Virtu Financial Inc (VIRT) 2018 Q3 法說會逐字稿

Good Morning. My name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Virtu Q3 2018 Earnings Conference Call and Webcast. (Operator Instructions)

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

Thank you, Kelly. Good morning, everyone, and thank you for calling. As you know, our second 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 including the announced transaction and are therefore subject to risks, assumptions and uncertainties, which may be outside the company's control, and our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. We refer you to cautionary notes regarding forward-looking statements in our press releases and encourage you to review the description of risk factors contained in our Annual Report

On Form 10-K and other filings with the Securities and Exchange Commission. It is important to note

That any forward-looking statements made on this call are based on information presently available

To the company, and we do not undertake to update or revise any forward-looking 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 thank you everybody for joining us today. In addition to our third quarter earnings, we have a very important strategic announcement to make. Last evening, we signed a definitive agreement to acquire ITG. The significant acquisition underscores our commitment to our institutional client business and is a natural next step in expanding our transparent global technology analytics and liquidity solutions for our clients. Our combined capabilities will offer significant benefits for Virtu's and ITG's clients globally as well as an upside opportunity for our shareholders.

I'll start with the overview of the benefits to our clients as detailed on pages 3 and 4 of the slide deck, including a review of the complementary nature of our respective businesses. Since 1987, ITG has built premier global franchises and has been a leading innovator in the world of customer-oriented technology solutions to improve client's trading experiences in the global equities market. ITG was a pioneer in offering cutting-edge solutions to customers globally and the value of its long-standing global franchises cannot be overstated.

Today, ITG is truly the global leader in its market with the strong presence in the United States and with market leading businesses and leadership teams in Canada, Europe and Asia. ITG's key offerings comprise a complete suite of agency execution services including liquidity sourcing, trading algorithms, single stock and program trading, workload technology and trading analytics, products and services that its clients rely on to manage their day-to-day operations, risk managements and fiduciary responsibilities.

Each of ITG's franchises operate in areas that utilize trading technologies which are the core to Virtu's business. The combination of Virtu's technological efficiency, scaled global operations and core market-making capabilities with ITG's global suite products and services and experienced and talented employees will create a powerful offering that will enhance the overall client experience beyond what each company can provide on its own currently. All aspects of execution services stand to be enhanced from order routing and algo performance to middle and back-office efficiency. Clients will benefit from Virtu's common technological infrastructure which allows clients to benefit from the continuous research and development efforts and technology improvements we make every day.

We are excited about the opportunity for ITG's global sales force to sell Virtu's customized and attractive liquidity products in global equities, blocks, ETFs over 80 different FX payers, fixed income and commodities products. We'll be uniquely positioned to provide institutional clients with customized liquidity from our RSP books, which are comprised of positions resulting from retail, institutional and principle market-making activities. This is something that no other firm can effectively offer.

Turning to Slide 6. You see the importance we place on protecting client information in all aspect of our business. We take this obligation seriously and we recognize and appreciate the natural concerns customers will no doubt have. Virtu has establish policies and procedures for our existing client and market-making businesses that are designed to safeguard sensitive client information and will continue to design our policies and procedures with our clients in mind. These safeguards include physical separation, logical access control and entitlement reviews. Clients have entrusted their most sensitive confidential information to ITG in POSIT, in Triton, in the analytics segment. Rest assured that we will be vigilant in protecting that information. We will build on the existing safeguards ITG has employed and ensure that going forward, there continues to be physical and logical separation, monitoring, testing and training.

Let's discuss the analytics or POSIT Alert businesses, for example. They will be located in separate physical spaces. Access will be restricted by keycard to only authorized and personnel and monitor. Technology controls will restrict logical access. Personnel will be trained to ensure adherence. In addition to monitoring and testing our safeguards and policies through internal audits, we are also looking to contract an external independent auditing firm to regularly review the effectiveness of our controls. In addition to these safeguards, Virtu is a firm believer in using technology to enhance transparency to end customer. Our tools provide the ability for institutions to have unprecedented visibility into the complete life cycles of their orders. That includes importantly why their orders were routed, not just that they were routed.

