Virtu Financial Inc (VIRT) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Virtu Financial 2021 Third Quarter Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Andrew Smith, Head of Investor Relations. Please go ahead.

Thank you, Anthony, and good morning, everyone. Thanks for joining us. Our third quarter results were released this morning and are available on our website. This morning's call, we have Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Co-President and Cooperating Officer; and Mr. Sean Galvin, our Chief Financial Officer. They will begin with prepared remarks and then take your questions.

First, a few reminders. Today's call may include forward-looking statements, which represent Virtu's current beliefs 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 upon information presently available to the company, and we do not undertake to update or revise any forward-looking statements as new information becomes available.

We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our annual report and Form 10-K and other public filings. During today's call, in addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. Non-GAAP measures should be considered as supplemental to and not as superior to financial measures prepared in accordance with GAAP. We direct listeners to consult the Investor portion of our website, where you'll find supplemental information referred to on this call as well as a reconciliation of non-GAAP measures to the equivalent GAAP terms 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.

Good morning, and thank you, Andrew. This morning, we reported our third quarter results, which reflect an 11% increase in adjusted EPS in a market environment that was slightly softer than the second quarter. For the quarter ended September 30, we generated $0.70 of adjusted EPS of $5.5 million per day of adjusted net trading income, bringing our results for the first 3 quarters of 2021 to $3.38 per share and an average adjusted net trading income of $7.6 million per day.

Our performance in the quarter such is that it highlights the success of our organic business growth plan, the goal of which is to increase our overall baseline performance in 2 ways. First, by expanding our addressable market by approaching new opportunities such as options, market making, crypto and Virtu capital markets. And second, by increasing the competitiveness and profitability in our existing offerings through the hard work of integrating Virtu's best-in-class technology with the businesses we have acquired evidenced by Virtu's Algo technology, legacy KCG quant-style strategies and our customer-facing ETF block desk.

I'll point out some important highlights for this quarter. Our growth initiatives generated over $350,000 of ANTI per day, which represents 6% of our ANTI in the third quarter. Since 2018, we have grown its initiatives by a 61% CAGR and, in many cases, leveraged our existing technology infrastructure to build these businesses from scratch. In particular, I would highlight that our options market making business continues to expand. And while we do not expect this business to simply grow in a straight line, we continue to evolve our capabilities, connectivity and expand the amount of symbols and venues we trade.

In the latest quarter, this business saw strong results despite options volumes being down 15% from recent peak in early 2021. We continue to make select key hires to expand the geographic footprint of this business and accelerate our growth. I also want to provide an update on our cryptocurrency. We have formed a dedicated team of traders and technologists and plan to add additional resources in the near term. With the launch of crypto ETF globally, we now trade approximately 20 products across the U.S., Canada and Europe. We are now connected to the principal spot venues to source liquidity and have meaningfully increased the number of venues and markets we can access.

Given our historical expertise in market making across a diverse range of products and our scale ETF pricing, combined with our global connectivity with institutions and retail clients, we believe Virtu is uniquely positioned to provide liquidity to our customers in crypto products. Our ETF block desk continues to make meaningful progress, and we are now a top 5 liquidity provider as measured by the winning hit rate in total notional volume dealt in U.S. ETFs.

I also want to note the progress we have made and our commitment to return capital to our shareholders. Our Board of Directors has previously authorized $470 million in share repurchases. Through the end of October, we have repurchased 13.4 million shares at an average price of $26.95 for a total of $361 million, consistent with our previously announced targets for share repurchases. In the third quarter alone, we repurchased 5.4 million shares at an average price of $25.71, for a total approximately of $139 million.

As we look out in the next 12 to 24 months, we want to reiterate our commitment to returning capital to shareholders and I'm announcing that Virtu's Board of Directors has approved an additional repurchase authorization of $750 million over the next 2 years. We believe this level is consistent with our expectations for cash flows generated by the business and would target this time to complete the buybacks.

As we stated previously, we remain committed to returning capital to investors and have prioritized share repurchases for the foreseeable future. We aim to be in the market consistently buying back shares as they work to accomplish our capital management goals.

Our baseline performance to this cycle is enhanced by incremental ANTI from our organic business growth plan and the effect of returning capital to our shareholders through share buybacks. We believe that over the long term, this combination will be a powerful driver of growth. The steady growth of these initiatives as well as the continued less volatile performance of our Execution Services segment, coupled with the culmination of our multiyear integration of KCG and ITG has got us to provide clear detail around where Virtu's results should be given at various levels of ANTI in a given time period. We believe our performance this quarter is consistent with that guidance and value creation for shareholders.

I'd like to take a few minutes to provide an update on the recent industry discussions around market structure, payment order flow and wholesale market mix. I provided a detailed update on our last public earnings call and there has been no shortage in activity since then. As I have said many times, we welcome the dialogue and we are here to have fact and data-driven discussions with regulators, customers and other constituents as we do on a regular basis. Since I last spoke to you, it is clearer than ever that our markets, especially where retail order flow is concerned, remains fair, transparent and resilient.

