Virtu Financial Inc (VIRT) 2018 Q1 法說會逐字稿

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Virtu Financial 2018 Q1 Earnings Call. (Operator Instructions)

Thank you. Andrew Smith, Investor Relations, you may begin your conference.

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

Today's call may include forward-looking statements, which represent Virtu's current belief regarding future events, and are therefore subject to risks, assumptions and uncertainties, which may be outside the company's control, and our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our Annual Report in Form 10-K and other filings with the Securities and Exchange Commission. It is important to note that any forward-looking statements made on this call are based on information presently available to the company, and we do not undertake to update or revise any forward-looking statements as new information becomes available.

In addition to GAAP results, we may refer to certain non-GAAP measures, and you will find a reconciliation of these non-GAAP measures to GAAP terms included in the earnings materials.

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

Thank you, Andrew, and good morning, everybody. We're going to try something a little different today. We're going to try to limit our prepared remarks to keep them brief and focus solely on the supplemental materials, and then I will hand it over to Joe for some further discussion, and then we'll try to save as much time as possible to answer your questions.

So starting on Slide 3, and as we announced this morning, Virtu realized $340 million of Adjusted Net Trading Income and $0.76 of adjusted EPS in the first quarter of 2018. I'm proud to report that both of these represent records foreword to since becoming a public reporting company. There were several factors which contributed to this outstanding performance this quarter. First, revenue synergies from the continued integration of the quantitative market making capabilities and the customer franchise that we inherited from the acquisition of KCG in 2017, combined with the efficient financial technology and order routing capabilities from legacy Virtu, continued to bear fruit in the first quarter. This is the second full quarter after the closing of the KCG acquisition, and we could not be more pleased with the results, and believe we are still in the early stages of reaping the strategic benefits of this combination, as we migrate all of the legacy KCG market making and institutional trading to legacy Virtu technology. To be little more specific about these revenue synergies, I mentioned several examples of these in our prior 2 earnings calls. Namely, first, we are adapting and deploying the KCG more quant-driven strategies to new marketplaces, and that Virtu has -- already has access to, utilizing Virtu technology. Second, we're using the KCG quant know-how in the Virtu market making strategies. We think that those make -- that DNA, if you will, makes those strategies more nimble and more profitable. Third, and we gave some examples of this in the last several calls, we're trying to effectively internalize KCG's hedging flow with the rest of the firm through Virtu scale technology, which allows for that level of internalization and integration. Naturally, as we continue to get further away from the closing the KCG acquisition, it becomes more and more difficult to quantify these categories, as the firms have blended together. But given the market conditions in the first quarter, it's very clear to us that having a scaled integrated firm was a very significant competitive advantage that helped us generate elevated results in the first quarter.

Another factor that contributed to our performance in the first quarter is the continued rationalization of our cost base and the integration process. This quarter, adjusted operating expenses were $133 million, in line with a detailed expense guidance provided previously. We continue to believe that we will achieve the synergy targets and expense guidance we have provided and our scalable business will generate cash flow margins that are among the best in the industry. That's how we have always run Virtu and will continue to do so. We have reduced costs dramatically and believe that when the integration is complete, we will have realized approximately $300 million in operating expense synergies, or approximately 40% of the combined cost basis of both firms prior to the merger. Our headcount on May 1 is 536 people. Obviously this is down materially on a combined basis, while revenues have increased. This confirms our thesis that market making firms do not to be -- do not need to be managed and run like large financial institutions. Importantly, I want to note that this headcount is inclusive of more than 30 new hires that we have made in the past 6 months. So in addition to rightsizing the combined companies, we have actively sought to attract and hire the top talent necessary to achieve our long-term goals.

