Virtu Financial Inc (VIRT) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Virtu Financial 2020 Third Quarter Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Debbie Belevan. Please go ahead.

Thank you, operator, and good morning, everyone, and thanks for joining us. Our third quarter results were released this morning and are available on our website.

On this morning's call, we have Mr. Douglas Cifu, our Chief Executive Officer; Mr. Joe Molluso, our Co-President and Co-Chief Operating Officer; and Sean Galvin, our Chief Financial Officer. They'll begin with some prepared remarks and then take your questions. But first, a few reminders.

Today's call may include forward-looking statements, which represent Virtu's current belief regarding future events and are, therefore, subject to risks, assumptions and uncertainties, which may be outside the company's control.

Please note that our actual results and financial condition may differ materially from what's indicated in these forward-looking statements. It's 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 take -- undertake or update any revised 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, we'll refer to both GAAP and non-GAAP results. 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 a supplement to and not as superior to financial measures prepared in accordance with GAAP. We direct the 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 term in the earnings materials with an explanation of why we deem this information to be meaningful as well as how management uses these measures.

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

Thank you, Debbie. Good morning, everyone, and thanks for joining us to review our third quarter results.

Before we get started, I'd like to welcome Sean Galvin back to the firm as our new Chief Financial Officer. Sean previously served as the Chief Accounting Officer of KCG, back when we acquired that firm, and he knows our business quite well. Sean is a unique talent, and we're delighted to welcome him back to the Virtu family.

I'll begin today's discussion by touching upon the highlights for the quarter, and then Joe and Sean will provide more color on our detailed results and outlook. We'll keep our comments brief so we have plenty of time for Q&A.

As we look at our performance year-to-date, we've navigated the crisis well, not only delivering record results for our shareholders, but also providing over $959 million in price improvement to retail investors. We continue to serve as a key component to the financial markets, providing valuable services to our clients to help them access global markets, locate liquidity, transfer risk, raise capital and analyze performance.

Our performance this quarter reflects the combination of our successful efforts to increase our ability to monetize trading opportunities and highlight the enhancements made in many aspects of our business. We continue to find ourselves at the center of an incredibly efficient and robust trading environment, though obviously more subdued as compared to the frenzied first half of the year.

We delivered solid results in Q3, including adjusted EPS of $0.81. Total adjusted net trading income of $362 million or $5.7 million per day, adjusted EBITDA of $249 million and an adjusted EBITDA margin of 68.7%. Year-to-date, we have generated $1.8 billion of adjusted net trading income or $9.6 million per day and $4.58 of adjusted EPS, a record performance for Virtu.

The underlying fundamentals of our business model remains strong and the outlook for revenue growth and margin expansion from our strategic organic growth initiatives continues to be positive. In the fourth quarter-to-date, we have achieved an average daily net trading level consistent with that of the third quarter. The elevated level of retail trading activities continues, benefiting our customer market making business as we maintain our strong market share in 605 volume in Q3. Our noncustomer-facing market making business outperformed market indicators, particularly in equities, options and commodities.

We continue to see great progress in our strategic growth initiatives, which have contributed 8% of adjusted net trading income year-to-date and 9% this quarter. Through the first 3 quarters of 2020, these organic growth initiatives contributed over $137 million of adjusted net trading income or $727,000 per day, demonstrating our ability to grow as a firm.

We have progressed our options growth initiatives by enhancing our infrastructure and expanding our symbol coverage. These efforts have grown our average daily adjusted net trading income by 374% this year, albeit from a modest pace as compared to all of 2019. As we continue to build out our footprint in options, we're focusing on improving our pricing and symbol coverage to create a scalable framework that we can replicate to more venues and symbols over the coming quarters.

Expansion of our customer-facing ETF block desk has resulted in a 160% increase in average daily adjusted net trading income in the first 9 months of 2020 versus all of 2019. Our fixed income ETF trading provides us with significant opportunities to grow as a corporate credit market maker.

In our Execution Services business, we've had a number of important product launches, platform enhancements and milestones as we announced throughout the quarter, which demonstrates our dedication to investing in and growing our client business through optimizing our liquidity sourcing, transparent algos, workflow and trade analytics and data solutions.

Heading into 2021, Virtu is very well positioned financially. Given the extraordinary results in 2020 and our multiyear outlook, we are poised to continue to accelerate significant equity value creation for our shareholders. To that end, we're pleased to announce that our Board of Directors has authorized a $100 million share repurchase in line with our long-term commitment of returning capital to shareholders. With our excess cash generated this year, we have substantially delevered the balance sheet, bringing our leverage ratio to 1.2x trailing 12-month adjusted EBITDA. We are comfortable that going forward, we'll be able to pay our $0.24 quarterly dividend to our investors and devote a substantial portion of any excess returns directly to shareholders in the form of incremental share repurchases.

As Joe will discuss shortly, our revised expense guidance reflects our significant progress integrating our acquisitions thus far and the soon to be fully realized synergies in a post-COVID, normalized operating environment, further lowering our cost base. Coupled with our consistent dividend and demonstrated higher earnings capacity, we believe Virtu is a compelling investment in all market cycles.

Before I turn the call over to Joe, I'd like to address our practice of providing monthly preliminary adjusted net trading income estimates, which we began earlier this year, to see if providing more frequent updates would reduce overall volatility in our shares. However, our experience has been that monthly reporting is not aligned with a long-term perspective from which our business should be measured. We remain committed to robust disclosure and transparency around our results, and we'll be providing quarterly reports and commentary on earnings calls.

