Virtu Financial Inc (VIRT) 2017 Q3 法說會逐字稿

Good morning, my name is Leandra, and I will be your conference operator today. At this time I would like to welcome everyone to the Virtu Financial Conference call announcing 2017 third quarter results. (Operator Instructions)

Mr. Andrew Smith, Head of Investor Relations, you may begin your conference.

(technical difficulty) Leandra. Good morning, everyone. As you know, our third quarter results were released this morning and are available on our website.

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 and our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. It is important to note that any forward-looking statements made on this call are based on information 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 10-K and other filings with the SEC.

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. You'll find a reconciliation of these non-GAAP measures to GAAP terms included in the earnings materials with an explanation of how management uses these measures.

When used on this call, adjusted net trading income refers to our trading income, net of all interest and dividend income and expenses and all brokerage and clearing expenses, clearing and exchange fees as well. This will be the first quarter where we report on the combined results for Virtu and KCG. Given that the acquisition closed on July 20th, Virtu's third quarter GAAP results will incorporate KCG's results from July 20th until September 30th.

And answering your questions today are Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Chief Financial Officer. They will begin with prepared remarks and then take your questions.

Now I'd like to turn the call over to Doug.

Thank you, Andrew. Good morning, and thank you for joining us today. It's been over 3 months since Virtu closed the acquisition of KCG and this morning we reported our first period with combined results which includes KCG's results beginning July 20th through September 30th.

I will spend the majority of my prepared remarks bringing you all up to speed on our integration efforts and our progress so far, and then turn the call over to John Molluso to talk about our synergy and capital achievements to date.

Despite the slow start to the quarter, we have seen the powerful potential of the Virtu KCG combination beginning to come into focus. I'll begin on Slide 3 of the earnings presentation.

If we look at the first 3 whole months as a combined firm from August 1st through October 31st, the trailing 3 months adjusted net trading income for the combined firm is $203.3 million.

These results are even more impressive if we consider the context in which they have taken place; an environment of ultra low implied and realized volatility in conjunction with the muted global trading volumes persistent during the quarter and we are only beginning to achieve trading efficiencies and harmonized the strengths of both legacy firms.

At approximately $3.1 million of adjusted net trading income per day in this environment coupled with our demonstrated ability to manage the expense in capital base, we are off to a great start in this game changing combination of these 2 firms.

As a result of changes which we'll discuss in a moment, the net revenue picture of the combined firms has stabilized over the last 3 months, and that stability together with the amount of excess capital present at legacy KCG makes us confident that we will be capable of generating earnings and cash flow well in excess of what we need to meet our capital requirements and pay the existing $0.24 quarterly dividend for the foreseeable future.

In addition, we remain excited about the numerous global growth initiatives for the combined firm, which we will quantify and discuss today. Our results for Q3 are in the press release. And as you can see this quarter in particular was a bit messy given this tough period and the various purchase accounting adjustments required by GAAP. In light of that complexity, we are providing an extensive earnings presentation with supplemental disclosure to deliver enhanced clarity and transparency into how the operations of the combined company are shaping up.

This includes monthly adjusted net trading income results to highlight how our combined operations have performed recently. I will use the remainder of my time here to review the key strategic benefits we expect to see from the merger and then discuss our vision, progress to date and the next steps for fully leveraging the strengths of the combined firms.

In short, we have even more conviction today than we did when we announced the merger on April 20th about our ability to deliver the following strategic benefits: First, leverage our existing scale and achieve greater cost efficiencies through our global presence in 36 countries; second improve KCG's wholesale market making in the U.S. and in Europe by integrating Virtu's extensive liquidity provisioning capabilities and scaled financial technology with the best-in-class KCG customer franchises and the vast experiences as a quantitative firm; third, grow distribution of the combined firm's agency execution capabilities in the United States and Europe by delivering Virtu's transparent and efficient order routing capabilities and KCG's robust client franchise.

The combination allows us to raise the profile in understanding that Virtu's order routing and trading capabilities particularly in a post MiFID II environment where these skills are already being incorporated into our customer offerings.

I would like to provide an early progress report on the integration. As we said on our last call we hit the ground running on day 1 with our detailed plan that we developed ahead of the deal closing.

We believe that we are building the only true scaled global market making and institutional agency firm that combines deep customer relationships and the quantitative trading skills that have evolved over the last 20 years at KCG with the world-class technology and market structure expertise of legacy Virtu.

Getting this integration right is our greatest opportunity to benefit our shareholders, customers and employees. Going forward, Virtu's leading proprietary trading technology will power our expanded product and service offering vibrating all of our global trading onto Virtu's proven platform underpins the scale and efficiency we expect to gain from the merger are unique hallmarks of Virtu.