Third, and obviously which will be on the front of your mind, the operating environment in Q1 improved considerably. Average realized volatility in Q1 was 19.8, a far cry from the 5.7 average in Q4, and markedly above the 2017 average. This environment clearly played a significant role in our Q1 results. But quarter-over-quarter, the impact from sustainable revenue synergies and integration efforts are clear drivers of continued improvement across our firms. While the environment thus far in Q2 has not sustained the overall averages for realized volatility that we saw in Q1, it does remain decidedly better than the second half of 2016 and overall 2017. This is important as we consider a return to long-term historical averages in realized volatility, which is what we're seeing thus far in Q2 is a meaningful -- as a meaningful improvement over the operating environment of the past couple years, and this is a positive for Virtu.

Finally, we continue to make significant progress on the capital management front. We just repaid another $100 million of our term loan. This brings total repayments to $626 million from the July 20 closing, which means we have reduced interest expense by approximately $35 million per year. We targeted a long-term debt to EBITDA ratio of up to 2.5x to 1x by year-end 2018, and we are nearly there at the end of this quarter at 2.6x to 1x.

Turning to slides 4 and 5, our Market Making segment generated $314 million of Adjusted Net Trading Income and Execution Services generated $27 million. You can see our performance in the Market Making segment this quarter was outstanding. Unsurprisingly, our performance was led by our Americas Equities franchise owing to the volatility in the U.S. equities market, as well as the index options led performance in Global FICC, Options and Other. While Virtu has never had a material presence in the broad single name equity options category, our equity and volatility index options, Market Making business were significant contributors to this quarter's results. I was also very pleased with the growth of our FX business, which has continued to improve from the first half 2017 and had a very nice quarter in the first quarter of 2018. Our Execution Services business improved its Adjusted Net Trading Income over Q4, excluding BondPoint.

We are committed to a robust agency execution business led by superior technology and transparent trading and post-trade analytics. In addition, we remain confident that we can realize previously unexplored synergies between the institutional business and the Market Making business as our key institutional clients have responded well to the opportunity to interact with our central risk book of retail orders.

Finally, on the regulatory front, we remain very pleased with the tone and tenure of the regulatory content coming out of Washington. We no longer have regulation by enforcement and regulation by headline grabbing but rather regulation that is data driven and is receptive to input from market participants such as Virtu.

I will now turn over to Joe, the remainder -- to go through the remainder of materials, and I look forward to answering your question. Joe?

Thank you, Doug. I will pick up on Slide 6. We wanted to put this quarter in perspective given the various moving pieces, which include the continued integration of 2 firms into a scale and unified operation, enabling our record performance. Back in the third quarter, we provided detailed guidance on the following Q4 operating expenses, first half of 2018 operating expenses, and full-year 2018 operating expenses. If you look on Slide 6, you'll see we were on target with this guidance in Q4 and remain on target for the first half of 2018. So the $133 million of core adjusted operating expenses is slightly less than half of the first half 2018 guidance. And the trend there remains favorable. I also wanted to drill down a bit on our compensation expense for this quarter. Our adjusted GAAP compensation expense was $59.5 million for this quarter. This represents 17.5% of net revenues. This comp to net revenue ratio is in line with Virtu's compensation ratio as a standalone company in 2015 and 2016. As I said, we expect operating expenses to be within guidance and wanted to point out that the compensation ratio in particular is something that is demonstrative of the significant operating leverage in our model. We included this analysis to demonstrate our commitment to the Virtu philosophy around expenses and point out that this is ultimately a technology-driven service business with a service business cost model.

Slide 7 reviews the capital structure and long-term debt. We are ahead of our targets for debt repayment. And our trailing 12 months debt to EBITDA ratio is 2.6x. You'll recall we have a long-term target of a range of 2x to 2.5x by year-end, and we are well on our way to achieving this goal. We also used $11 million of our $50 million authorized share repurchase program in Q1 to repurchase 375,000 shares at an average price of $29.27.

Slide 8 takes a step back and reviews Virtu's capital return history. To restate our philosophy, we believe in returning excess capital to shareholders and stakeholders. When we went public, we set a policy that would return at least 70% of our net income to shareholders over time. We view this policy over the long term, not quarter-to-quarter because of the inherent variability in our results. Indeed, we set what we believe to be a fully appropriate dividend policy because of our long-term confidence in the sustainability of returns. You can see through the end of the first quarter, since we've been public, we have returned 89% of our earnings in the form of dividends. Our capital return priorities remain; reduce our debt load to a long-term debt to EBITDA target of no more than 2.5x; consider opportunistic share repurchases; maintain a payout ratio in a long term of at least 70% of our net income.