And now Joe will take you through our revised expense guidance and outlook. Joe?

Thank you, Doug. So our business benefits from both episodic and sustained increases of market volumes and volatility. However, it is our disciplined focus on expenses and capital management that enables us to return healthy margins in the quieter times and exceptional margins and returns when conditions are more favorable.

So if you turn to Slide 7 in our quarterly supplement, we wanted to highlight how we think about the value proposition of Virtu as we head into 2021 and beyond. The underpinnings of this outlook for 2021 are our outsized performance in 2020. In 2020, in particular, we have already repaid $288 million of debt. In addition, we have announced a $100 million share buyback authorization.

Further, we are providing specific operating guidance on expenses for 2021. As you can see, we're anticipating adjusted cash operating expenses of $545 million to $575 million and total operating expenses of $605 million to $645 million. This run rate reflects the substantial progress we have made in completing the integration of our acquisitions. To put this into perspective, the total annual adjusted operating expense for Virtu, KCG and ITG combined was roughly $1.1 billion prior to our acquisition of each company. Comparing this to our 2021 guidance, you can see that we will ultimately realize roughly $480 million in total operating expense synergies, which is 25% higher than our original synergy estimates. Keep in mind, this has been accomplished while growing our business and expanding global client relationships.

We've also been prudent with our excess cash flows this year. Our long-term debt is $1.6 billion, a level we feel comfortable with in any market environment. This comfort allows us to shift our focus on returning capital to shareholders and plan to dedicate any excess cash going forward to share repurchases, which we think suits our business model. Of course, this is in addition to our existing $0.96 dividend.

Given our demonstrated ability to generate meaningful adjusted net trading income and cash flows across various environments as well as our planned operating expense guidance for 2021, we would look to always target at least $2 of adjusted EPS to be a baseline earnings going forward in any environment.

In addition to our regular dividend, we plan to dedicate excess cash flow to our shareholders in the form of share repurchases. In the earnings supplement on Slide 9, you can see, we've provided an illustration of estimated free cash flow available for repurchases, assuming various levels of adjusted net trading income per day and our 2021 adjusted operating expense guidance. To be clear, we expect Virtu revenues to remain volatile. However, as you can see over any multiyear sample period, without the noise from integrating the recent acquisitions and with the current levels of our debt, we expect to be able to generate significant cash flows, which can now be dedicated to returning cash to shareholders in the form of share repurchases. As previously announced, our Board of Directors has authorized $100 million share repurchase.

Now I'd like to turn the call over to Sean, who will provide further details on our segment performance before we open up the call to Q&A.

Thanks, Jeff, and thank you, Doug, for the warm introduction. It's really good to be back with the team.

During the third quarter, our GAAP net income was $200 million and normalized adjusted net income was $161 million. Basic and diluted GAAP EPS was $0.92 and normalized adjusted EPS was $0.81, roughly 4x higher than the year ago quarter. Income before income taxes of $252.5 million included a $56.2 million gain, net of related transaction fees from the sale of MATCHNow to Cboe Global Markets.

As Doug mentioned, volume and volatility have settled down compared to the first half of the year but remained well above 2019 levels, and our results reflect this.

During the third quarter, adjusted net trading income, which represents our trading gains, net of direct trading expenses, totaled $362 million or $5.7 million per day, which is 45% higher than the third quarter of 2019. Market Making adjusted net trading income was $257 million or $4.02 million per day, 82% higher than the year ago quarter. Execution Services adjusted net trading income was $105 million or $1.64 million per day, a 3% decline year-over-year due in part to the sale of MATCHNow.

Turning to expenses. Our third quarter results reflect a decrease in discretionary compensation accruals as compared to the first half of 2020. Year-to-date, our cash and overall compensation ratios were 15.4% and 17.5% of adjusted net trading income, respectively, which are in line with prior guidance. We expect our full year 2020 compensation ratios consistent with these levels and also expect our noncompensation operating expense run rate to remain around third quarter level for the remainder of the year.

Adjusted EBITDA came in at $249 million, 139% higher than the third quarter of 2019. We continued to successfully leverage our efficient cost structure and delivered an EBITDA margin of 68.7% in the third quarter.

As Joe mentioned, we have been diligent in paying down our debt, making $388 million in prepayments since the ITG acquisition in 2019, and have reduced our debt to $1.67 billion. Our finance interest expense has decreased by $24 million to $68 million year-to-date compared to $92 million for the same period in 2019. At quarter end, we had $567.7 million of cash and cash equivalents.

We remain committed to our $0.24 quarterly dividend, which we have consistently paid over 22 quarters in every environment since our IPO. Over this time, our cumulative payout ratio has been 55%, including buybacks, and our just announced $100 million share buyback authorization further demonstrates our continued commitment to return capital to shareholders.

And now I'll turn the call back over to Doug for closing remarks.

Thank you, Sean, very much for that wonderful review, and now we will open the call up for questions.

(Operator Instructions) The first question is from Rich Repetto with Piper Sandler.

Doug and Joe and Sean. So my first question would be on this -- on your target of $2-plus of normalized adjusted EPS. I'm just trying to see how we should -- the consensus for 2021 is a little bit higher now. Is this -- how to view this $2 target? Is it a floor? And does it back into sort of what you view as normalized NTI? If you look at the wonderful chart on Slide 9, it would say somewhere around $5 million NTI per day?