In addition to migrating our technology and trading efforts, since the deal closed in late July, we have restructured our business development in sales operations to leverage our expanded product and geographic reach and consolidated offices in locations where there was overlap and are cross training our expanded global customer facing sales force to more efficiently reach customers and improve their experience.

The response from our customer base has been universally positive as they appreciate the value that a more efficient and scaled firm can add to the financial market.

We created the earnings presentation to provide an update on integration and guidance on the result we expect going forward. Let's turn to Slide 4 titled Integration of updates.

The takeaways here are as follows: first, the legacy KCG wholesale market making and Virtu market making businesses are extremely complimentary and symbiotic, and we were mainly excited about the numerous revenue growth opportunities. Virtu's technology has already enhanced the customer experience on the market making institutional side and has already borne fruit as we have migrated some of the legacy KCG strategies onto the Virtu platform. Similarly, KCG's quantitative tools and expertise are making the Virtu strategies more competitive and profitable. There are literally dozens of trading integration products underway across the firm with many achieving real tangible P&L, none of which were modeled at the time of closing.

These improvements are evident in our August, September and October results as illustrated on Slide 5 of the earnings presentation. To date, we have generated approximately $14 million of incremental annualized adjusted net trading income from these growth initiatives alone.

The size and scope of these initiatives is many multiples of what has been achieved to date.

Second, technologically, we are moving to a single pan-asset class and geography integrated technology platform. From the operations and trading perspective, the legacy get go and night systems were essentially unaware of each other.

Legacy KCG had at least 3 independent trading systems in addition to separate back office platforms that were largely disconnected. This setup is markedly different from legacy Virtu, and we do not believe in operating multiple trading or back office systems as a rule, because supporting separate systems requires expensive overhead and infrastructures, it's operationally risky, and limits opportunities for internalization. This integration is already underway.

Third, risk parameters and risk tolerance for the respective firms have been harmonized, and we do not view the wholesale market making or agency execution businesses as inherently more risky given the volume of customer flow being serviced by legacy KCG.

Fourth, as we have peeled back the various parts of the legacy KCG business, it has become clear that the core wholesale market making business is significantly less volatile than the consolidated results KCG had reported.

We will provide data to demonstrate this fact in a few slides, but legacy KCG operated certain prop quant-driven strategies that took relatively more risk over significantly longer time horizon, required significant capital and generated volatile results as compared to its core customer focused market making businesses and this distorted the consistency of the actual underlying market making business.

Most importantly, these strategies had very little to do with legacy KCG's primary mission of serving customers and has significantly deteriorated more recently in less volatile markets. We have made significant progress with respect to synergies. At the announcement of this transaction we predicted we would achieve $208 million of annualized synergies net of anticipated revenue loses.

We now believe that by the end of 2018 we will have achieved $262 million in growth synergies with minimal impact on revenue base overall, and almost no impact on the revenue base we view as part of the core business.

Headcount at legacy KCG peaked at 1,100 around the second quarter of 2016 while legacy Virtu was 150. Today, our combined company has a headcount of 648 persons excluding BondPoint and Neonet employees. These headcount reductions have not and will not adversely impact revenue.

As we have previously noted, many of the departed employees worked in redundant cost centers or offices that generated little to no revenue or even lost money trading.

We believe the streamlining achieved to date is enhancing the customer experience and has improved our operating performance. Our 605 and 606 reports indicate our market share with the retail brokers remains largely unchanged. How has this been achieved, well, consider the following: KCG counted 7% of its revenues outside the United States in 2016, yet 23% of the headcount outside the United States on the same date.

Legacy KCG's European trading operations alone had been losing approximately $2.5 million per month in 2016. We have streamlined the legacy KCG European business to become a more focused client service organization, and we are fully committed to a client [face] in European operation.

We have begun the process to shut down Neonet, which was acquired by KCG in 2015 and contributed to the losses in Europe. KCG's Singapore and Mumbai offices had 29 employees and generated little to no revenue yet required meaningful capital and operational expense.

With regard to communications and data processing, we have begun dismantling the duplicative technological footprints, and we will achieve the synergies as outlined at the time of the acquisition.

We also note an increased interest in examining the market data and technological cost among industry participants. These trends can only help us as we attempt to make our business even more efficient.

We have consolidated redundant office space. We will further reduce operating costs as we continue to consolidate back office functions, clearing operations and overhead departments, as all of these systems will be migrated to a single efficient Virtu quality process supported by a common infrastructure.