Finally on Slide 9, we wanted to put the operating environment in perspective. Obviously, February 2018 was an extraordinary month from a volume and volatility perspective. And you can see, we have the last 6 months on the bottom left of the Slide 9. Importantly, although the March-April environment was less than the Q1 average, overall we remain well above historic lows seen in 2016 and 2017. For example, looking back to the third quarter of 2016 till the end of 2017, realized volatility never rose above single digit averages. Good news is that although April market conditions dipped below the Q1 trend line, realized volatility remains consistent with a more normal environment.

With that, I will turn the call back to the operator so we can begin the Q&A portion.

(Operator Instructions) Your first question comes from Richard Repetto of Sandler O'Neil.

Yes. So I guess -- I appreciate the comments you made about the things, how you've integrated and how, from a revenue standpoint, I guess, the synergies that you've combined between the 2 firms, Doug. I guess, given this quarter and the outsized results, you said it was decidedly better, but I guess if you could help us as we model going forward, we're back at historic norms, but is April -- like we don't -- I don't think it's a $5.6 million net trading income per day. But say, if you were at $4 million before, in the $4 million to $5 million range, would you be midpoint there or above or below that, or just some quantitative way for us to get a feel for that?

Thank you, Rich, and thanks for the nice comments. But look, I mean we've always steered away from giving direct guidance. I know that frustrates you, it frustrate some folks on the street, but I think this quarter is emblematic of why we steered away because every time I've done a forecast, in the last 10 years that I started Virtu with Vinny, I've been wrong, both to the high side and to the low side. I think the key point that we've tried to stress over and over again from the first call that we did in the third quarter with the KCG integration is that this is a dynamic combination, these 2 firms, that we've put together a firm that has fabulous customer franchises, great quantitative models and a superior -- with some great people in it, and some superior backtesting and simulation environments, with a firm that has a long history of having very nimble, scalable financial technology. And so our quarter-by-quarter numbers will vary given the market conditions around volumes and volatility. But fundamentally there is a growth story here, both from a revenue synergy perspective and also from a scaling of this business perspective. And again, I'm obviously avoiding the question, right. To be clear, I'm not going to give you a direct answer. And you and I worked together over the years and I've never given you that direct answer, and I'm not going to do it now. The point I made about the second quarter is, obviously February was a superior month from a volume and volatility perspective. We've seen that before certainly in the 10 years that we've been operating Virtu and then in the 3 years that we've operated as a public company. I think of the third quarter of '15, the first quarter of '15, where there were exogenous events, which accelerated volumes and volatility. And that's the story of this business, which is over the long period of time, we're going to continue to grow, we're going to continue to take advantage, if you will, of marketplace opportunities like we saw in the first quarter. The thing that encourages me, I'm a positive upbeat guy, is that realized volatility has not returned back down to 6 or trading at a significant discount to implied volatility, it stayed up there in double digits. So again, I hope that's the new normal. Over the last 2 years, I got asked a lot of questions as to, hey, is there a systemic change in volatility here? I think the answer is clearly not. So looking forward, I'm very optimistic about the potential of these -- of the combined firms. And as I mentioned in my prepared remarks, it's harder and harder to say Virtu and KCG because we really have less than a year after the transaction become one.

Got it, okay. And just one follow-up, Doug or Joe. You've clearly [Virtu-vized] the combined firm from both a cost and a capital perspective. And I guess, if you look at the synergies, you're almost 90% there, but the year-end target is debt pay down, you're 40% there. And I guess, is it because the run rates planned this front end big cost takeout and so forth, or I'm trying to gauge the possibility or the potential for you to exceed, I guess -- I know it's early in the year, but these targets, which you're meaningfully there already on synergies and debt pay down, et cetera?