Rich, it's Joe. I think at least $2, it's a target. We chose the levels on Page 9. If you look at where the combined ITG, KCG and Virtu would have come out over the past 5 years, so that's why we started with $5 million there, $5 million a day. And you can see that produces $2.15, and we're comfortable with that.

So look, $2 is a round number target that we're comfortable with, but I'm glad you like Slide 9 because we chose those numbers -- we chose the lowest number there based on historical data, which would -- if you owned ITG, KCG and Virtu on the first day of 5 years ago, we're pretty comfortable that, that's where it would come out.

Yes. I think, Rich, the bigger point we're trying to make is we've made these large acquisitions, they were difficult, they were significantly larger than the legacy Virtu firm. There was an enormous amount of wood to chop both on an operational basis, on a technical basis and just getting it right even from a footprint perspective. And then obviously, a lot of work to do on the balance sheet. We've borrowed and repaid billions of dollars. And now, we're at the point where we have a normalized footprint going forward. We have an operating expense base that frankly is incredibly compelling, given the legacy companies that we acquired and the amount of expense that we've extracted.

And this company has always, always since we started in 2008, many and myself, been a cash machine and will continue to be a cash machine. And we've provided these illustrations of, well, if you look at historically where our adjusted net trading income has come in, what it generates in terms of EPS in this very clear expense guidance and then a very clear direction from my board and from this management team that excess cash has always been and will continue to be returned to shareholders in the form of our dividend and now in the form of incremental buybacks. So we think that's an attractive story over the next few years, which is how we look at the firm.

Okay. Very helpful. Doug and Joe. The follow-up question would be on expenses. And I know this is unusual -- the expenses in the quarter were a little bit unusual because it looks like the compensation, you're trying to sort of level out the compensation for the year. But if you take that $130 million in comp and you annualize that, you're still well below -- you're well below the guidance range for next year. And even if you use -- and I sort of missed the comp ratio guide, but if you use 15%, you'd still be well below. If you would had rather than 9%, a 15% comp expense ratio in the quarter, you'd still be well below. So I'm just trying to understand the guidance for next year. Is there any more synergies to come out and compare it to the run rate of this quarter?

Yes, Rich, it's Joe. I'll take a shot at that. The guidance for 2021 does reflect additional synergies, both in compensation and communications and data processing and ops and admin, right? So it does reflect further synergies. And I think that's the point. When I went through in the script that when you compare this to the synergy targets, we were -- we're exceeding those. And I think next year is the year where we would sort of stop counting the synergies because we would say, okay, the firms are substantially fully integrated.

But yes, it does reflect further synergies. I think we've made clear on prior calls that this year, we paused some things in terms of the synergies given the coronavirus situation. But yes, the FY 2021 guidance in there does include further synergies.

But I guess the question is, if you take the $130 million this quarter and annualize, you get $520 million. And again, it was a low comp ratio, but I'm just trying to make the jump to the expense guidance for next year being in the $620 million range around the midpoint.

You answered it when you asked the question, right, the comp accrual is obviously much lower this quarter given where we -- given what happened in the first 2 quarters of the year. The first 2 quarters of the year, we accrue to a ratio pretty much. And in the last 2 quarters of the year, we generally accrue from a bottoms-up as we go through our comp cycle. So the difference there, as you can see, our cash comp ratio this year -- this quarter is 10.4%. Total comp ratio is 9%. I think that's the lowest we've ever done. Year-to-date, we're at 15.4% and 17.5%. I think on the last call, I mentioned that we would end up in the mid-teens on a quarterly -- on an annual basis this year for cash comp. And so that's kind of where we're headed.

But the answer to your question is in a lower third quarter compensation accrual. So I wouldn't annualize that third quarter number. Now I understand what you mean. No.

The next question comes from Ken Worthington with JPMorgan.

Maybe bigger picture. I believe your retail business works with more than 100 brokers. And I know we focus on the bigger ones. The trend over the last year has been the migration to 0 commissions. So the question is, how many of the 100 or so brokers that you deal with have gone to 0? And do you get the sense that more are willing to migrate in this direction to the benefit of trading volumes of Virtu? Or is this trend really all played out at this point?

Yes. It's a great question, and thanks for asking it. I think if you look at the universe of firms that we receive wholesale 605 eligible order flow, it really sort of divide them into kind of 2 buckets, if you will. And there is the, what I'll call the, for lack of a better word, the discount or discount brokerage model. And clearly, you're right, the -- well, E*TRADE now merged into Morgan Stanley, et cetera, they have all gone to the 0 commission model. There's about a dozen or so of those, the Robin Hoods, the trade stations, great clients of ours.

And then there's a whole range of, what I'll call, more kind of full-service wealth management style firms, Ken, is by the way to describe it. And their commission rates are probably all over the map, and some of it may be blended with asset advisory fees and whatnot, et cetera, et cetera. And you know very well because JPMorgan would be one of those. And so there's literally hundreds of those globally that we deal with. It's not just U.S.-based firms. It's firms in Canada and Europe and in Asia that have U.S.-bound retail eligible flow that we have relationships with. And so looking at both of those buckets, it's sort of divided that way.

So again, we're agnostic as to the form of the client that sends it. Obviously, we look at the flow and measure its toxicity and its attractiveness, and then we can determine what level of price improvement we provided and whatnot. So it's a very nuanced business on a customer-by-customer basis. And we're always looking for that next new entrants, the new wealth manager over in Europe that may not have a relationship. It's really a service business we're in as much as a price improvement business.