Turning to the achievements with regard to the capital structure. When the deal was announced on April 20, we had identified $440 million in capital of the combined company that we could use to rapidly pay down debt and help return the combined company to its current capital structure on a pro forma basis.

At the time we estimated that we would be able to release and repay the $440 million of debt within 12 to 18 months after closing. I am pleased to say that we are well ahead of the schedule and have made voluntary repayments totaling $200 million towards our term loan within the first 3 months post closing.

In addition, we made a strategic decision to divest of our fixed income platform BondPoint. We felt this business could be best positioned to grow in the hands of a strategic acquirer. We were very pleased with the competitive bidding process and believe that ICE is the perfect acquirer for BondPoint, its clients and employees.

Jeff Sprecher and his team at ICE are world-class, and will grow BondPoint to the benefit of our mutual customers. We will use the net proceeds, approximately $250 million, to further pay down our loan.

In terms of the overall capital position, we provided a snapshot in the prepared materials which Joe will review. In summary, we have trading capital of $1.3 billion as of September 30th, approximately $500 million more than is required to operate the combined business.

Our trading capital, even assuming further reduction of $240 million to reduce debt remains well above what is required to operate our businesses. We have been able to manage the capital base sufficiently through capital synergies by combining the businesses. However historical capital usage in the legacy KCG business was higher due to certain prop trading strategies that required significant capital as detailed on Slide 7 of the earnings presentation.

We will continue to return capital to shareholders through our quarterly dividend from a combination of excess cash on hand and earnings for the foreseeable future. As we generate excess cash, we will continue to be mindful of our primary mission of returning capital to our investors through increased dividends and share buybacks.

Now I would like to turn to Slide 5 and highlight some recent trends in adjusted net trading income. We are providing detailed monthly results in adjusted net trading income here to highlight the trend and give you a clearer picture of what the business is capable of producing in a given environment.

Adjusted net trading income for the entire quarter, including the KCG [stub] period of July 1 to July 19 was $173 million. This differs from the reported number because of the first 20 days of July before the transaction closed.

July was an extraordinary, slow and disappointing month that distorted results. Again, we owned the legacy KCG business beginning July 20, and as a result, none of the improvement to our combined trading had been implemented.

August, September, and October are the first 3 months we assumed full operational control of KCG. We averaged $3.13 million per day in adjusted net trading income over this trailing 3-month period.

Note that the average achieved in this 3-month period takes place in an environment of historic lows in realized volatility and the monthly results were very similar ranging from $64 million to $70 million. Therefore, we think this is a representative run rate of what the business should produce in this environment.

It is important to note that we were only beginning to apply some of the technology, internalization and other efficiencies to our business. In addition to the numerous growth opportunities from the combined firms, we remain excited by our growth opportunities in Asian equities in particular and the opportunities presented to us in Europe as a result of MiFID II.

If you turn to Slide 6 titled "Target Cost & Synergies Summary," you will see that we are providing some detailed expense guidance. Joe will go through these in more detail. If you apply the expense targets for cash in total expenses, we expect that the 2008 full year expense base for the combined companies should be between $490 million and $515 million. This translates into $262 million in overall synergies.

I am going to turn the call over to Joe. Before I do that, I want to summarize what we have accomplished in the 3 months since this transaction has been closed.

We have de-risked the overall business by paying $200 million of our term loan ahead of schedule saving us $10 million per interest in year. We have also shuttered what were effectively poor performing and capital-intensive quant style strategies embedded in the business. This reduces earning volatility and releases capital.

We have managed headcount down to 648 people net of divestitures from a combined peak of 1,250 people. We have improved operating efficiency. We've agreed to sell BondPoint for $400 million to ICE subject to customary conditions. This will reduce debt by [$250] million saving additional $13 million of interest per year.

We are winding down the operations of Neonet, and we are stopping the bleeding in Europe and Asia. In sum, we are executing on our synergy plan significantly ahead of schedule.

In closing, I would be remiss if I failed to thank all the combined Virtu teams. Our ability to hit the ground running on day one is a credit to the sustained efforts of the legacy Virtu and KCG's integration, planning and preparation prior to the close. While these are still very early days a shared spirit of excellence has inspired our teams to bring forward the best of each culture to make our combined company the best it can be. We could not be more excited about the opportunities that lie ahead now that we are operating as one company and one team. Joe?