I'll let Joe answer the specific. I just wanted to make one comment, which is, first of all, I appreciate you making Virtu into a firm because we refer to [Virtu-vizing] things, and then obviously, I like that comment. I think it is important to note that, hopefully you all see the manner in which we operate. And when we say we're going to do something, we're going to do it. And it is very possible to run firms of the type, with a lots more of a footprint from a headcount perspective, and there are very significant synergies to be obtained from combining these firms. But again, it's all driven by the fact that Virtu's underlining financial technology, which was built from scratch, if you will, within the last 10 years, was architected with a notion of scalability and being ubiquitous across asset classes and geographies. That's the key differentiator of this firm as compared to other firms that have tried to make these combinations work and have not succeeded. So with that, horribly 30,000-foot comment, I'll turn it over to Joe for more specifics.

Yes. Rich, thank you. I think when we originally announced the transaction, we had gross synergy of $250 million. We revised that to $300 million. On annualized basis, we're $233 million. I think, we're sticking with the $300 million. You're right. The ability to obtain big numbers upfront was -- specific to this acquisition, we can go into the detail, the non-U. S. operations originally -- but -- were originally impactful. But I think the important thing is that the guidance that we put out there in our first quarter as a combined company in Q3, we always put out numbers that we feel comfortable and confident in, and I think that we are comfortable and confident that the $300 million is the right number and that we'll get there by -- on a run rate basis next fiscal year. By the end of this year, we should be at the $250 million to $275 million range, like it says on Slide 6. In terms of capital, I think we originally said that we would return $440 million of capital to reduce debt. We've done $626 million to date. And you take out the BondPoint net proceeds of $276 million, so without BondPoint, we returned $350 million in capital. So we'd have $40 million -- we'd have $90 million to go to get to that original goal. And so I think by the end of this year, we're well on our way. Obviously, this quarter helped a lot in terms of the debt to EBITDA ratio, and certainly operating expenses are not headed up. So even if you look at a more normal environment, whatever that is, if you take the fourth quarter of 2017 and put it on the first quarter of 2018's expense base, you're going to get EBITDA numbers that are $110 million or $120 million. And if you just extrapolate that out to the end of the year, with this quarter, you are going to be closer to 2 and 2.5. So we feel good about that.

Okay. And congrats, you finally got the environment to put the platform to use here.

Your next question comes from Alex Blostein of Goldman Sachs.

This is [Sherrick] filling in for Alex. Just wanted to know what are your latest takes and views on the market-data pricing and the SEC blocking the market data fee increase. And can you also talk about the market data consumption trend within Virtu? And are you seeing any increasing spending or actualizing the screens?

Thank you very much for your question. Yes, when we started down this path a couple years ago, just questioning the need for market data increases, I certainly felt a little bit like Don Quixote tilting it to the windmill, and if you remember that book from college. And Joe was Sancho Panza, my sidekick. And obviously it was rolling a rock up a hill and we feel somewhat vindicated, validated. I think the important thing is, this is not Virtu, right? Six months ago, 24 investment firms from all wakes and shapes of the financial industry, Virtu, Citadel, Vanguard, buy-side institutions, retail brokers, IBKR, great firms wrote a letter to the SEC essentially saying, look, enough is enough. Give us some transparency around these costs. So when the entire industry, entire customer base is saying, we get it. You provide a really great service, I got a lot of friends at exchanges, but we work really hard for our money. Be transparent around why these costs are increasing, and maybe we'll live with increases. And so at that moment in time, I think -- and then obviously, we've got folks at the SEC now, Brent Redford and others that are very contexted in this situation, and are asking the right questions in our view. So that's a positive trend obviously for Virtu because that is a significant portion of our cost. We've been very good historically about maintaining our costs and only increasing them 1% or 2% a year. So I don't think this is going to have a material effect on rolling back costs. I'm not that insane to think all of a sudden these costs are going to get slashed in half, and there'll be a significant decrease to our expense base. The important point was to say that there has to be some rationale relating to how these costs are derived, and they can't all just be passed along to the industry. It's not just Virtu, it's all the aforementioned great firms that are saying the same thing. So I think it's a positive in a sense that we won't see material increases in these costs. Joe, you want to give -- fill in a little bit on some of the information?