Got it. So has the -- is there more benefit still to come from 0 commissions as -- do you think these other firms are going to migrate lower and lower either in the U.S. or globally that could benefit you? Or has it really just played out?

I don't think it's played out. I think the theme of price compression in everything in the vast services market is we are not -- the game is not over, right? So if you have a full-service broker that's still charging you heavy for bid, $300 a trade or something like that, I think that's going the way of the dodo bird. But again, I think those firms -- and again, this is not my business model. You know much better than I do. They're trying to sell a full range of services, if you will, to their investors, which is very different than the approach that some maybe more online firms take.

So I think, overall, it's going to continue to be price compression. I think that is a very significant tailwind for us. I think those firms will be more and more dependent on the expertise and the service of a firm like a Virtu and our competitors to provide the necessary best execution or routing and in the case of Virtu and our competitors, meaningful price execution and therefore, value to their customers. You're really seeing that -- effectively that function of maintaining best execution, guaranteeing price improvement, in fact, has essentially been outsourced to Virtu and a handful of other firms that are very, very capable of doing that, whereas the online brokerage community and the wealth managers, obviously, are performing a very different function. So as you see the pie kind of shrinking on that side, they're going to be forced to not invest in the spend of the millions and millions of dollars that we do to be connected to now the 15 national securities exchanges and the 16 or so options exchanges in the United States and the rest. So I think that trend is a positive for a firm like ours.

Great. And then maybe just for Joe. Joe, now that we're in the more normalized trading environment, can you talk about how you've positioned Virtu to more efficiently get capital when you need it? You secured a pretty expensive line during the peak of the crisis. The balance sheet is in great shape right now, but you're making it more efficient. We've got the buyback announced. Can you talk about your ability to more efficiently borrow if the opportunity arises again, where market volatility is up, activity is up, your participation is up and you want to drive more business?

Yes. Look, I think we've done a number of things. First of all, I'd say, on Slide 9, the target range available for share repurchases accounts for not only adequate capital but a cushion, right? So we feel like in our cash and capital management going forward, we've adequately allowed for not just adequate but cushion so that we can take advantage of opportunities where needed. The expensive line you referred to is gone, right? We don't have that anymore. We don't need it. We have substantial borrowing capability with our settlement bank, on a self-clearing basis, access to the balance sheet of great institutions like JPMorgan through prime brokerage relationships.

We've -- importantly, we've consolidated all of the legacy broker-dealers, which I think is kind of one of the most important things. We entered this year, we hadn't done that, and that hard work has been done. So we feel very, very good about where we are from not only a day-to-day standpoint, but should we'd be in a position to take advantage of opportunities or need more capital, we have it. Just in the past several days with some of the volatility post election, we've been more than fine in terms of capital.

The next question comes from Alex Blostein with Goldman Sachs.

Great. I wanted to touch on some of this organic growth -- some of these organic growth initiatives you guys highlighted on Slide 6. Maybe help me understand the trends this year, and I understand it might be a little difficult to completely kind of separate the 2. But obviously, we had incredibly kind of robust trading backdrop in the first part of the year. I'm assuming that kind of boosted some of these revenue initiatives, the organic growth initiative. So if you were to kind of think about what these would have been without the boost in volumes and volatility we saw in the kind of early part of the year, I don't know, if third quarter number, the way if you guys could provide that might be a better run rate. And then more importantly, how should we think about building on these organic growth initiatives into '21? So I don't know if it's like Q3 annualized and off of that level, maybe is the way to frame it?

Yes. I think look, that's a very, very fair way to look at it. I mean, I think as with many things, you have to slice and dice the various initiatives. So like in this environment, had we not invested in recalibrating, if you will, our options infrastructure and taking that initiative starting in 2018, we likely would have had -- you wouldn't have seen -- we wouldn't have been able to capitalize any of the opportunities this year in 2020, Alex. So I think that's one thing.

As well on the ETF desk, we've made significant advancements and beefed up that. But certainly, the marketplace dislocation, particularly in the fixed income arena in the first -- and parts of the second quarter were very, very significant. And obviously, the same thing with the KCG strategy. So yes, it probably would be an interesting way to look at what this looks like in a "more normalized environment" to look at what we did in Q3 and maybe annualize that number.

So it's -- I think that's probably the right way to approach it. It's always hard in our business to kind of separate out the alpha from the beta, if you will. But I think the bigger point here is we are very capable of continuing to grow this firm, and these are marketplaces where the total addressable market is very, very significant, right? I mean you obviously know what the options world like is here and around the world and the same thing with block ETF trading. So these present really significant opportunities for us to continue to grow the firm.

Got it. And so what is the number in Q3?

Joe, do you have that number?

Yes, we can give it.

Yes, sure.

Yes. We have that number at 9% in Q3 of our adjusted net trading income.

Right. So just do the math, $362 million -- 9% of $362 million is...

Yes. Got it. Okay. That's good enough. We could probably do that. Okay. The other question I have for you guys, back to Rich's question around the $2 earnings number as kind of the floor. So clearly, you have the benefit of history of these companies combined on a pro forma basis to kind of run the analysis much longer kind of term than we can. But since the ITG deal closed, quarterly, you guys were at around $4 million for the -- per day in trading income for the majority of 2019 and obviously, they got a pretty big boost this year given everything that happens.