Thank you, Doug. I will now continue with the earnings presentation of our results. Slides 8 and 9 present a snapshot of how we will report results as a combined company. We are reporting results in 2 main business segments; Virtu market making and Virtu execution services. We are also including all of the global volume information we have disclosed previously for the market as a whole. In the market making segment we will report global equities including America's equities and rest of the world and global FICC, fixed income currencies and commodities. This aligns much better with how we manage the segment, and then the legacy Virtu reporting of 6 categories or the legacy KCG presentation of aggregate market making activities. On Slides 8 and 9, we show you how these results would've looked pro forma on an adjusted net trading income basis.

On Slide 9, you could see the same results for 2017 on an adjusted net trading income basis, the pro forma results for the trailing 3 months that show the uptick in the result that Doug mentioned, as a result of the integration and the improvements that have begun to take effect.

Turning to the next 2 slides we have prepared an analysis which explains part of the reason for the historic volatility in legacy KCG's market making results, which Doug alluded to in his remarks. If you look at the results on Slide 10, you can see that the GQS trading subset of the historical market making division contributed 21% of the market making group adjusted net trading income in 2015, 11% overall in 2016 deteriorating from 15% in the first half to 3% in the second half and 4% overall in 2017.

A great portion of this business was a quantitative portfolio risk book; its size was typically $1.5 billion to $2 billion long/short and used approximately $130 million of capital. We determined the characteristics of this business did not fit with our mission to serve customers. As such we have shutdown most of it, while retaining the portion most suited to appropriate risk and capital usage as well as consistent results.

Slide 11 shows that if you exclude GQS trading, a year-over-year change in market making adjusted net trading income would've been down 11% and 21% respectively from 2015 to 2016 and year-to-date 2017 while realized volatility for those corresponding periods was down 15% and 47% respectively.

Turning to Slide 12, we are providing to you some detailed expense targets we have for the combined business going out to 2018 and 2019. As stated on Slide 4, our original synergy estimates included $180 million for occupancy overhead and compensation and $70 million for technology, communications and data processing.

Looking at the guidance we are providing for 2018 we would target around $438 million of cash operating expenses and $65 million of depreciation and amortization synergies. So on the same basis as the original estimate, we would arrive at $262 million in total synergies realized in 2018. Assuming further that the run rate achieved in Q4 2018 continues throughout 2019 target operating expenses would be $395 million and depreciation and amortization would be $60 million, which would imply an annualized synergy savings of $310 million as described on the table on Slide 12.

Our revenue dis-synergy estimate as Doug described has been reduced from $42 million to $7 million. We are able to target these enhanced synergies, because our initial assumptions regarding headcount, technology spending, occupancy costs and other expenses were conservative. Obviously, being on the inside we can provide better guidance now that we have a more complete understanding of the business and execute on our plan.

Turning to specific results for Q3, you can see the snapshot of the GAAP results on Slide 13. These results include a division of revenue and expenses between the pre-July 20 period and post-July 20 period and appropriate purchase accounting adjustments. All of these moving pieces led to the reported GAAP loss of $40.4 million. When you normalize for these expenses on Slide 14 you get an adjusted EPS figure of $0.08, this is against the [GAAP loss] of $0.17 per share.

If you look at Page 14, the add-backs relate mainly to items that are a consequence of the merger such as onetime professional fee expenses, expenses related to capital raise incurred in connection with the transaction and items that are distorted as a result of the transaction such as legacy KCG compensation.

All right, so we've talked about revenues, expenses, [picture] clarifying, finally Slides 15 and 16 talk about capital. On Slide 15 you could see a snapshot of the trading capital at September 30, 2017. You can derive our trading capital from the balance sheet and you can see that trading capital balanced at September 30th is $1,358 million. It's important to note that the nature of this trading capital is the same as reported by legacy Virtu, it's highly liquid and converts to cash in a trade date to settlement date cycle.

Turning to Slide 16 you should take away the following. This business remains well capitalized, even over capitalized. Even accounting for the additional $240 million that we have promised for debt reduction there remains a significant amount of excess capital, in this slide, $268 million to $368 million excess. This excess capital will allow us several options, reduce debt further, maintain our dividends and depending on the circumstances even consider share repurchases at the appropriate time.

I would also note that we target having $941 million in total debt by the end of 2018 taking into account the remaining amount of the $240 million of capital return and the net proceeds from the sale of BondPoint and application of tax receivables.

Finally, given the robust credit markets there may be an opportunity to reduce the cost of our debt further through opportunistic refinancing and/or repricing. And with that, I will turn the call back to the operator to open it up for Q&A.

(Operator Instructions) And your first question comes from the line of Rich Repetto with Sandler O'Neil.