Yes. We have -- our line of communications and data processing includes all of our telco costs and data center costs, as well as more data. We don't break it out. On a -- if you compare that line item to where Virtu and KCG were as standalone companies prior to the merger, it's lower, it was flat this -- from quarter-to-quarter. This year, I think we're going to see some reductions in that as some of the timing around some of the telco expenses kick in. But market data fees, so -- I haven't extracted the organic growth in market data fees from that publicly. But I think Doug's comment is the right one, which is we don't expect any material reduction in it, but I think what we're hoping for is the -- is that they stop going up at the rate they've been going up in the past.

Okay. And just one more for -- from us. I mean outside of the volumes that we saw on Feb 5, can you just provide any color on how the NTI was tracking in Jan and March, if that possible?

Yes. I think the interesting thing about this quarter it wasn't just like one day, it wasn't like an August 24th event. Again, I don't do specifics on monthlies. I know that frustrates everybody, and we're not going to do it here. But it was not an isolated situation. You saw continued volatility throughout the month of February, and that continued through March. I mean, clearly it's tailed off from the peaks. So I think realized volatility actually was a premium to implied volatility for a period of time there, which is a great situation for a market maker. And implied volatility spiked it like 30, and obviously we had some of the market movements in the VIX that people were very focused on, et cetera, and those kind of things. But I think the interesting thing about the quarter was that it wasn't just a momentary flash, if you will, similar to what we saw around Brexit or around maybe the Trump election, it was more sustained. So January and March were very solid months, but clearly February was an outperformer.

Your next question comes from Alex Kramm of UBS.

Real quick, I guess, just in terms of the improvements quarter-over-quarter, I think you talked about continued improvements as you, I guess, combine kind of trading strategies, et cetera, if that's the right word, but can you quantify that at all as you have done that already? Can you parse out, I think you've done in the past, how much maybe of the improvement quarter-over-quarter came from kind of like the organic opportunities? And then maybe related to that, is this -- I know this is probably an ongoing process, but you think the heavy lifting of that is done, or do you think there's still some kind of like revenue synergies that we should be thinking about as we go through the year?

I'll answer the second part first because frankly, it's easier, which is I don't think, and I said this in my prepared remarks, to use a sports analogy, I don't know if we're in the first quarter but we're definitely not in the fourth quarter. That's football not hockey; hockey only last 3 periods. So maybe we're in the third inning. There's still a significant amount of opportunity here. We have not finished the replatforming, if you will, of the KCG strategies and the KCG framework onto the Virtu architecture. Certainly we have not finished that in our retail segment, which is obviously the most sensitive too because it's customer-facing. We've begun that process. We've done it more in some of the prop and institutional segments. And every time you do that, it's not just the costs, say, of decommissioning architecture, it's -- the Virtu technology is nimbler, it's easier to deal with, and allows for more intraday iteration, and that allows for more analysis. Intraday, it's better at market structure and obviously it's much better smart order router. So every time we've done something like this, we've seen an uptick. So I am very excited and optimistic that there's improved enhancements, and it's not just me. The important thing is that the really smart men and women that work here are collaborating, and we're excited about integrating. The Austin office of Virtu has become quantified, if you will, because we've got a couple of really smart young folks down there as quants. Our head trader down in Austin is spending a lot of time working on quant strategies as well. So we've really integrated the 2 firms in less than a year and we're seeing significant uptick as a result of that. So I do think that there is more runway there, Alex, which we're very excited about. In terms of like how much of it was the environment as opposed to organic, again, it's very difficult to say because strategies all around the firm performed exceptionally well, and it's hard to do so. It was a lot easier in the fourth quarter, right, when we said to you guys, look, volatility in volumes actually went down and revenues went up. Here, we made $100 million or so more of Adjusted Net Trading Income from the fourth to the first quarter. It wasn't all the environment, it was -- clearly some of that was just further enhancements and the strategies performing well. But I can't sit here and with a crystal ball and say it was X percent as opposed to Y percent. Again, I look at this as a long-term Virtu investor, which is what I am, I look at this over the long term and say I'm very excited about this combination.