Study after study and empirical analysis after empirical analysis continues to show that the U.S. equity market are more accessible than ever, and U.S. retail investor experience has never been better and is decidedly better than any market in the world. As such, we and many other market participants remain concerned that calls for reform are based on false narratives and factually unsupportable conclusions and innuendo. Today, we have a robust regulatory framework that has been developed and maintained by the SEC, FINRA and others which was designed to foster competition and has always been transparent, fact and data-driven and mostly, free of the politics of the day.

In an effort to further enhance transparency, we recently petitioned the SEC for specific regulatory reforms to enhance the measurement and objective disclosure of the enormous benefits that U.S. retail investors receive today. We believe reforms centered around enhancing transparency and enhancing competition will deliver tangible market-led benefits to retail investors. Despite the noise, innuendo and political environment, we are confident that the fact, data and a desire to continue to put retail investors first will win the day. When they look at the data, regulators, politicians and critics will see that the massive benefits of today's competitive ecosystem which regulation and transparency have created for retail investors.

Now I would like to turn the call over to Joe Molluso. Joe?

Thanks, Doug. Sean and I will have some brief comments and then we will turn to questions. After several quarters of elevated market activity, realized volatility dropped to 11.1%, which is the lowest we have seen in several years and 10% below the 2019 average. And as you know, 2019 was a historically low point for volatility.

Further, U.S. equity volumes were down 8% overall, and retail equity 605 volumes in the United States were down 6.6%. Despite the market conditions that were softer in the second quarter and meaningfully below the market activity of 2020 and first quarter of this year, our market making business outperformed realizing $249 million and adjusted net trading income of $3.9 million per day or 5% better than the second quarter.

Our Execution Services business also performed better than the market opportunity this quarter, realizing $106 million and adjusted net trading income was $1.66 million per day. This is 5% less than 2Q. However, BES is a global business and market volumes were down a larger percent quarter-over-quarter in most regions. For example, the U.S. was down 8%, Canada was down 21% and Europe 6%, with only APAC seeing a slight 3% increase in volumes. BES continues to contribute to our global scale and reduce the quarter-to-quarter variability to our firm-wide results.

I will review some thoughts on Virtu's ability to generate growth through both organic initiatives and through the excess cash flow we generate, and how this all translates into revenue and earnings growth rates. Last quarter, we reviewed a slide, which showed Virtu's ability to generate earnings at various levels of adjusted net trading income, coupled with our share repurchase capabilities. Our results year-to-date in this quarter are consistent with prior indications and demonstrate the earnings and growth potential of our base level of earnings power, combined with our growth initiatives and return of cash to shareholders.

Since the inception of our share repurchase program less than a year ago, we have repurchased approximately 7% of the company on a gross basis. Compounding this effect over a number of years should meaningfully elevate Virtu to create earnings power regardless of the environment. With our current overall debt levels now well within a long-term sustainable nominal amount, our quarterly dividend of $0.24 is more than secure and we have no immediate plans for any major acquisitions. Our ability to devote most of the substantial cash flow to repurchases will continue.

The announced $750 million incremental repurchase authorization will target a 2-year period and is a recognition that over a sufficiently long period of time, Virtu will generate significant cash flows, however episodic. Finally, our growth initiatives, while themselves volatile quarter-to-quarter are real and accrue to our bottom line with significant runway to grow. It's worth telling that while many of the initiatives included in our growth slide began only a few years ago, they will not grow in a straight line as volumes and volatilities fluctuate.

In the most recent quarter, we witnessed continued strength in some areas such as options, crypto and Virtu's capital markets had experienced a slight slowdown in others like (inaudible). We remain bullish on these initiatives and the potential for them to contribute meaningfully towards growing our baseline performance in any environment. These organic initiatives, together with the substantial cash flow and appropriate levels of debt going forward, evidenced Virtu's ability to thrive in any environment while producing significant returns to shareholders. And now on to Sean to conclude.

Thank you, Joe. In the third quarter, as presented on Slide 3 of our supplemental materials, our adjusted net trading income, which represents our trading gains and our direct trading expenses, totaled $354 million or $5.5 million per day, which is 2% lower than the third quarter of 2020 and 2% higher than the second quarter of 2021.

Market making adjusted net trading income was $249 million or $3.9 million per day, 3% lower than the year ago quarter and 5% higher than the second quarter of 2021. Execution Services adjusted net trading income was $106 million or $1.65 million per day, which is 1% increase year-over-year and 5% decrease in the second quarter.