First thanks for all the increased -- the disclosure, the monthly disclosures as well as the transparency both on the revenue and the expense side, but the first question is Doug you increased the cost synergies as well -- the net synergies as well, and I'm just trying to gauge your confidence level. In the beginning, your estimates were driven by I guess your due diligence, and now after having KCG directly under your control for 3.5 months so the confidence level that you can attain these upped cost synergies and actually net synergies?

Yes, we're very, very confident, highly confident in the numbers. If there's one thing I've learned over 10 years of operating these businesses is that you can do everything you can to generate net revenue, but you can control costs. If there was one thing we were very good at at legacy Virtu, it was -- and this comes from our DNA from our founder Vinnie, which is you got to know every penny of everything that's going on here and be really in the details of every cost, and that's the history of Virtu. I think as a public company we had a pretty good track record of explaining what our costs were going to be and how they were going to increase. And obviously, there are certain things out of control like market data, et cetera that we've talked about, but when it comes to really understanding the push and pulls, headcount, office space, all of our technology spend, what our footprint is going to be like, and we have a lot of experience around that. This is not our first significant acquisition. We bought a company called Madison Tyler in 2011, did that technology integration, we had a [SWAT]team in place to go through it all and make sure that we were extracting all the synergies. So Joe and I on the management team here are very confident in those numbers.

Okay, thank you, and then, I guess my one follow-up would be both on the GQS I guess -- I covered KCG for a while; I knew nothing about this, but can you talk about -- I guess, the question is overall capital, when you look at the reduction in your trading capital, can that be -- there's no burden on that in regards to having to pay down debt, that capital can be used for anything you want and then the BondPoint, what do you expect to raise from BondPoint -- I know capital is fungible, but asset sales, that has to be, what do you call it, transferred to debt pay down, correct, versus the just reduction in trading capital?

Yes, I'll answer -- you asked 2 questions, I'll answer the second one first, which is yes, the net proceeds of BondPoint after August that we pay corporate level taxes will be used to repay debt. It was a $400 million purchase price and corporate taxes, at least today, are 35%, so you guys can do the math. Roughly $250 million of amortization goes straight to repay our term loan that is incremental to the $440 million that we announced when we did the transaction, $200 million of which has already been paid. And then you asked the question about GQS and capital or whatnot, and the answer is, yes, they were -- a number of what I shall say quant-driven strategies here that just took a lot more risk and frankly their returns, most recently the second half of 2016, we put in the supplemental materials, and 2017, were very poor. So what we did was extract the portions of those strategies that made sense, embedded them in the customer book, so we're not actually losing any revenue. In fact those strategies are actually performing better with significantly smaller book sizes and therefore significantly smaller capital. And so there was just a number of instances around the firm where capital was being deployed very, very inefficiently. Again, it goes back to differences of the 2 firms. Legacy Virtu as you know Rich, because you covered it was never overcapitalized. It was the mantra again from our founder and myself which was capital is very important and it should be husbanded,, and if you don't need it for trading, it should be returned to investors and the shareholders. And when you manage capital with that level of efficiency, you run a more efficient firm and that's the standard that we've applied here. And it turns out as we got into the weeds of KCG, there was a significant amount of excess capital. We estimate at least $500 million of excess capital today that's after we paid all the transaction expenses and paid $200 million of term loan off, and that's incremental to the BondPoint proceeds and incremental to the $50 million of a tax payment we're going to receive from CBOE as a result of the sale of Hotspot. So there's a lot of excess cash floating around here. As we've said time and time again, we're going to use that to return our leverage ratio to a number we're comfortable with; somewhere between 2 and 2.5x EBITDA and then the remainder will go to satisfy -- continue to satisfy our debt payments and then to the extent there's excess -- as I said in my prepared remarks, I'm a big believer in returning capital to shareholders.

Your next question comes from the line of Alex Blostein with Goldman Sachs.

Hey good morning guys, so 2 revenue related question, and one's kind of what's within your control and one perhaps that's outside. So I guess in the first one, $3.1 million of kind of daily trading revenues today, that was pretty clear from the slides, kind of in the near term on the run rate basis. You guys mentioned you realized some of the revenue synergies already, but it sounds like there's more to go. So Doug, assuming the [volume] environment never gets better, which we hope it does where could that $1.3 million go? Just kind of what's within your line of sight on the potential additional revenue synergies from KCG and then I have a follow-up?