Alright. That's still helpful. And then maybe along the same lines, I mean, relative to my model at least, the FIC surprised me a lot, and I know that's a little bit -- that there's a lot of business in there, and I think you highlighted a couple of things. But maybe you can give us a little bit more detail in terms of the breakdown today, also which ones of the businesses, from the more quantitative perspective, performed. So in the past, FX has been a big focus. So maybe those businesses that are a little bit tougher for us to gauge some incremental commentary. And also maybe how those businesses are faring in April because obviously some of the FICs have realized of all commentary to very equity focused?

Yes. And that's a fair question. Obviously, we've kind of lumped categories together, and I know that -- again that frustrates some people, but I think it's a better way to look at the business. I mean clearly a couple comments. Clearly the VIX franchise in the first quarter saw superior returns because of all the volatility in the marketplace, it's kind of obvious to state that. We are a very large market maker in the VIX family. And it shouldn't come as anyone -- as a surprise to anybody, we've been doing that for a long time and there was a lot of volume and obviously a lot of volatility there. And people are paying a lot more bid offer spread, et cetera, et cetera. So that was helpful. I did make a comment in my prepared remarks on purpose, which was the FX had a very nice quarter as well. I think some of -- some folks were prognosticating the death knell of Virtu FX. I think those reports were false. It improved quarter-over-quarter and it wasn't just volume related because you didn't see the same volatility spikes. And indeed in April, our VIX -- I'm sorry, our FX P&L in April was up against the first quarter. So I'll give you that little tidbit. So FX is performing better than it has been. Again, as I have said many, many times, that is somewhat dependent upon what the central banks are doing. When the central bank rates globally are essentially 0, when the ECB is buying bonds, left, right and center, the large carry trades that you see in the FX business just simply disappears. It's not just Virtu. If you look at the large dealers as well and look at their fixed desk, they're all complaining about a lack of volatility in 2016 second half, in 2017 in FX. We suffered the same fate. I had 0 concerns that our FX business was going to 0. In fact, it's actually gone the other way. As -- and the Fed has started to raise rates, as the ECB has said, listen, we won't be the buyer of last resort for the rest of eternity. So now portfolio managers, treasurers are now faced with the very real situation where they now have to manage their risks. It's a global world, they have to manage the risk across currencies and so there's going to be large movements of currencies. When that happens and risk managers are moving portfolios, then Virtu does better. So I'm very optimistic about our scaled FX business, and that is one business in particular, where KCG quant capabilities, right, have really helped our business significant. So that's a prime example of where the integration -- wasn't just Virtu fixing the KCG technology problem, it was really KCG's years of experience and quantitative looking at markets making the Virtu market making algorithms work better. I hope I answered your question.

Your next question comes from Chris Allen of Rosenblatt.

Yes. I guess, just following on Alex's question, just given how (inaudible) like VIX was in the quarter relative to the prior quarter, can you give us any sizing of how that kind of fits into that FIC line? So we've obviously seen it normalize on a volume perspective, volatility perspective, a little bit in the fourth quarter -- sorry, the second quarter. So just trying to help us think about the path there and the magnitude that we should be thinking about maybe first quarter relative to fourth?