Our adjusted EPS was $0.70 for the third quarter, 11% higher than the second quarter of 2021. For the third quarter, our overall compensation expense was $84.6 million, which is basically flat from Q2. Our cash and overall compensation ratios were 20% and 23.7% of adjusted net trading income, respectively, which is also consistent with the second quarter. As previously said about our compensation ratio consistent with past practice, we approved year-end incentive compensation to a range of percentages earlier in the year. Depending upon how the remainder of the year unfolds, this may result in adjustments to our compensation ratio later in the quarter -- in later quarters as we refine our specific compensation targets. We will update guidance for 2022 expenses with our fourth quarter report early in 2022.

Overall, we believe our cost results going forward is consistent with the specific cost guidance and actual performance for 2021. Adjusted EBITDA was $210.8 million for Q3, up from $196.8 million in Q2, compared to $248.7 million for prior year quarter. Our adjusted EBITDA margin was 59.5% for the third quarter, which is an approximately 2-point increase from the second quarter and continues to be reflective of our efficient cost structure and disciplined expense management. Our capitalization remains adequate and our long-term debt was $1.6 billion at quarter end.

Financing interest expense was $20 million for the third quarter, which is flat from both the second quarter as well as prior year third quarter. We remain committed to our $0.24 quarterly dividend, which we have consistently paid over 25 quarters in every environment since our IPO, and approximately $139 million share repurchase in the third quarter demonstrates our continued commitment to return capital to our shareholders.

With that, I'll turn the call over to the operator for the Q&A.

(Operator Instructions) Our first question comes from Rich Repetto with Piper Sandler.

Congrats on a good quarter and thanks for your candid remarks on equity market structure. So strong quarter. We're trying to understand, one of your peers had very dismal results, and blamed it on the lower volatility. You yourself recognized that volumes were down and volatility metrics were slightly -- we've down as well quarter-to-quarter. So I'm just trying to see where the outperformance came from. If you could just highlight any of the areas, whether it's geographical or asset class or whether in retail marketing. Just trying to understand how you guys outperformed in the market making segment.

Yes. Thank you, Rich, and I appreciate the question. I think what you've seen in this quarter and we've been attempting to describe it quarter-by-quarter is the strength of a scaled global franchise. Obviously, I know the competitor you're referring to, which is a great company, but they are much more of a specialized market making firm and in that, I think, 90 or whatever percent of the revenue comes from global ETF market, which is a great business. But that's a small part of what we do globally. And the philosophy behind Virtu always was, let's try to be the best bid and best offer in every marketplace you possibly can electronically around the world in every asset class, right? That's been our goal.

And so through the years, we built this scaled franchise. And certainly, like ETF block market making in the U.S. was a little bit down this quarter, but it gets lost in the launch of other results that we have. And we -- in particular, we've grown our options business. We've done great work internalizing between our market making businesses. So our ETF business is now internalizing off of our single object market making business and our options group doesn't have to worry about hedging their delta risk because you can hand it off to our single object market making business and we're able to leverage everything that we do globally to really improve our market making capabilities.

Retail had a nice quarter. Obviously, we don't break anything independently and individually because we look at this all as a single franchise and a single firm. And so a lot of the investments we've made over the years in technology and internalization continue to pay off. And I think this quarter is just emblematic of what we've been talking about over the last 5, 6, 7 quarters, which was we're going to continue to put our heads down, work on the blocking and tackling, integrate the firm, manage our expenses. And even though like 605 volumes were down like 5%, 6% this quarter, we did better in retail market making this quarter than we did last quarter because we worked hard and the strategy has performed better.

Okay. That's helpful, Doug. And my related follow-up would be you sort of outlined the crypto and option opportunities and made both look like great opportunities for electronic market maker like yourself. But just trying to see where you see the bigger opportunity, like with crypto, did the ETF approval of futures ETF that sort of jumps out a bit? Or where do you see more opportunities in crypto versus options?

Yes. I think that's a great question. And sitting here today, I would say, options to me is a very like large, compelling, very well-known opportunity. We can all look at what the total addressable market is. You all know what the volumes are. Everything is published by the OCC. Internationally, you look at the Nikkei, if you look at the NIFTY 50, obviously, there's some big index options in Europe, right?

So all of that kind of plays right into the Virtu strength, which I just outlined in terms of being a scaled global electronic market making firm. As I've reiterated this business a couple of years ago, and it's been a bit of a slog, obviously reorienting our technology, our infrastructure, everything from the renewing to the trading infrastructure to the middle and back office to make sure that we could be the competitive options market making. We've done a lot of the work. There's more work to do. And we're in the early innings.

So we think it's exciting because we can be a not cut for a market maker. There's obviously a significant customer segment here in the United States, and there's international options. And then there's a whole category of nonequity options. And as you know very well, we're a market maker of commodities products and FX products and whatnot. So the delta hedge there is well known and understood by us. So we're in a unique position to be quite scaled in options.

When it comes to crypto, obviously, it's a newer asset class, if you will. We've been monitoring it very closely. But again, we've made a strategic decision that it fits nicely into what we do as a firm. Clearly, with the SEC approving at least a futures-based ETF that has widened the number of participants in the marketplace and kind of plays right into the core strength of what Virtu is all about, which is to say, we are a market maker that is quite capable of interconnecting asset classes, whether they were expressed as a spot of future ETF, and that's exactly what has happened with crypto products. So you see it in Canada, you see it in Europe and now you see it in the United States where ETFs have been launched.