Yes, that's a great question. Honestly, it's a difficult one to put my finger on exactly, and the reason I gave the examples in the earnings presentation was to make it very clear and tangible. So those are 3 or 4 of the I'll say dozen revenue enhancing projects that we have going on between the 2 legacy firms. To date the run rate on those is $14 million as I said in the script. I think it's many multiples of that and so is it $100 million of incremental revenue? I know that might be a little high, but right now it's early days, it's real tangible results that we're already seeing from being more intelligent around the Virtu strategies by taking the KCG strategies to markets where heretofore they didn't have efficient access like Canada and Europe and Asia and things along those lines. So could that $3.1 million become $3.4 million or $3.5 million, $3.6 million, yes, I think that's definitely within the realm of possibility. November continues -- the net trading revenue continues to grow in November, which I'm excited about. It's obviously early days since it's November 7th or 8th, but this is in a flat nonvolatile market place. I should also point out that some of the legacy Virtu efforts in Asia continue to bear fruit, and we've improved our trading there, and there's significant opportunities around being a systemic internalizer in Europe which we're very excited about and we're poised to already up and running as an SI. So I think -- obviously, you guys will all come up with your models and your conclusions, but it's not unreasonable, Alex, to assume even in a flat volume and volatility environment, there's room for growth. Obviously, we've all talked many times about volumes of volatility and how that is an exponential factor to our performance. And that's the Virtu model, right, keep your fixed cost manageable, be able to generate an impressive EBITDA margin in a famine environment, and then when inevitably markets come back, all of that incremental net trading revenue, net of taxes drops to the bottom line. And so this model will continue to scale exceptionally well. I hope I answered both your questions, I tried to.

Yes, you definitely did, you actually had on the second one a little bit, but I wanted to follow up just around MiFID II. Again, you kind of highlighted on that in the prepared remarks, but we're obviously getting a little bit closer to the deadline here. As you guys talked to your European customers, any updated thoughts on the opportunities both for the global execution services so kind of through unbundling and ultimately on the market maker as well given the systemic internalizer opportunities that you mentioned?

Yes, I've been all over since the closing, actually before the closing, I've met with probably our top 50 to 60 customers. I've been to London, Dublin, all around the United States meeting with our big retail customers and our institutional customers. I had the privilege of being over in London a couple of weeks ago spending time with both our retail broker-dealer partners over there as well as the significant institutional sales side firms that we have the pleasure of providing agency services for. And there's a lot of uncertainty over there, but I think what is certain is that in an unbundled environment where firms are looking for best execution, where they're looking for order routing capabilities, where they're looking, most importantly, for post trade transparency, where did you send my order and why did you send it there, there's not another firm that has the compliment of technology and order routing understanding that Virtu does. That was the legacy Virtu agency offering that we talked about a couple -- 4 quarters ago. And applying that transparency in that infrastructure to Europe in an unbundled environment, to me, is a game changer and the response from the institutional clients has been terrific. We've had a number of them come to the offices in London and in Dublin and look at the technology and the tools that we have, and they've come away very, very impressed. So I'm excited about that. I think, secondly as a firm that also has the lever of being a prop trading firm, I think, people had overstated I don't think SI liquidities can be 40% of the market or anything crazy like that, but I do think it's going to fill in the niche of the broker crossing networks which, effectively as of January 3, are no longer permitted. And so we have a live SI stream. We're going to have it in single stocks and in ETS, our core strength. We're going to either distribute it directly to some of our broker-dealer partners or we're going to use broker-dealer partners like we've announced in [FiNet] and [QuantHouse], and we're going to allow them to redistribute it, if you will, to their customers. So again, we're agnostic as to the form of distribution. We're a great firm that can provide a good offer spread, and we're happy to have it distribute directly or indirectly, but to us that's a significant opportunity to effectively have another distribution mechanism for our prices.

Your next question comes from the line of Chris Allen with Rosenblatt.

Morning guys, I guess, I just want to ask a little bit about the expense outlook, and I may've missed this, I apologize, you showed a couple of different things this morning, but just the guidance range, is that just really dependent on the compensation levels relative to revenues, I'm just trying to think about if the current revenue environment persists, or if we see a vast improvement like how material change you might be seeing in the expense outlook moving forward?

From our standpoint, it's a bottoms up that is kind of [sanity] checked by a ratio. If you look at -- if you make some assumptions around $3 million to $3.5 million a day, you're going from like the high teens to low 20s as a comp ratio, though we are comfortable with that in terms of the guidance, but we are -- I'm never really targeting a fixed pool based on a ratio, because we don't think of the firm that way, we think of the firm from a bottoms up standpoint and then sanity check it as a ratio.