Yes. It's obviously a good question. Again, I've resisted getting into specifics of categories because I have found that, that ultimately doesn't really help the analysis of what we're trying to accomplish here, which is we're an overall firm. And I get why you're asking the question, Chris. Obviously, it's very fair and legitimate question. Look, I mean, obviously you can look at the volumes of the Cboe, I know they have they're, call it, 8:30, you can ask them what their volumes were like. I know they put them out monthly. We're a significant market maker on the Cboe Futures Exchange, and we trade options as well. So that was a significant opportunity for us in the first quarter. But there are other elements within or other asset classes and sub-asset classes within FIC, namely FX, which I just spent -- answering Alex's question, I spent a significant portion answering that, and we saw an uptick there as well. And our energy business and metals business did very well. We've seen some growth in Asia, in particular in our FX business, as that becomes more of a 24-hour integrated business. And at the end of the day, I'm not going to size what the opportunity was. Clearly it was significant opportunity. But I'm very comfortable that, that category will continue to grow. And again, the key point of that category is that we are a multi-asset class market maker across geographies. We're a firm that has strength. And so we're making markets in not only the VIX futures but the options and all the ETFs that are -- represent or the ETP products, if you will. And so that's just a great opportunity for a multi-asset class multi-country market maker like Virtu.

Got it. Thanks for the granularity in terms of the other segments within that line. I mean, the only other question I had was just the rest of the world equities. I was surprised it wouldn't be up a little bit more than we saw. And any commentary there? The volumes in Europe and AsiaPac were pretty good during the quarter. So any color there would be helpful.

Yes. It's a great question. Thank you for it. It's really -- obviously it's the Asian countries, which we previously reported separately, and the European countries, and they're obviously very different segments. I would say, Asia, Tokyo volumes -- overall share volumes were down around 7-ish percent in the quarter from the fourth quarter. So that obviously doesn't help. Europe, you're right, was up. I think part of the issue is clearly the uncertainty and getting used to MiFID II. I saw some statistics and I was over in Europe last week speaking at TradeTech, so I had an opportunity to talk to a lot of buy-side investors. And the uncertainty, I'll be nice and call it that around MiFID II, and we had a route in terms of dark pools and the SI regime is new. That forced a lot of people into periodic auctions and into the large block-crossing facilities that ITG and Liquidnet and, I guess, BIDS have. So you saw an uptick in that volume. Exchange volume didn't really change and obviously the BCNs went away, broker crossing networks and our legal and dark pool volumes were hurt not only because there was a double cap but because there was uncertainty as to the enforcement of the double cap. So all of that did not help our European business. Now that being said, long term, I'm a big believer in the SI regime, what I said at TradeTech, maybe I wasn't that eloquent, but I'll say it again, which is that institutional investors do not necessarily want to transact on an exchange, and there's a reason, there's always been and there always will be off-exchange liquidity. So MiFID II is trying to force people onto exchange. They just don't want to go there, which is why you saw the rise of periodic auctions and block-crossing networks. Our SI capability in Europe is first rate. We have -- we're connected to 12 brokers right now. We're -- probably we have more broker connectivity than any other SI provider in Europe, but it's still very early stages. The estimates are, and the data will come out in June, that's somewhere between 2% to 3% of the market, and the first quarter was an SI. So it's a baby step. So all that BCN and dark pool volume has kind of migrated to the periodic auction and to block-crossing and a little bit to exchanges. I am very confident that a lot of that's going to come back to SI because that's ultimately what we were doing in the broker crossing network, it's where we made a lot of money. So at the end of the day, I'm very optimistic about where Europe is going to lead. I just think it was a very difficult quarter in Europe for the SI providers because it was so darn new.

Your next question comes from Ken Worthington of JPMorgan.

So can you talk about maybe new products that launched or have gotten much bigger in the quarter? I think you launched cyber currency trading. So is that right? And were there any other new products in either equities or FIC that launched or got much bigger this quarter?