Clearly, if the SEC saw fit to approve ETFs, the purpose of which were spot crypto coins, you would see an explosion in ETF volumes. And I think that's all obviously going to be -- because we're an authorized participant. With all the issuers that have filed, we're very well known as the lead market maker on the New York Stock Exchange. So all of the things that we do exceptionally well would play right into our hand. You saw like our friends at the CBOE decided to buy Eris, which we thought was really interesting because really what that means, Rich, is that people have concluded that this asset class is going to be institutionalized, right? The institutional traders, one access to it. So CBOE I hope -- and we're a part of that, we were a part owner of Eris. So we're excited about that as an opportunity to further institutionalize crypto products as an asset class.

Our next question comes from Chris Allen with Compass Point.

Nice quarter. Just kind of a follow-up on Rich's question just on kind of the outperformance in market making. Maybe digging in a little bit on the competitive environment in wholesale market making, looking at Bloomberg reports that provide payment for full data and retail shares of skewed, it looks like you guys are picking up share and coincidentally it looks like Citadel has seen a decent amount of share since Gensler made comments around concentration risk. So maybe if you can just provide some commentary what the competitive environment, it looks like where there's been some changes maybe in response to the regulatory pressures, any commentary there would be appreciated?

Yes. It's a good question. And I think the Chair obviously made some comments, which I thought were frankly off target in terms of the competitive nature of the environment. It's always been like very, very competitive marketplace. This is -- somehow the notion that it was dominated by one firm, Citadel, I mean, obviously, they had significant market share, but we've been punching and fighting and trying to get market share for them. And other competitors have been doing the same thing for years. It's not an easy business to be in. You need to be scaled. You're providing effectively guaranteed execution to hundreds of clients and 8,000 individual names. So it's a very, very difficult marketplace to be in.

Frankly, 3 years ago, we had effectively 0 market share with Robinhood, which is one of the largest participants. We made a concerted effort, Chris, to adapt Algo to make sure that we can handle their flow. It's obviously voluminous, to put it mildly. And so I think we're now like somewhere in the neighborhood of 37%, 38% in their marketable. This is all public information from the 605 and 606 report. A number of other firms have announced that they're entering the wholesale business, Jane Street, Hudson River, these are great firms, and we welcome the competition. We think it's a good thing. It keeps us sharp and it demonstrates that somehow this is a concentrated marketplace where there's impossible barriers to entry, is just that, it's a myth, right?

So this is a very competitive market. And the winner ultimately are retail investors. Because what has happened is retail brokers have made a business market-driven decision that rather than trying to internalize or flow on their own, they are first called wholesalers and market makers that are really good at. So we're providing service, a service of ordering -- of routing, excuse me, nonmarketable and marketable orders, and we internalize some of them. The other ones we obtained price improved liquidity and passed it on. And we absorbed all of the costs, all of the exchange and ATS cost as part of it. And that is really what this wholesaling ecosystem is all about. The retail brokers have made a conscious decision that it makes businesses for them to outsource this business because they save on expense, and also their customers get a much better execution.

So I know this is not the question to answer, but i actually help myself by half answering it. So when you peel back the onion, it actually looked and understand how the ecosystem works. It is impossible for me to conclude that someone would look at this and say, we need to throw this entire ecosystem out. First of all, there's no statutory basis for that. So we're really talking about nothing. But at the end of the day, the facts and the data are just so overwhelmingly competitive, it just -- it shocked me every time I have a conversation with someone, and most of whom are really uninformed about how this all works. So I think I answered the question you asked.

And the competitive environment is stable? Is that the answer there?

Sorry, I didn't hear you.

And the competitive environment which -- I mean, how has that evolved maybe over the last couple of quarters?

We haven't seen much of a change. Obviously, new entrants are in. And frankly, I don't want to sound flipped, but we don't really worry about the competition. We're in constant dialogue with our broker-dealer clients. We understand the targets they want us to achieve in terms of price improvement, and that's how they have their flow. And obviously, we continue to improve what we do. And we have always been the scaled low-cost provider. That's really the key here, that's really been the key to our growth and will continue to be the growth. And it's the same thing in our wholesale business, right? We view this as being a scaled business, and it is part and parcel of everything we do. So obviously, the fact that we're good at noncustomer market making and we've invested a lot of technology, just makes our wholesale business that much better.

Our next question comes from Ken Worthington with JPMorgan.

I'd love to hear how FX and commodity market making did this quarter. Was there growth in those markets from 2Q to 3Q? And I know you don't break it out, but when looking at the U.S. equity business, given sort of flattish volatility and lower volumes, how did revenue capture fair in that business? And I know you don't provide specific numbers, but directionally, was it up, down or flat? Like that would help me a lot.