So in an event that you guys do slip below $5 million per day on a, call it, annual average basis, is the takeaway from the conversation should be like, look, there's enough things on the expense front, you still are willing to do to get you to the $2 number in EPS, is that -- that's basically the point?

Yes, I think you've articulated it very well. Obviously, there's a lever around incentive compensation, which is pretty significant, right? And we accrue, as Joe said, to a percentage and then to a number later in the year. You've seen the ebbs and flows of our comp accruals this year. So certainly, I don't like to think of a number less than $5 million per day. But you're right, 2019 was kind of an extraordinary year in terms of just lack of market opportunity in terms of volumes and volatility.

So again, I like to stay away from trying to prognosticate around what marketplaces will look like, and I'm a very optimistic guy, as you know. And going back, as Joe mentioned in his remarks, to our -- from our 2015 IPO forward, more of the quarters and certainly more of the years than not have been above $2 if you pro forma this expense base. That's kind of the point we're trying to make, which is, we've done -- it's not really pretty when you make the sausage, I've been told. Not that I never made sauces. I've eaten a lot in my life, and I really like when the sausage comes out, right? So we've been making sausage for the last 3 years. And now we've got this beautiful Kielbasa that we're all going to enjoy for the next numbers of years.

I'd add one thing to that as well is that the premise of the question is that in any 1 year, right? The point that we're trying to make on the dedication of excess cash flows to share buybacks is that we can continually reset that bar higher, right? In any year, if you look at the outcomes over the past 5 years and as Doug said, use this cost base and then take the net trading income of the firms together, you get a year where there's a trough, but you also get a year like this. And you get some other years that were well above $5 million. And if we're going to be able to take the substantial cash flows in any 1 year of buyback stock in any kind of 2-, 3-, 4-, 5-year period, that's going to add up. When you look at those numbers on Slide 9. And you're going to be able to reset that bar. So that even if you are in a trough year, hopefully, you're above $2 at that point.

The next question comes from Dan Fannon with Jefferies.

So I wanted to talk about the retail and these elevated levels of engagement that's been happening. And if you think about the profitability of that order flow and how that's changed, have there been any changes in terms of requirements of price improvement that you have to provide? I want to just discuss the kind of competitive backdrop there and maybe how the economics are shifting as a result.

Yes. It's a great question. And obviously, Dan, we monitor it, if not hourly, but for sure, daily, weekly and monthly. And I've discussed this before on prior calls with regard to the vast preponderance of the benefit, if you will, and the "payment" we're providing is in the form of price improvement. And every counterparty broker we deal with, directs order flow to us or to the competitors, the Citadel and Susquehanna of the world based on price improvement. That's the first and that's the most important thing.

And so obviously, think of that as kind of cost of goods sold and there's a little bit of a game theory, right, between us and our competitors as to "the more price improvement, i.e., the more we pay" for the order, improving off of the national best bid or best offer than the more order flow we're going to get. However, not all flow is the same by broker and certainly even by symbol and by time of year, and et cetera, and clients on the brokers kind of move around and around. So we're always constantly measuring the various toxicities, if you will, the sharpness of the flow. "Not all retail flow" is retail. Some of it is professional trading flow or RIA flow that tends to be a little more correlated with other market participants and harder to handle, and some of it is larger size, et cetera. You get all those metrics.

I would say, overall, and since we have bought Knight Capital, the business has had periods where it's more competitive where competitors decide to ratchet up, if you will, the execution quality they prepare to give and then they struggle with profitability and they come back down. So I take a very long prosaic look at this, which is why I strongly have urged all of you guys not to focus on basis point moves in market share. They don't really mean anything. They don't really mean anything. What really -- at the end of the day, what I focus on is do we have happy clients? Are we providing good service, right? Do we have market share from all of our customers that is meaningful to us and to them? So we're a meaningful partner of theirs. And then, obviously, is the net after paying this price improvement and, in some cases, payment for order flow, are we a positive? Is it a positive net experience? Because otherwise, we're providing guaranteed execution not getting paid for it, and that's silly.

So there's a back and forth here and all of the other players that we compete with, they're also economic animals. They don't have any magic elixir or magic algorithm that we don't have, right? We all kind of are doing the same thing. And we're all providing great service and value to the marketplace. So I know this is a little handy way we have an answer, but there are ebbs and flows around competition. The business continues to be very profitable for us. On a net basis, on a gross basis, it's incredibly profitable. But as I said in my remarks, we have "paid," not in our financials. We've provided back to our retail customers about $950 million of price improvement this year.

So think about how powerful the predictors and the algorithms, if you will, that were in the Knight firm that we acquired are, right? And that number doesn't appear in our financial statements. I wish we were able to keep all of it, but that's not the deal we have with our customers, and that's the service that we provide, and that's why this structure is fully embedded in the ecosystem of the financial markets, and it's there to stay. Exchanges can't do what we do, and that's why these orders get sent to us.

Okay. That's helpful. And a couple of more clarifications on just expenses. So for 4Q, I believe you said the comp ratio is going to be flat, but I assume that that's with the year-to-date comp ratio and then next year, Joe, you mentioned more synergies. So is there a way to put a number around the synergies that you still have to take out of the business? I assume some of that's just delayed because of the COVID stuff that you didn't do this year, but talk about that. And then also, what is kind of a normal baseline level of growth for your expenses in kind of a -- is it inflation? Is there a percentage we should think about? Or is there always some level of decline that we should be thinking about on the opposite side?