Yes, I think that's a really good point Joe made which is, Chris, that this is not an all Wall Street style firm. So if our revenues go up and double, sure, we'd be a little more generous with our employees, yes, but there's no formula here. We're not going to announce -- yes, this is old school Virtu style in terms of compensation. We're going to compensate people fairly, but at the end of the day this is not a star system; there's no star traders here. It's all about the firm and the financial technology, and we've got some great people here, but don't think of expenses ratcheting up proportionate to revenue. They won't.

And then just, probably just a follow-up, just on the sequential improvement by month that we saw through October -- and you may've provided this, again, I apologize if I missed it -- any color in terms of what asset classes you're kind of seeing that in or is it kind of more broad based, just you're kind of realizing some of the benefits from combining the 2 firms?

It's the latter. It's combining the benefits of the 2 firm. So I would say it's more in U.S. equities than it is in other asset classes, but -- so for example, we're running today smarter FX strategies, thanks to, I'll say the quant genius of some of the KCG guys. We got some really talented quantitative strategists here at KCG that at legacy Virtu we just never had. And so that intelligence, if you will, is making the Virtu classic market making strategies a little more patient, a little more intelligent and therefore more successful. And so candidly about a third of that was in our FX line of business, and maybe a third of that was outside of U.S. equities, because we're now running some KCG quant strategies as I said in other marketplaces. And the remainder was U.S. equities, probably more legacy Virtu than legacy KCG, Chris, just in the sense that again the legacy Virtu strategies were just bid offer market making type strategies and having a little more intelligence, a little more smarts from the 20 plus years of KCG being a quant firm has really helped the Virtu strategies; very excited about that.

Your next question comes from the line of Ken Worthington with JPMorgan.

Thank you for taking my questions, given the divestiture of BondPoint, can you help us understand what revenue and expenses will be foregone with that sale?

BondPoint never really published its revenue numbers. I think there've been some estimates that your colleagues have made that look at the volume and will get kind of the pricing card and get something in the mid 20s -- $20 million of revenues. So that's a ballpark, correct, and I think the margin on it is consistent with the overall margin for kind of legacy Virtu, so it's more of like a 50% margin EBITDA business.

But I think the important point is there, Joe, also we're using the proceeds to pay off bank debt, so from a -- it's net and neutral results.

Yes, so from a EBITDA -- we look at this deal as earnings neutral, EBITDA neutral and obviously we are required to use the proceeds to pay down debt so we are going to do that and it helps us delever, it helps us -- there is even more benefits because obviously as we delever more we're able to go to the credit markets and potentially lower our cost of debt. So we don't really look at the BondPoint sale, it's just in the prism of kind of EBITDA accretion, dilution or net income accretion dilution, although we -- in those prisms we look at it as pretty neutral.

Okay, and is BondPoint incorporated into the expense synergy numbers, or is this incremental to the numbers you gave us?

No, we never -- importantly, we did not assume any BondPoint synergies in our expense estimates, and as important in the revenue dis-synergies. We did not assume revenue dis-synergies from BondPoint as well. So the $7 million revenue dis-synergy has got nothing to do with BondPoint.

Thank you, and then you talked about the $14 million of incremental revenue from the merger of KCG and Virtu, can you flush those out, where are you getting enhancements and maybe just if you can give us some anecdotes to help [tone] the color that'd be helpful too.

I think I alluded to some of this in answering Chris Allen's question, but I'm happy to do it again, which is the $14 million, that's run rate, and that's really as I said in my prepared remarks, Ken, sort of the tip of the iceberg in my view, because we've got dozens of other projects working right now all of which have produced negligible revenue but I'm very excited about. So here's an example. Legacy Virtu is a FX market maker as you're well aware. Quoting on the bid and the offer, when one of its bids or offers would get lifted obviously as a nondirectional trader you have to make a decision when do you go and cover, when do you balance; we're trying to make it tick. But often times it turns out because we didn't have a quantitative simulation environment, experience of the legacy KCG firm -- and I can't complement those guys enough, really impressed with the skill sets here -- we would balance early and the position would [be in revert]and if we held onto a position for 1 second or 5 seconds, or in some cases 0.5 second, we would've made 3 ticks or not lost the tick. And so applying that quantitative intelligence, and it's not just FX, but that's where we tried it first just because we had the most data and there was a lot of volume, it turns out that it makes the Virtu strategies a lot smarter. And so as we said in the presentation on Page 4, that's already realized $8 million. That one little nugget alone has realized $8 million of annualized trading. So apply that across -- there's a lot of futures trading in a lot of exchanges in the 36 countries that we trade in. And so obviously we're rolling it out to other futures exchanges and indeed it'll work in the spot exchanges and FX as well. So we're going to become a smarter market making firm than legacy firm will. The second area which is outlined on Page 4 as well is how do you take the KCG quant strategies and expand them around the world. We knew this from due diligence that they candidly had not done a great job taking these quantitative strategies in equities and in futures and in other asset classes around the globe, that's what Virtu's all about. We've got streamlined, low cost, low latency, connectivity to 35 countries outside the United States. And so we've already achieved $4 million of run rate revenue synergies there in 1 country up in Canada. So we're in the process of rolling those strategies out to another 34 countries. Third area, again on Page 4 was getting back to how Virtu would effectively cover in balance in U.S. equities or in cross border equities, when it had an ADR position or an ordinary position it needed to balance, again, because we were a risk averse bid offer capture styling firm when the book started to move away from us we would immediately cover into the market either crossing a spread or trying to scratch and paying exchange fees. Well, that [tends] to, on balance, reduce your opportunity cost. If you can be more intelligent about how you trade, if you have the benefit and the bounty of customer information and customer orders, you can be more intelligent. This is exactly what we thought would be the case looking at it from the outside of due diligence, and we were very excited about it. It turns out when we turn these things on, and we've only done it in 2 limited areas, it generates at least $2 million in net trading revenue. So these are 3 concrete examples of new revenues that had been created simply by combining, frankly, I'll say the genius of the KCG firm in their quant strategies and the efficiency and understanding of market structure of Virtu. It's kind of like the Reese's Peanut Butter Cup commercial, you take chocolate and peanut butter, and at the end of the day you end up with a great candy, that's what this firm is.