Yes, sure. I mean, again, we've gotten away from looking at the various like subsegments, I would call it, of our market making business as they become smaller parts of what we do. And again, I'm not trying to avoid the question, I'll try to answer the best I can. But we do look at the firm as a mosaic of market making and the scaled opportunity to continue to grow. And we pointed out like some new areas we've gotten into. So in terms of -- like I think subareas, FX has been under pressure the last couple of quarters or longer, and the actual -- given the volatility statistics, we put them all out there.

So like volumes were down and FX and any commodities and volatility has been down. So in terms of how they performed, Ken, what we do as we looked at like internal metrics as to what the opportunity is and then measure our performance against those metrics and on that base -- which obviously is all internal data, you don't have access to it and all that kind of stuff. But on those metrics, both segments performed well. And commodities, in particular, we've seen good growth in our Metals segment clearly and in natural gas as well during the quarter because you saw the spikes in natural gas as we come into the September, October period. And finally, we have some volatility in natural gas.

I will say, crude has been a slower area for us in the last couple, 3, 4 quarters, and that's largely because of the disruption in the crude market. And I can't even remember when crude went negative within the last year or 2, and that really impacted the ETF market as well, right? So you saw a lot of folks and a lot of the volumes in crude were impacted by that strange market event. So things like that are out of our control. If we just look at like crude volumes since that event, it has obviously been pretty dramatically down. So I would say, overall, we continue to be pleased with those segments. Joe, do you want to say anything.

Yes. No, we're pleased with the segments, Ken. If you look at it, quarter-to-quarter is always tough. Even if you look at it versus 2019 and 2020, in foreign exchange, 2020, if you look at the volumes on the spot venues, they weren't really up much versus 2019 even in a year like 2020, and they're kind of flat year-over-year. And in some of the other areas, there's been an energy as well until recently really muted environments. And I think over the long term, if you look versus 2019 versus where we are today, we're pleased with where those businesses are. They're still very good solid businesses.

Equity capture, up, down, sideways?

It was up this quarter, which helps our results. Obviously, Rich had asked that question earlier, and I guess I kind of vaguely answered it. But again, we don't publish equity capture because it can be a little bit of serendipity sometimes, particularly in the retail business when you have moments of these mean stocks that kind of flow out and there's extreme volatility, so there offers widen.

But as an overall firm, including customer and noncustomer in terms of certainly U.S. equity, which is the numbers that we're looking at right now, we saw an increase in capture over the quarter. And I would characterize that more as kind of a growth of same-store sales. I'm trying to recall if there were moments of volatility. I'm sure there were during the quarter, but nothing really sticks out. So that's just really blocking and tackling getting better at an increase in same-store sales.

Okay. And as the follow-up, just love to get a little bit more in depth in the crypto rollout. Can you talk about the evolution of the business maybe through the quarter? And I see the prepared remarks where you've broadened the resources in crypto. But are you market making at this point in spot tokens or futures? If so, what tokens are you doing? Or is the focus here to force still been on the crypto ETFs?

Yes. Good question. So to be more specific, we are connected and trading on 4 major spot venues, with plans to add 4 to 5 additional ones. FGX pointed to finance. And Gemini I think is the other one and we're going to add (inaudible) and a couple of others. So we've obviously done our due diligence, more counterparty risk and whatnot because, right now, it's not really the kind of the prime brokerage and centralized clearing. So it's a little bit of a different asset class for us. We are obviously connected to the futures world, and we are a market maker in the U.S. ETF and then all of the ETFs up in Canada and Europe as well.

So I would -- the analogy I would use, Ken, is it feels to me, it's a little bit like our commodities business in the sense that we've got spot gold and silver, we got gold as a future and we've got clearly, obviously, gold ETFs in U.S., Canada, Europe and in Asia. So we look at that as a similar style business. And one of the things we're looking to add would be direct market making to retail and institutional customers that want a stream of products. Right now, we're market making in tokens or points, I guess you call them, or however you would describe them. And we'll be judicious about adding those. But again, we're not going to go too far out on the SKU in terms of 50-odd venues because of risk management, but we think being connected to those 4, and then ultimately those 7, 8, 9 venues, we're going to be covering 85%, 90% of the addressable market in the universe.

So that's kind of the business plan there. I would say, we're doing a lot of blocking and tackling in terms of understanding the operations around borrowing and keeping in the wallet and moving coins back and forth, it's a little bit different. And trying to do it securely and intelligently in the Virtu kind of way, because as I've always said, I don't want to have a (inaudible) kind of situation, right, where all of a sudden our collateral disappears some place. So I'm excited about it as an asset class, we don't have to have the burden of saying or deciding whether or not there's any value to these things because the marketplace has spoken. People are interested and we had retail client come to us and say, can you provide a stream? And we're in discussions with institutional counterparties that are anticipating that their clients will watch this as an asset class.