Yes. No. Look, in terms of the expenses and the expense guidance, the -- if you look at the original synergy targets, if you add up the synergy guidance, I think, on KCG was $250 million, round numbers and ITG was $133 million in terms of midpoint. So we're guiding total expenses next year, $605 million to $645 million. So I don't know what the difference is in terms of the last stuff to be achieved, but it's going to mean that we're -- instead of achieving $384 million, we're going to achieve $479 million using kind of midpoints. And I hope you go through the mechanics off-line on that. But the synergy guidance in terms of run rate just in the next quarter, just to be clear, I'm glad you brought that up, we would expect cash comp to be flat quarter-over-quarter, third quarter to fourth quarter, so not quarter-to-date.

And then long term, we've always, as Doug said, in a down year, we do have the incentive comp lever, a substantial portion of our compensation, both cash comp and share-based comp is incentive comp. So we do have that lever. So we would and we have in the past and will in the future flux it if need be.

In terms of communications and data processing or other expenses, we've always guided those to grow in kind of low single digits -- low to mid-single digits, really. And I wouldn't expect that to change.

The next question is from Chris Allen with Compass Point.

I wanted to ask a little bit on Execution Services. I'm just trying to think about why that would be down year-over-year just given the overall volume backdrop we've seen?

Yes. Good question, Richard. A couple of reasons. One is you have to adjust about $2 million a quarter for MATCHNow, which we disposed -- we sold, not disposed, that's harsh. We sold, as you know, to CBOE, right? So that's a '19 to '20 comparison. And then with this business, in particular, and you can look at the old ITG filings, more than half of this business is outside the United States. So you have to look at other than U.S. equity market lines. U.S. equity market volumes were down 21% quarter-over-quarter. Europe was down 22%. Canada down 13%, right? And we outperformed each of those metrics in each of those subregions. But unlike our Market Making business where, as you know, we're more of a global equity firm than a FICC firm, number one. And then obviously, more of a U.S. equity firm, thanks to the great legacy Knight businesses.

Our institutional business is much more regionally bound. I'm sure somewhere, I think, in our financial statements in the 10-Q footnote, we go through the kind of the regional breakout of our P&L. A lot of that is from the institutional business. So when you look at Europe where volumes were down 22%. If you go look at like block volumes in Europe, in particular, they were way down. In the same way, if you look at the FINRA data on block volumes in the third quarter in the United States, block volumes were down significantly. So that really then disproportionately hurts our POSIT Alert business, which is our block business. So a lot of -- the group actually had a really solid, nice quarter, but given the marketplace, obviously, on a comparison basis, it certainly looks like it was down significantly.

Yes. And then just on the timing and pace of buybacks. Should we expect those to start immediately? And I mean, you expressed the $5 kind of 4 -- sort of $40 million to $60 million range. Should we be assuming that the minimum for next year will be roughly $10 million per quarter?

Yes. Joe?

Yes, look, we would get started right away. The authorization will be open for a year that doesn't preclude us from kind of doing more in the next year as results come in. But we -- there's no reason for us to kind of tie them out quarter-to-quarter. We would be as aggressive as we think prudent depending on where the share price is.

Got it. And just a clean up question. The other revenues, $70 million, less the MATCHNow of $58 million, but $12 million is much higher than normal. Just wondering what was in this quarter.

We had to mark up one of our investments. We have an investment in a PTS in Japan that is doing very well. And the accounting rules require us to mark-to-market it. So that's -- it's not a cash gain, but it's a nice investment for us.

Yes it is (inaudible) doing exceptionally well. We're very happy and proud to be a partner with SBI in it.

The next question comes from Ken Hill with Loop Capital.

Just had a quick one on open technology for your data as a service platform. I was hoping you can give an update there. It seemed like it had a lot of potential given all the data you guys have and interact with. So I'm just kind of curious if you could give an update on how sales might be progressing there? What client uptake looks like? And how you're investing in data kind of longer-term there?

Yes. Thanks. It's a great question. Yes. I mean, we're very excited about it. We think that's the future of the delivery of all the wonderful services that we have on the analytics side. We don't separately break out workflow in our [VES] segment. But it's a -- the response of the marketplace, especially from this way, Ken, has been very, very positive because we're giving clients what they want, which is access to their own data, our analytics tools and a platform under which to undertake that rather than sending them some nonmanipulatable flat PDF file or something like that, right? So it has the advantage of obviously giving the clients what they want. And it also reduces the manual functionality, if you will, of the analytics business. I mean that's the vision that we have for that business.

So it is -- the client response has been great. We've had client wins because of it. Obviously, given what's happened on the market makers, this side, it tends to get dwarfed by the Market Making returns, but I'm very, very happy with the performance of that segment.

The next question comes from Michael Cyprys with Morgan Stanley.

Maybe just coming back to some of the points you're making earlier about pricing compression across financial services across the industry. As you spoke about earlier, and firms may become more dependent on market makers like Virtu. I guess how do you see industry structure potentially evolving? And could it make sense strategically for a firm like Virtu to be part of a financial services firm to help them better capture more rents across the overall ecosystem as the ecosystem compresses? Or do you think there could be any conflicts there that could preclude any such combination? How do you think about that?

