obviously long term for a feast and a famine. We're not in a feast environment right now, but still, we had significant operating margins. I think the exciting thing, which we talked about in the prepared remarks, is that the Execution Services segment kind of helps serve very well.

And I think a lot of that has to do with 2 things. One, they give a lot of credit to the scope and the scale of the former ITG products. Frankly, as an outsider, I didn't really grasp the power of being on the desktop, the workflow solution products, ITG Net, Triton, Triton OMS, and how that really just drives revenues because you're there on the desktop with the clients, so they're going to use your algos, Algo Wheel, RFQ-hub, the very products we outlined. And so they all kind of fit together. It's like a nice valet of products, if you will. So that was really helpful.

And the second thing is, to pat ourselves on the back. We've done a really nice job in porting all of the former KCG algos to Virtu. That work was largely done in 2018. We had our bumps in the road, and we tried to transition that. But we were seeing a real uptick in algo usage from our clients, who like the fact that it's very deterministic, they're very simple, they're very understandable, and they're extremely transparent, extremely transparent.

So we answer all the questions as to order routing and performance. And then you layer on top of that now, we've got an analytics business where we can really demonstrate with the great suite of post-trade analytics products that we now have, that our performance really surpasses benchmarks and is in the best of the peer group. So long-winded answer to your question, but we're excited about the future here obviously.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [4]

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Yes. And you gave us a lot on Slide 5 and a lot around the opportunity set with ITG. Is there a way to put some numbers around what the kind of potential cross-sell kind of revenue opportunity on a combined basis you see based on kind of some of the early success you are having?

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [5]

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Yes. Yes. I mean look, that's a great question. I mean I think, look, the statistics that I put in there on the percentage that I think is the most important thing is that 80% of algo users are also workflow technology, and analytics and commission management users. So to me, that's kind of prime facie evidence that this firm historically has done a nice job of cross-selling.

Now you have a full suite of liquidity products. We tried to outline them all. But we make markets in just about anything that could be traded electronically in any marketplace that allows us to be a market maker. So we've got ETF blocks, we've got FX, and now we have a delivery mechanism form. So it's hard, Dan, to sit here and size that opportunity because we've never had access to asset managers in Europe, for example, to distribute our FX products through a Triton trading platform.

So it's early stage to kind of scale or size what that opportunity will be. We'll probably provide a little more information in that, I think, next quarter as we get a little further into it. But look, we've seen competitors that are kind of getting out of the of the business, if you will. Bloomberg is shutting down some of its operations in order management, in execution management. And so it's a real opportunity for us to grab more real estate and to be on the desktop. That's the most exciting thing.

I don't think people truly appreciated the power and the scope and the importance, if you will, of the ITG products. I said it in my prepared remarks, and I will continue saying it over and over again. ITG is a wonderful product company. It has now given Virtu the opportunity to be a wonderful product company from pre-trade to post-trade. And with our understanding of multiasset class capability, I think we really are building something very important. And we're investing -- for the record, I will say it again. We are keeping these products. Not only are we keeping them, we're investing them, we're going to make them better and more performant.

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Operator [6]

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And your next question will come from Rich Repetto from Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [7]

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It's obviously ringing through how excited you are about the cross-selling opportunities with ITG and all the things you mentioned on Slide 5 and 6. So I guess the question is on the head count, you brought head count down. And you sort of addressed this in the prepared remarks. But it looks like ITG is -- it was 888, but it was a little bit lower than what we thought it was to begin with. And you're reducing head count and you're moving up the synergies as well. So I guess the question is, is the sales force strong enough to take advantage of these opportunities? And well, could you -- I guess that's the question. Given these synergies, the head count reductions, are you able to take these opportunities that you're so excited about?

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [8]

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Yes. That's a great question. Yes. I'll give the ITG management team that was here a lot of credit because I think the, number one, there's great people here. Number two, there's a wonderful sales force that has very, very deep relationships. I was with of one our salesmen yesterday in Milwaukee, great town. And it was just very apparent the depth of the relationships that these gentlemen have with a number of large institutions in Milwaukee, for example.

And that's really in large measure, Rich, the asset that we bought. ITG is a firm. And I said this publicly and I'll say it again, that was a superior firm as an institutional firm than was Virtu because of 2 factors: one, the product; and two, the very deep, long, sustained relationships that they have had. So much like we did on the KCG transaction, where the head count reductions did not impact the great sales and relationship management and coverage people on the desk at KCG in our retail and institutional business. It's going to be the same story here.