So as it becomes more of a regularized, I guess, I would describe it as institutionalized asset class, that's exciting for us. in terms of what the total addressable market would be, your analysis would probably be better than mine in terms of -- clearly, there's a ton of volume and you can see other institutions get -- and I'm excited that it fits very, very nicely into what we do as a global market maker. And obviously, we're going to add people. But in terms of like connectivity, in terms of trading strategies, in terms of like operational, in terms of being a lead market maker and being an authorized participant in activity, we have all those things, but the incremental spend for us to get into this is effectively de minimis or 0.

So that's what the -- again, the beauty of our scaled model is we can pivot and shift and get into these new opportunities with very, very minimal cost. And obviously, there's a focus cost and we're reallocating people from other trading areas, but we think in this instance, it's well worth the investment.

Our next question comes from Dan Fannon with Jefferies.

Doug, just wanted to follow up on the options market making. You talked about increased symbol and venue coverage in the prepared remarks. Could you, I guess, give us an update on kind of where that fits, either I don't know if you want to use a baseball analogy or just thinking about the -- what percentage of the market you're actually interacting with? And how we think about the kind of full coverage or what's the goal or time period for the kind of meeting what you think will be kind of the end state?

Yes. Look, it's a great question. I understand people are very focused on it. To use the baseball analogy, we're definitely out of the dugout. Whether it's the first, second inning or the third inning, I don't know, but it's still pretty early innings. It is a very different marketplace, a very different market structure from what we are used to. We are now trading complex instruments. We're involved in options, which is like a very important step to getting into, what I would call, customer market making or the kind of "605" options market making. Because as you know, the market structure and options is very different than it is in cash equities in terms of off-exchange trading, everything is done on an exchange through these auction processes.

And so we're doing that. We are very, very active in the index options in the United States and we are now market making in index options on report in Asia, which is a significant expansion for us. We have gone out of the firm to hire laterally where we need it. We've hired options forms and experienced options traders that have been fully vetted, and then combine them with Virtu technologists and people that understand market structure. And as I articulated earlier in my prepared remarks and in answer to a prior question, the fantastic thing about the firm is that when it comes to handing off the delta hedge or understanding pricing around either underlying stock or an ETF or commodities product or an FX payer, all of that DNA is already within the firm.

So my friends that are options market making refer to effectively have the best hedge desk in the world, which is their own internal colleagues, right? So that's really the core strength of the firm. In terms of the setup, we're now connected to all the principal options, menus and understanding in the United States and understanding their DNA. I will say, we're getting approached by option venues all the time because people are excited to have us as a new participant. And then the last piece of the puzzle is, obviously, from a business development standpoint, when we want to get into direct "retail market making" we obviously have all of the relationships with all of the big and small players that have options as well.

So all of the infrastructure and business development and people understanding who Virtu is and have credibility, they're all there. So it's really just the hard work, which we're very good at, and doing the blocking and tackling and getting better. I'm very, very pleased with the progress we have made. Very, very pleased with the progress we've made in options, and I continue to be very optimistic. In terms of where we'll be, I think 2022 is going to be a key year for us. I've said publicly and I'll say again, we fully intend to be active in the 605 business early in 2022, whether that by the first quarter or second quarter, I'm not quite sure. It kind of depends upon how we do.

But the beauty of that market structure, Dan, as you well know, is that you can experiment in terms of retail options market making by participating in the options, and that's what we're doing right now. So we're learning and we fully intend to be a meaningful participant in that marketplace for the foreseeable future.

Great. And then, Sean, just to clarify, I think you reiterated the previously stated expense guidance for this year. And then -- but I know it's early for next year. But just remind us, there's no more synergies coming out from legacy transactions and we can just think about kind of a normal kind of inflation plus some ongoing spend as kind of a reasonable base framework to think about 2022?

Yes. I think, I'd say yes. There's always a little bit more synergies that we continue to work on. But I think most of that has been realized already.

Our next question comes from Alex Blostein with Goldman Sachs.

A quick follow-up, I guess, on page -- on Slide 5, around some of the new initiatives. I was hoping you guys could break down how much various initiatives certainly kind of contribute to this organic growth numbers you put on the slide, either for the quarter or year-to-date, that would be helpful. And then as a kind of secondary part to that, I haven't heard you guys talk much about credit. And I think that, obviously, that corner of the market continues to get more electronically traded. What are sort of the aspirations and the ideas you might have in credit? And I think you had a partnership with MarketAxess at some point of time that could maybe propel some of those initiatives. So curious to get an update there at all.

Yes. Thank you. Let me handle the credit for you, and then I'll turn the organic initiatives over to Joe, because he does a much better job. And in terms of credit, yes, you're right, I didn't put it in my prepared remarks, I probably should have, the price which -- because it is -- we have so many things going on, it's like different privatized opportunities. Look, we think it's an important opportunity. It continues to be electronified. We are NAV connected and trading corporates anonymously on market access. We're being onboarded for direct trading and credit which is the first for Virtu. And we've done our first portfolio trades in credit, which worked, I never thought I would say publicly. Because I didn't think this should be an asset class that would be addressable by virtue, but it is, it is and certainly having an ETF desk that is a significant market maker in fixed income ETFs has really helped us.