Well, here's what I would say. Obviously, I love running this firm. We're a great independent firm. We've got all types of levers and growth initiatives and whatnot. And I don't worry about that end game. I keep my head down and we run this firm with intensity and operating discipline, et cetera, et cetera. The comments I made before, I think you're just a natural evolution of the markets towards efficiency. What this firm has always been about when my partner, Vinnie, and I started this firm, it was always about -- people use asked what your secret sauce, HFT, all the stuff, but I say that's old bunk. It's really about operating discipline and scale and efficiency. You have to be the best bid and best offer.

How do you do that? Everything that isn't geared towards producing a best bid and best offer is a waste of time. So offers, all that kind of all the (inaudible) are waste of time. Focus on the technology and innovation to be the best bid and best offering. And that's the ethos of this firm and will continue to be the ethos of this firm. As marketplaces have gotten more competitive as commission rates have gone to 0, as spreads has compressed, that's a positive trend for our firm, right, because we can be the most efficient and always will be the most efficient provider of that price either as principal and now as an agent, right? That was the strategic evolution of our firm as an agent.

And so I think larger financial institutions who we have wonderful relationships with. I never -- Morgan Stanley is not a competitor of Virtu any form at all, JPMorgan, et cetera. And Goldman. We've worked exceptionally well with each of those firms. We provide a service and a function to them, and they provide 1,000 more services and function, both to us and to the ecosystem. At some point in time, could a large financial institution look at us and say, wow, these guys do all of that globally across asset classes, geographies as a principal, as an agent, and they really have built a hell of a mousetrap here, and the run rate expense of that is X. And we're spending 100x X to do kind of the same thing? Sure. I could see some very, very, very smart person in the C-suite somewhere saying that at some point in time. I don't worry about that. I got a day job to do. Someone smart like you and a big institution like Morgan Stanley can write a great paper about that, and maybe it'll happen some day.

Okay. Maybe just changing gears as a follow-up question, thanks for the color there, on Execution Services. Maybe you could just remind us of what portion is transactional that's driven by volume and activity versus what portion of the Execution Services revenue would you say is more recurring in nature?

Yes. I'm looking at Joe to see if we break that out. And I don't believe that we did.

No, we don't break that out. I mean there's a good portion of it, it's volume-driven. I would call -- if you look at it over time, Michael, the comment I'd make is that when we bought ITG and really scaled up this business, the thesis was that it was going to be volatile, and it was going to be driven by volumes, but that it would be less volatile than the Market Making business. And I think that's been proven out.

I would describe the entire revenue base, not necessarily -- there are recurring elements of it, but I describe the whole revenue base is reoccurring as opposed to Market Making, which is really kind of driven by volumes volatility, as you know.

And if I could just sneak in another one follow-up there on just that point. Any sense on how you expect that revenue pool to grow on the Execution Services side as you look out over the next couple of years?

Yes. So obviously, there's a volume element to it, as I mentioned in response to Chris Allen's question, and even Triton, which is a workflow solution for which we get a subscription fee, there is a transactional element to that, right? The more widgets that go through our EMS, the more we get paid by the Street. So you'll see -- we do disclose in our update that we have a volume-driven percentage, if you will, to some of our workflow business.

So I think the wave of the future, frankly, is towards more of a subscription financial technology style model. We've looked at each of our customers and said, if the commission dollars we're getting are not significant to justify the spend in order to maintain it, we're going to need to put you on a subscription type of model and the Street is accepting of that, the bytons accepting of that globally. So there's more of a trend there. Again, there's a longer sales cycle there.

We're also engaged with a number of folks on the sell-side, smaller broker-dealers and some midsized Tier 2 broker-dealers that need more of a holistic sell-side solution as an EMS OMS complement. And so that would be, again, subscription driven. So that's something we're very bullish on longer term. But right now, the mix of the business is -- still the vast preponderance of it is transaction driven.

Next question comes from Alex Kramm with UBS.

Sorry if this was already asked, but on the expenses for next year, can you give us a little bit of a quarterly flavor? I guess the reason why I ask is, you mentioned earlier that there's still some synergies to go through, where I think a lot of that is the, I guess, the layoffs that you -- that you did do this year. So is this one of those situations where January 1, those layoffs happen and then the cost base is fully reset? Or is this going to be a process over 2021?

Thanks, Alex. This is going to be a process. Again, we could talk about the mechanics offline, but I think the way I would lay this out is just kind of scaling down our -- I mentioned -- I answered someone else's call on comp. I would just quarterize the comp, I think that's the best way to do it. And then some of the other things may start higher, particularly overhead and then scale down as we abandon leases and kind of continue to clean up in some of the acquisition, excess offices and things like that. But a quarterized comp, and I'd scale down the other things starting a little higher and ending up with a lower run rate.

Okay. Fair enough. And then just quickly, obviously, you decided to no longer give monthly NTI, if I heard this correctly, but you made some quarter-to-date comments. So if I think through what we've seen so far, is it fair to assume that October was running below and the election then made up for it and some of the trading activity around that? Or any other flavors you would give us to what you've seen so far this quarter to give us a better idea of where and how you're making money right now?

Yes, sure. I'm happy to address it. I mean, again, as I said in my prepared remarks, we tried to be responsive. And frankly, all it did was, in my view, it generated more volatility in the stock, particularly around the August results, which I thought was not helpful to building long-term value around our stockholder base, frankly. I talked to a number of our long-term partners. Investors have been with us, frankly, some of them since the IPO. And my conclusion was this is just encouraging more, shall I say, day trading or quarter-to-quarter style trading, and that's not -- again, obviously, that's -- we're part of the ecosystem, but that's not really what I do on a day-to-day, why I'm here at day-to-day. We're trying to build long-term value as we've laid out here.