Yes. Good question. So yes, we -- as I -- I think I've said on the last call, I can't quite remember. I hope I said it publicly; if not, I'll say it now. We are a market maker in the Cboe in the CME futures products around cyber currency, I guess, they're bitcoin futures right now. We do not currently make markets in any other cyber cash markets, primarily because of our concern around risk management. In other words, our MO has always been to trade in transparent and regulate exchanges with centralized clearing, or clearing through a prime broker in cash, if you will, bitcoin and other cyber currencies that is currently not available. And so we have concerns around counterparty risk. And so therefore, we've dipped a toe in but it's a very, very small toe. But I do -- again, I don't have to make a qualitative judgment as to whether or not those are appropriate asset classes, if you will. It's a new asset class. We're excited about it. If and when it becomes more regular -- regulated and centrally cleared, certainly we will put a big toe in and then all the little toes will follow and we'll be big market maker there. So we're excited about that. In terms of other products, obviously any (technical difficulty) started market making in Spotify. Anytime there's an IPO, we do all that. I don't think there are any other new futures, and certainly we're running in 36 countries. So there wasn't any new product in particular, Ken, that is popping into my mind that came up in the first quarter. We really make markets in 19,000 or so instruments. Anders is actually telling me it's 25,000 because I always forget the OTC products. So it's higher than that. So we pretty much have spin the globe here. Clearly, there is a proliferation of ETP products. We had a big issuer in this week, had a whole suite of new products they want to launch. We're a big supporter of that. We become an LMM or an AP in these products. And so every time one of those things happen, that's a new opportunity for Virtu. So we continue to iterate with these issuers and continue to grow. But other than that, there's nothing in particular that pass the mind.

Okay. And then, Joe, as we think about competition for the year, and I know that you guys have already kind of reiterated the guidance. Obviously big earnings quarter, as we think about how you're accruing compensation, is it more straight line, or are you accruing more with how you expect kind of revenue to come in through the year? In other words, if 2Q happens to have lower revenue, does the comp kind of come down too, or should we straight line the comp from 1Q?

We accrue comp on a top-down and a bottoms-up basis, so we look at bottoms-up headcount, we look at individuals, we look at performance of the business, we look at performance of individual businesses. And as with Virtu, no one here has payout deals or strict comp to net revenue targets. So we -- so it's geared more towards straight line, Ken. And then we check that versus the performance of the business because the model is not a high comp to payout model; it is a operating leverage model. So there is a band. If you look at the old -- the pre-KCG Virtu numbers that I put in this deck here, you can see this quarter's numbers right around there, I could see it ranging from -- that ratio ranging from a high-teens to the low 20s, but that's where we like it. So that's kind of how you should think about it.

(Operator Instructions) Your next question comes from Kaimon Chung of Evercore ISI.

Most of my questions have been asked and answered, but just want to get your perspective on the recent scrutiny on the VIX. You think it's still a good gauge of volatility, given some of the issues surrounding it like the settlement of futures and options we view on the VIX-linked products and proliferation of ETFs. Now that the regulator are looking into it, what's your sense of what's going on there? And any concerns if that could impact volumes?

Yes. Thank you. Good question. I mean, their call is in [50] minutes, I don't want to preempt. And look, I think Ed Tilly and Chris Concannon to the best -- if not the best in the industry, they've dealt with this in a very forthright upfront manner. I said on the last call and I'll say again, our -- my experience and our experience is more with the futures exchange there, and the way that those -- the way that they manage their tasks and closing cross and settlement is like any other future exchange we've ever interacted with, it's very transparent. I think all the participants that are experienced there understand how it works. I think, unfortunately, there was a suitability issue with regard to folks that were holding [SVXY] and the XIV product. It's not an investable product, it's a trading product. So if you're holding it for a year because you wanted to be short volatility, that was probably a really bad idea and is particularly a bad idea on February 5th. The closing price at 4:00 has little relationship to what the settlement price is going to be because futures exchanges settle at 4:15. And market makers and professional traders know that and retail investors and others don't. So again, are there issues there around suitability of that regulators, I'm sure we'll look at absolutely. Is that an investor education question? Clearly, it is. It's fundamentally the product flawed and that Cboe in my humble opinion do anything wrong, I think the answer to that is no. When it comes to options and settlement of the VIX, that is way beyond my pay grade. Just a lawyer by training, so I can't do that math, but I'm sure Ed and Chris will give you all the answers that you want to that question.

There are no further questions at this time. I will now return the call to our presenters.

Thank you very much, everybody, for your attention and your interest in Virtu. We look forward to speaking to you on our next regularly scheduled call. Thank you.

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