So I continue to see more automation. We're quoting the significant upsize the counterparties want to deal with us. But it's a very nascent business for us, and so it has an immaterial impact on our performance today. But again, strategically, we think it's really, really important. Our block desk has real credibility. We're ranked in the top 5 in the United States in terms of just hit rates and volumes that we're executing. So we have become a trusted counterparty. So we have dedicated folks, Alex, that are now in our, I guess, I would call it, our credit mark making group. They're attached to the ETF desk, and so we're already willing and prepared to be a liquidity provider. We've hired some business development people to go out to asset managers and pension funds and folks that need liquidity in credit. So it's going to be a growing area for us.

Joe, do you want to handle the rest?

Yes. I mean, look, on Slide 5, we've kept it at this level of detail because it's really a mix of things between new businesses. If you look at the 2018 bar, a lot of these businesses underneath that $160,000 a day were 0. Obviously, options and crypto were 0. And there was a block ETF test, but it's been really overhauled and we're adding new clients, as Doug just spoke about. And he also spoke about options and crypto and late. So Alex, I think we're going to continue to present it this way. I think the opportunities are there. We could add things to this as we need. Look, I think the Virtu capital markets business is something to highlight, right, that business. It just started last year and performance is already double 2020.

We hired a team, and they've done extraordinarily well. We are very excited about that business. We expanded the team. We're hiring someone else to market. So look, I think we're going to keep it at this level. And part of the reason is because it's going to fluctuate quarter-to-quarter. The decline in realized volatility, mute some of the real progress we've made here. So we're going to keep it at this level. And we're not even talking about execution services on this page. That business has been really transformed. And I think outperformed this quarter as well. We're talking a lot about market making. But when we look at it internally, the meaningful expansion in the margin of that business since we acquired ITG has been really outstanding. So we don't want the focus to be only on these businesses. This is a good way for us to highlight some incremental revenue that we're -- which was really next to nothing just a few years ago.

Our next question comes from Michael Cyprys with Morgan Stanley.

I just wanted to circle back on crypto. So it sounds like you're starting to make markets in the underlying crypto coins, the physical. Just curious your perspective on what you think it's going to take to be successful in crypto market making? How different do you see that from other asset classes? What do you have to do differently there? And if you could also talk a little bit about which coins are you making markets in today? And maybe talk a little bit about your process around determining which coins to add?

Yes. It's a great question. Thank you, Michael. Look, I mean, as a general matter, as I said before, it feels like any other -- one of our commodities market making business to take hold, we trade gold as a spot instrument. We trade gold, the future is obviously in Chicago and in other places around the world. And obviously, there's been a proliferation of gold ETFs in just about every jurisdiction where we are a market maker. So if you just equate crypto clients effectively to some digital measure of wealth or value like gold, it's no different in the strategy that we are running in crypto right now are analogous to what we would do for our gold market mix trend. So that's the kind of 10,000-foot why it's going to work and why it makes sense for us to be in it.

As I mentioned before, however, there's an operational difference in the sense that like for our gold market making, we would go to Morgan Stanley or JPMorgan or somebody like that and say, hey, could you be our bulk manager, we need someone actually to manage the gold for us. Can you be our prime broker in futures and in spot because we need someone to give us leverage and to handle settlements. And in ETFs, obviously, would be our own settlement person because we're self here in the U.S. But otherwise, we'd use ABN, our partner in Europe and in Asia.

In crypto, today, as I said, those institutions, the JPMorgan and Morgan Stanley, are largely not providing that service as a prime broker as a settlement agent and then not providing leverage and capital. So we're doing it largely on our own. There are new types of institutions that are attempting to provide some level of like -- they obviously will manage you well as they help you move coin back and forth and there's some leverage. But it's a different asset class in the sense that it's a new asset class and institutions have not yet embraced it as part of the traditional financial services offering. So it's a little more work. And certainly, from a risk management perspective, we have to say, rather than having third-party risk to JPMorgan and Morgan Stanley or Goldman, we now counterparty risk to Coinbase or to an FTS and things like that. So we have to monitor it more closely.

Those are obviously large institutions and we feel very comfortable around the risk. So it fits in nicely as a segment that we can market making. But obviously, operationally, there are some nuances. But we're really good at understanding nuances, that's what Virtu has been really good about. I would then extrapolate to say, as I mentioned earlier, there are obviously retail brokers today that are providing crypto access to their clients. Robinhood is one and there are others that are doing it. Those firms need liquidity as well. And so think of that as like our customer market making business, right, where we act as a wholesaler. So it's no different.