So that was the idea behind that. And certainly, we will continue to give color. Yes, I mean, October was more of a muted month when it came to volatility, but we still performed I thought exceptionally well. And obviously, these last few days around the election, I saw some comments from the Head of Global Trading at JPMorgan, and I would echo exactly what he said, I thought it was very, very well articulated, which is, it was a really, really busy period for us, but it wasn't chaotic and crazy.

So obviously, there's a good deal of uncertainty still around election results and -- both at the White House and the Senate and whatnot, so there'll continue to be some volatility. But as the market gets more conviction around that, I'm excited that we're seeing increased volumes. And obviously, we've seen an up market for the last couple of days. I think the market was down today. So I continue to be very optimistic about what the fourth quarter would look like just given the marketplace. But more importantly, all of the investments that we have made and the growth initiatives are really, really bearing fruit. And I think that has come through in the first half of the year and in particular, in this third quarter.

The next question comes from Kaimon Chung with Evercore ISI.

Most of my questions asked and answered, but maybe just looking for a little more color just on the progress on the virtual Capital Markets and maybe the pipeline of activity there?

Yes. Thank you very much. I mean, I'm very, very happy with that initiative. The guys that run it are just super talented and really have outperformed even my lofty expectations for how that would integrate with the rest of the firm. So I'm very, very excited about it. As we put in our investor presentation, it's really across industries. I think what we've successfully done is leverage 2 things. One is -- well, 3 things. One is the market share that we have, right, which is really compelling to companies because they see that, hey, we're #1 in their stock, and we're #1 in their industry. So there has to be a lot of natural crossing flow. That's the first thing.

The second thing is we obviously have a tool pit in terms of algos, in terms of alert so that the guys running the ATM business and trading on behalf of our clients can effectively internalize and give a great outcome as measured by analytics tools to the company.

And then the third thing is, obviously, we've got a great group of guys running that business that have long-term relationships with issuers of all sizes and strikes that can -- that want to use our services. We've also undertaken, for the first time, going up to Canadian issuers that are issuing it in the United States as well, that's another growth opportunity, and that's having a scaled very, very well-regarded office up in Toronto helps that.

So it truly is a firm-wide endeavor that has really borne fruit this year, and I'm excited about how it's going to grow. Again, it's just part of the theme around efficiency and technology making markets better.

The next question is a follow-up from Dan Fannon with Jefferies.

Just wanted to ask about debt paydown going forward here. You've obviously got a lot of flexibility with where the balance sheet sits. So from a modeling perspective, just kind of assume you're comfortable with these levels. And then also, M&A where you guys have been so successful obviously, the buyback is new, but how do you think about M&A in this type of environment? Is that less of a focus or less of a priority given what you're seeing from some of your organic initiatives?

Yes. I'll take the first part there. Good question. We've decided that as we came up with the target cash flows available, those only reflect what would be required to pay back from our -- according to our debt covenants, right? So when we acquired ITG, we entered into a new credit agreement. And there's basically guardrails around the amount of leverage. And if we have a great quarter, we're required to offer a repayment to our debt holders. And so we've modeled that in. But you're right, we shouldn't model any voluntary debt repayments because we are very comfortable with the [$1.6 billion] notional.

In terms of our M&A strategy going forward, I'll let our CEO answer that.

Yes. I mean, look, Dan, we obviously, strategically grew this firm through a lot of hard work and 2 wonderful acquisitions that were -- have been very successful from a product and a growth standpoint and obviously, from an expense integration standpoint. And therefore, they were very, very accretive to our shareholders. That's the #1 priority.

Now that we have this fully scaled firm, I've said on prior calls, we're going to be -- the bar has been raised. We're going to be very opportunistic around M&A. We've got something really special here because we're a large-scale player with a public currency. And so we will continue to look at things, examine them and see what strategic, see what's not. But a lot of the targets that we looked at this year, looked at their 2020 or even the first half 2020 and annualized it and said, give me your multiple based on that, and I said, well -- or give me your historic multiple based on that. So well, I'm not trading at (inaudible) multiple.

So I think the marketplace needs to kind of calm down in terms of -- from an M&A perspective. I think people -- I need to look at companies on a normalized basis and then conclude whether or not strategically they fit in. And then I've said every time I've answered this question, I will not do a transaction that's not accretive to my shareholders because I'm a big shareholder. We've got something special here. There's not a company that I can think of that has a product or a service that we can't -- that we're not doing right now or that we can't build on our own, right? That's the key. We are a fully scaled financial services firm. So we will be opportunistic. We'll try to be good partners with folks, but we're going to do what's in the best interest ultimately of our shareholders. And my Board with Joe, Sean and I, big encouragement, concluded that right now using the extra cash on our balance sheet to buy back stock is the best way to provide value to our shareholders, and that's going to be our ammo for the foreseeable future.

Thank you very much, operator. I believe we have no more questions in the queue. I'd like to thank everybody for their time and attention today, and we look forward to speaking with you in early, I guess, the April, March, yes, something like that. We'll give the earnings date.

I wish everybody a happy and healthy conclusion of 2020. We will talk to you then. Thank you.

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