So redundancies come from overlap between middle and back-office functions and management layers and legal, finance, compliance, things like that, which are unfortunate, but that's kind of where they come from. They generally do not come, Rich, from coverage. And ITG had a very, very well trained, very deep culture of cross-selling products already. We are now obviously training them in not only the Virtu algos, but in the Virtu liquidity. And I think the opportunities as I -- as you can tell by the enthusiasm of my voice, are very significant. Now for the first time, our colleagues, our new colleagues that are trying to sell FX analytics, for example, have access to FX market makers that understand every venue where FX is traded, where we trade 95 pairs every day. You can't really put a dollar amount on that level of expertise within the firm and their ability to cross-sell. We're really going to be upgrading our ability to sell multiasset class products globally.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [9]

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Got it. And that's helpful. It seems like the conversation has now gone to revenue synergies, right, than revenue dis-synergies. But anyway, my last question is going back onetime, I know you're probably not going to do this going forward, but the breakout. Can you give us the ITG contribution for March in the Execution Services?

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [10]

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Joe?

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Joseph A. Molluso, Virtu Financial, Inc. - Executive VP & CFO [11]

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Yes, Rich. We have not done that. What I would say is, if you look at Page 8 of the Supplemental Materials and if you look at the difference in Execution Services between 4Q and 1Q, I mean, it's obvious that the -- I would say the significant portion of that increase is due to the fact that we owned and operated ITG for 1 month. So there's no real mystery there in terms of how that number grew from $24 million to $51 million. So that was -- that is a good representation of the contribution.

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Operator [12]

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Your next question comes from Alex Blostein from Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [13]

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So I was hoping we can maybe double-click on what happened in the global equities bucket. I think in the past, you used to break it down between Americas and non-U. S. Sorry if I missed it in the release or the deck somewhere. Doesn't look like it was in there. But can you help dissect a little bit more sort of the trends between those 2 buckets, like you've done in the past?

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [14]

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Sure. Yes. I mean going forward, we've combined the bucket. You're right. It's less -- as we've grown and expanded the firm, our view is, we are a market-making firm. We've an Execution Services business within Market Making. The -- we look at equities as kind of a global product, if you will, and it's very integrated because we trade a lot of cross-border, and we've now migrated the KCG products or KCG quant strategies, excuse me, globally, so they really are fully integrated. And then obviously global FICC is largely FX and the commodities products that we trade.

The largest part of our Market Making business, and certainly, the largest part of global equities is Americas Equities, not a surprise. The largest segment within that, Alex, is -- continues to be the -- what we call the VCMM, the Virtu Customer Market Making (sic) [Virtu's Client Market Making] business, which is largely the former KCG 605, our retail Market Making business. It's no mystery when realized volatility declines and volumes decline, there's a disproportionate -- that business tends to have its ups and downs. And this was a quarter where we had downs because realized volatility was significantly lower in the first quarter and volumes were significantly lower in the first quarter as compared to the fourth quarter. And as a result, there is less opportunity and less flow we're getting from our retail partners and less opportunity for us, therefore, to internalize and less opportunity for us to make P&L. Kind of simple.

It's somewhat formulaic for us internally because obviously we have all the input and data. I know -- obviously, we can't share that level of input with the universe because we do have competitors out there. But I can assure you, there is no fundamental change or trend, if you will, that has happened with respect to that business. It's just really the ebbs and flows of volume and volatility in that business. We've now owned it -- I guess, this is our fifth or sixth full or partial quarter, and so we've really gotten very familiar with the trends in terms of how the flows come in and how toxic or nontoxic they are, and what the opportunity set is. And the first quarter, candidly, was right in line with our expectations, unfortunately, given the opportunity.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [15]

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Got it. Okay. And then on the pace of capital deployment. I guess as you guys have closed the deal now, maybe help us through the pace of deleveraging from here and whether or not we should generally assume that kind of older excess cash flows, net of dividend, will just go toward deleveraging and kind of the pace for that?

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Joseph A. Molluso, Virtu Financial, Inc. - Executive VP & CFO [16]

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Yes. I think at the outset, we said that we wanted to get back to our kind of long-term debt-to-EBITDA target of 2 and 2.5x by the end of 2020, Alex. So I think we'll still be on that target. We said a portion of the $125 million excess capital from the ITG transaction in part will be used as part of sources and uses to fund the transaction, and we did that. I think as we approach the call date of our bond, we will save the dry powder here to do something should we decide that the market opportunity is there to lower our cost of funding, we'll do that, and we will likely incorporate some of that capital deployment with that. But then going forward, yes, I would assume that the pace of debt reduction will be similar to what we outlined at the time of the transaction as we get to that long-term goal.

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Operator [17]

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Your next question comes from Chris Allen from Compass Point.

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Christopher John Allen, Compass Point Research & Trading, LLC, Research Division - Analyst [18]

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I was wondering if you could just maybe help us think about the pace of the synergies in 2019. I think it's fairly easily conceptualized for 2020. Maybe just a rough idea of what's in the run rate right now. Is it going to be kind of gradual realization or there's going to be kind of some tipping points in terms of technology integrations going forward? Just so we can model it correctly from a quarterly perspective.