And obviously, all of those firms know us very well. I think we provide good service. We've been a trusted counterparty. So we are in the process of launching, let's just call it, crypto like Virtu providing a stream as well. The other counterparty would be Robinhood or whoever the retail broker is, and obviously, we know them very, very well. The last thing I would say is, obviously, we've got an EMS business, Triton. We've got analytics products as well. So as this asset class becomes more institutionalized, there's going to be a need for institutions as well to have EMS, if you will, to access the market and then they're going to have their own best execution obligation. So they're going to need someone to provide analytics.

So everything we do, all the products and services we provide, either as a market maker or as an institutional Execution Services counterparty, we intend to add crypto to each of those products. It's the Virtu playbook. This is like Page 1 of the Virtu playbook. We got something, it's a widget, we can market make it and we can provide services as an execution services accounted for.

Great. And just as a related follow-up, if I could. I recall in the past, you were a little more hesitant about getting into physical market making for crypto. And I think you had thought about that, Eris as more of your entry point into crypto as a separate entity. So I guess what's changed from a regulatory or market structure environment that makes you comfortable to enter the marketplace? What hurdles did you overcome? And if you could just maybe share some updated thoughts on Eris and the opportunity there?

Yes. It's a great question, very fair question. I mean, I guess, I got skewed away by (inaudible), which I referred to earlier, and hacking and all those things. And -- but as we've gotten to know firms like Coinbase and obviously, Gemini, and Galaxy and FGX, a couple of -- obviously Coinbase is now a very large public company. And as Robinhood has got into it, it's been very -- it's become clear to me that, like, number one, this is an asset class that's here to stay because there's so much value associated with it, I don't have to make that qualitative judgment.

But more importantly, number two, there are very credible scaled institutions and a lot of money behind them. I don't know what Coinbase's market cap is, but it seems extraordinarily high. And obviously, they've generated significant EBITDA and all those kind of things. So looking at them as a counterparty with transparency, it's less about regulation. It's more about understanding the counterparties and the transparency behind them.

The other thing that's evolved is that there are a number of these wallet infrastructure, I call them, crypto infrastructure companies that have come up. I'm not going to name names because I don't want this to be a PSA for who we're using. But there's a lot of really good companies out there that are getting into the marketplace and understand -- I mean, one I will name is Gemini, who we do really good work with. And they're regulated by the New York Department of Financial Services, that kind of thing. So we feel very comfortable, Michael, with them as kind of trusted counterparties. They've got a clearing service and all that kind of stuff that we take advantage of.

So it's not quite obviously -- as I mentioned before, not quite goal, if you will, in terms of the infrastructure that has been built up, but you're seeing basic steps towards it. And that's really why we've kind of changed our tune and why we're excited about it and why we think we could kind of be in the middle of it.

(Operator Instructions) Our next question comes from Chris Allen with Compass Point.

Maybe a quick follow-up just on crypto. Maybe you can give us some color just in terms of how much capital you're deploying this opportunity right now, and how that compares to maybe how much you deploy in commodities, for example?

Yes. Great question, Joe?

Yes, Chris, obviously, we don't break out segment capital, but it's not an amount that would be considered material overall in Virtu land. I think just following up on the answer to the last question. Despite there being no kind of central clearing or even settlement mechanism like a CLS in FX, the markets mature in terms of some of these services that Doug was referring to, the companies have matured in terms of the size and their access to the capital markets themselves. And our ability -- it's not just the amount of capital that we look at very closely. You see we put that -- in our supplement, we put the amount of capital that we have deployed overall and it really has kind of remained constant over a long period of time.

I mean, crypto is mature enough, that it's very liquid. You're able to borrow it. We've got these wallet management transfer kind of services and we feel like we're able to better examine the counterpart, right? That was always the thing, it's bilateral. It's one thing to be bilateral to a prime broker if it's a large global bank, and it's different with some of these venues. But again, the maturity and the amount of capital around them and the visibility to us has gotten us a lot more comfortable. But we still manage it very closely in terms of maximum exposure, et cetera. So...

Understood. And just getting some investor questions just on the expense one. I just want to confirm that there's no changes there, which implies on the cash comp side, about $40 million, $50 million in 4Q comp. Is that the kind of correct way to think about that?

I think when you look at the full year guidance, we will be at the high end of it, maybe a touch higher. I would say that full year cash comp and total competing year-to-date, we're at 16% and 19%, respectively. We'll be under 20% or just right around that. So we need to touch higher. But we're comfortable with where we are, especially when you look at comps to net trading income and then you look at some of the peers that we referred to earlier as well, I think we still stack up well. And I think just to reiterate what Sean said about 2022 guidance, I think we've always been very specific about guidance because we've been going through large integrations where the cost base was moving a lot. I would expect it to move less in the future, as things settle down.

Thank you, Chris. And I'd like to thank everybody for participating today. We look forward to talking with you sometime in 2022. Everybody, enjoy the rest of the year. Thank you.

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