Your next question comes from the line of Kaimon Chung with Evercore ISI.

Hi, lots of inputs, but can you just give us a sense of how legacy Virtu and KCG did separately, maybe just what the adjusted net trading income did, and maybe where the headcount stands as of now?

We've -- on Slides 8 and 9, we've got that Two Main Business Segments breakout, legacy Virtu, everything other than the technology services and the agency execution services is in Virtu market making. So all of those legacy categories are in the new Virtu market making bucket and the agency and execution went in Virtu execution services and for KCG, we by and large maintain the division of the market making execution services. We're one firm now. We are going to report as one firm, we're reporting the headcount as one firm. And on the headcount, they were so desperate that it's easy for me to say Virtu's headcount hasn't fluctuated too much so you can [take] that. I think on the business segment side we have these 2 buckets and look we actually think this is a much more appropriate presentation. We'll consider different ways to look at it going forward in terms of metrics. The underlying metrics haven't changed but we look at America's equities, rest of the world equities, the Fixed Income Currency Commodity is an options business that's very consistent with the way other firms report that and then our agency and technology, commission and fee businesses effectively are in the other bucket, that's the way we're going to report it. So we're not going to specifically break those 2 down.

Thanks for that, and I think Alex touched upon this, but maybe I'll ask in a different way, realized volatility hit lows and so a little pickup in Q3 run rate, but what's your sense of normalized volatility levels, and what would it take to get back there? Appreciate the progress you've been making with the KCG integration, but what can you share with us to give us a confidence that your models [levered] to that normalized volatility level in the same way or better than it was in the past?

Yes, it's a great question, I think the thing that's most striking about the results which I was very excited about was if you look at like the, what happened to realized volatility from August to October, I think it went down to, I'll say historic low. Realized volatility was sub 5, which is just pretty startling in terms of the lack of the say intraday action in the marketplace. And in that environment, we had a very fine month in October, so to me, if that's the baseline of what the firm can generate on a consolidated basis, when you've got realized volatility in single-digits but even sub-5, I'm really excited about when, not if, but when volatility comes back. I don't, on these calls and I don't want to talk to investors, profess to be the genius around volatility and when it's going to come back and why it has. I've been so muted lately, I think smarter people than me can do that. Obviously, you can have your own view on that. All I'm saying is that when you have a firm that has its fixed cost base under control and I think we put our money where our mouth is today and you have a firm that can demonstrably generate net trading revenue in a muted volatility environment, you have a great model. And the model is in a famine, we can generate significant returns and then it feeds the model scales exceptionally well. That's always been the model of legacy Virtu and it's the model of the combined firm going forward.

I would now like to turn the call back over to Douglas Cifu for closing remarks.

Thank you, operator. Thank you everybody for joining us today. We're -- as I hope you can tell by my excitement, the tone of my voice that we're very excited here about the way the transaction has come together. I think culturally, the firms are fitting in exceptionally well. We've got a lot of work to do both on the expense side, and we've got a lot of roadway ahead of us in terms of growing the firm. I thank you all for your continued support and interest in my company. Thank you everybody, have a great day.

This concludes today's conference call you may now disconnect.