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Joseph A. Molluso, Virtu Financial, Inc. - Executive VP & CFO [19]

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Yes. No. I think if you look at Page 9, I think we did 2 things a little bit differently here. Well, the one thing we did the same is we provided you with some very specific type guidance, right? That's our philosophy. We want to anchor expenses in everyone's model because the rest of the business is obviously difficult to model. The 2 things we didn't do yet is kind of break it out between first half and second half and then give overall 2020 guidance.

I think you're right. When we look at the synergy run rate achieved here of $114 million, we're 85% of the way there. At the end of a 10-month period, when we announced the transaction, we estimated $133 million over 18 to 24 months. So we're obviously way ahead of the game. I think what we've also said consistently is that we will -- the pace of realization here will be gradual and sort of uniform as opposed to -- I think on the KCG acquisition, it was more -- it was just chunkier given the nature of the business.

So I think this will be gradual, uniform. And then in the coming months, we will begin to guide on the 2020 expenses as well to give you the ultimate synergy number. The 85% -- the $114 million here is 14% of that combined cost base. I think when we announced the deal, we said we wouldn't achieve the 58% that we got from KCG, but it's safe to say we'll do better than the 14%.

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Christopher John Allen, Compass Point Research & Trading, LLC, Research Division - Analyst [20]

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Got it. I mean any chance you'd give us kind of what 1Q 2019 pro forma adjusted OpEx would look like?

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Joseph A. Molluso, Virtu Financial, Inc. - Executive VP & CFO [21]

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Yes. Again, we haven't provided those 2 months of January and February. If you look at that actual number, you compare it to fourth quarter actual, it's kind of like the revenue story. You can gross it up and make an estimate. But what we did is, we took down -- to come up with that $114 million, we compared it to the $802 million. But obviously, if we did the synergy number off of $802 million, that wouldn't be apples-to-apples. So we have cut the $802 million based on a 10-month run rate for ITG to make it apples-to-apples.

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Operator [22]

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Your next question comes from Kaimon Chung from Evercore.

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Kaimon Chung, Evercore ISI Institutional Equities, Research Division - MD & Senior Research Associate [23]

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Maybe I just wanted to go back to the Execution Services. Wondering if you could just provide more color as to the mix of the increase between the new and maybe existing clients. What you think is a good run rate from here?

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [24]

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Yes. Good question. I mean the ITG acquisition closed March 1, so it really was largely from existing clients. It's early days in terms of trying to prospect for new clients. The one thing I will say, which I've been very happy with and you can kind of kick the tires on this and do diligence but once -- you can't really know until you get under the hood.

There is very little overlap on the Execution Services business in terms of the client base. We shared a lot of clients in the sense that they were all papered on both sides of the houses. But in terms of the real business and where the flow comes from, there's very few clients where there's any significant overlap. And even where there is overlap, it might be the high-touch business was at Virtu and the low-touch business was at ITG on the Execution Services side and vice versa.

So the existing client activity is really growing. The good news also is that ITG, the legacy ITG business, had a real preponderance of global asset managers. And that's the exciting opportunity for us because what we have found is if your -- if you got the market share in one region, it's an easier sell, if you will, to cross-sell that product regionally. And the one great thing -- there's many great things about the Virtu algo product, but the very -- one of the great things about the Virtu algo product is that it's not regionalized.

It obviously is smart enough to understand market structure in various regions, but it is uniform, scalable and global. So if you're a global asset manager and your global head of trading is located in London, the suite of products you want to use in Asia or in the U.S. or in Canada, it's really -- the touch, the feel, the lingo, the nomenclature, the transparency, it's truly a global product.

We are a global firm. We don't have desks. We don't have buckets of individuals. We don't have different products in different regions. Indeed, we don't have middle and back offices that are different. So it enabled us to truly offer global service to clients in a manner which heretofore the ITG firm has not been as successful with because of the effective silolization of their technology. All of that is going to go by the wayside as we globalize and virtualize the firm. That's really the exciting opportunity for us.

The other cool thing that I've recognized in my travels -- I was in Europe last week, for example, at TradeTech, and -- meeting with hundreds and hundreds of clients. And there are clients there that are just analytics clients. I mean you can lead with analytic in Europe, particularly in a post-MiFID II world where best execution is not only recommended, it's the law.

And so as a result, having a cross-asset class analytics product naturally leads you into a sale on an algo product or on a commission management product there, which is very important obviously even a Triton product and then, ultimately, into a bespoke liquidity provisioning product, i.e., the legacy Virtu 2-sided liquidity. So again, early days. We've been under the hood here for a little over 2 months, but the excitement around the firm is really palpable.

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Kaimon Chung, Evercore ISI Institutional Equities, Research Division - MD & Senior Research Associate [25]

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Okay. And then maybe just can you talk about your plans for the MarketAxess partnership? And would you be able to size that up to me over the next couple of years?

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [26]

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Yes. I mean that's a great example of -- I mean obviously, as you know, I have a very great relationship with Chris Concannon. He used to be my partner here, and he's the new president there. The conversations between the 2 firms had been going on for a while. When Chris took the job there with my other good friend, Rick McVey, we just called each other and said, hey, this makes a lot of sense. You're very good.

I'm speaking about MarketAxess. Obviously, it's a world-class firm. I have a lot of respect for it. And they've got a very, very strong following obviously in terms of credit and other fixed income products that people want to trade on a cash basis. We have this great product called RFQ-hub, which is a leading RFQ matching service. It should be and it will be expanded dramatically into a global ETF RFQ product. And fixed income in particular is an asset class where RFQ capability is really desirous, particularly in a mid post-MiFID II world in Europe.

Virtu, as you well know, is a market maker in global ETF. In particular, we're very strong here in the United States in fixed income ETFs. We're a big market maker in block-sized HYG and JNK and other fixed income type of products. And we have a streaming NAV product that we use for our own internal market making. So it made a lot of sense. How do we distribute those products, if you will, to the thousands of great customers that MarketAxess has developed over the years globally? Well, we're effectively buying distribution for our eNAV and for our RFQ products through another distributor.

And so it's not exclusive. And I will do this with other companies that have access to clients. I'm very zen with the model of having direct relationships with the customer or going through another distributor and sharing the revenue. So in terms of opportunity set, that's a nice opportunity. It's going to be a 7-figure opportunity, we hope, for us over time. And it's an example of a good partnership. It also helps us as a firm to be a stronger market maker in fixed income, having a close relationship. And really working very hand in glove with MarketAxess, which is a leading fixed income electronic platform, obviously is a good thing as well. So it was a win-win situation all around. And on top of that, I got to talk to Chris Concannon more, which is always a good thing.

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Operator [27]

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(Operator Instructions) Your next question comes from Michael Cyprys from Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [28]

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I'm just curious around crypto. How you're thinking about the opportunity set? There were some headlines this morning around Facebook getting into that. Just curious how you see evolution there and opportunities for you guys longer term.

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [29]

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Yes. Yes. A great question. Look, I mean, as an asset class, the great thing is I don't have to make a judgment as to whether it's useful or valid or sustainable. That's not my job. And I'm not a -- I don't run a hedge fund, I don't run a big bank, so I don't make statements like that. What I said publicly and I will state again, is if there are regulated markets where we are very comfortable with the counterparty risk around electronic trading of any type of digital or crypto-type currency, whether it's as a future or as a spot product, if you will, and there's transparency as to how it is executed, cleared and settled in a way that we are comfortable with, we'll market make it, very, very simply. That's kind of how we look at the universe.

And so we have made investments in the Eris digital platform. We are believers in that. Don Wilson is a world-class talent, and they've got -- we're working on a product there. So we've made that investment, and we're already a market maker on Eris, and so we're a believer there. Again -- but we are the Switzerland of liquidity provisioning. So if there are other exchanges and -- whether future exchanges or spot exchanges around the world, we will be a market maker there again. But it has to be a situation where we feel responsibly that we can understand what the counterparty risk, understand what the market structure looks like and have a very clear settlement and clearing process.

There's a number of great firms that are working on that. We're working with a number of firms behind the scenes to help design products that we find -- that we think are exciting. Some of our retail partners have announced, as you indicated, that they will jump into the space on behalf of their customers. And so therefore, we will be great business partners with our retail partners and provide 2-sided liquidity on these products as they evolve. So I'm excited about it. Again, not making any qualitative judgment as to the necessity or validity of these products. As long as they're in an environment that feels Virtu-like, we will be a market maker.

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Operator [30]

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I have no further questions in queue. I'll turn the call back over to Doug Cifu for closing remarks.

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Douglas A. Cifu, Virtu Financial, Inc. - CEO & Director [31]

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Thank you, everybody, for your participation today. I hope my enthusiasm and excitement about the ITG transaction has come through. It sounds like it has. Most important takeaway is that Virtu now is a very broad financial services firm, with its core around financial technology, but we are a product firm. Just take a look at Page 5 and 6 and think of everything, from pre-trade to post-trade, everything between a natural buyer and a natural seller, Virtu has a client solution for. I thank you very much, and we will talk to you soon.

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Operator [32]

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Thank you, everyone. This will conclude today's conference call. You may now disconnect.