More importantly, based on feedback we have received from some of the most sophisticated global money managers around the world who are users of Virtu's existing algorithms for liquidity sourcing, we firmly believe the buy side understands and indeed is demanding the type of solution we are prepared to offer through this merger. Remember that in legacy Virtu, we began an institutional agency offering based on specific feedback from dozens of the most sophisticated global institutions.

From a global client servicing perspective, we anticipate that from a day-to-day standpoint, there should be little to no change in how clients interact with the combined firm. The leadership of the combined firm will be a combination of legacy Virtu and legacy ITG personnel. The current CEOs of ITG's non-U. S. franchises in Canada, Europe and Asia are each experienced, talented professionals and will be retained and will report directly to me. I'll look forward to getting to know Etienne, Robert and Michael and their teams better and working closely with them in the future. In addition, we are excited for our key personnel and account coverage in the U.S. to work together with the talented team that ITG has in the U.S. to enhance client experiences.

Turning to some of the specifics of the transaction itself. I'll first go through the overall benefits and then turn it over to Joe to review some of the terms of the transactions.

From a strategic point of view, turning to Slide 7. The acquisition diversifies and stabilizes Virtu's revenue base. Following this acquisition, Virtu's adjusted net trading income from commissions and fees will increase from 10% to approximately 37% on a pro forma basis. It should be noted that Virtu's Execution Services business currently is experiencing its best performance since we closed the KCG acquisition. This is a direct result of integrating our underlying technology and improving client access to Virtu's unique liquidity.

While still early in the quarter, our October performance in Virtu Execution Services has outperformed the significant uptick in market volumes and the volatility, and importantly, the feedback from clients has been excellent. Also, here you can see that on historical basis, ITG's revenue base is more consistent than Virtu's and will have an overall effect of decreasing our quarter-to-quarter volatility.

Finally, the addition of ITG's workflow and analytics products will bring recurring revenues to Virtu, further dampening quarter-to-quarter volatility. From a value standpoint, as with KCG, we believe this transaction will be meaningfully accretive to Virtu's shareholders. We have modeled $123 million of overall net synergies, which we expect to achieve over a 2-year period. We believe our track record with KCG demonstrates our ability to integrate these companies successfully. We have identified $125 million of capital synergies, a portion of which will be used at closing to fund the transaction and the rest will be used over time to pay debt. We will issue no equity to finance this transaction. Instead, we will enter into a new term-loan agreement.

Finally, given the power of the combination, the potential of value creation through synergies and the lack of equity issuance, we believe this transaction will be highly accretive to Virtu shareholders.

Now let me turn the call over to Joe to discuss select key terms and review detail around significant expense and capital synergies. Joe?

Thank you, Doug. I will go through a few of the slides in the presentation that we have distributed this morning.

Moving on to Slide 8. We signed a definitive agreement to acquire ITG for $30.30 per share. It's an all cash deal, and we have the financing secured. We will refinance our existing term loan and raise an incremental approximately $1 billion to pay for the acquisition. As Doug mentioned, the leadership of Virtu will be supplemented with key leaders from ITG's businesses, and we expect a closing in the first half of 2019.

Slide 9 provides some detail on the estimated synergies. This is approximately 30% of ITG's trailing 12-month recurring expense base. We think this is very achievable, and we'll focus again on technology integration, back-office and infrastructure rationalization as well as traditional synergies that occur when public companies merge. I would note that in the KCG acquisition, based on the current run rate, we will ultimately achieve 58% cost savings on a net basis. So obviously, we think this percentage is very achievable.

Slide 10 is a hypothetical accretion based on public information. Again, we are not giving guidance and using public figures here but adding the after-tax synergies and subtracting the incremental interest expense from the financing, you can see the value that this transaction has the ability to create for our shareholders.

Slide 11 reviews some of the unmodeled upside from the revenue synergy opportunity Doug was discussing. The most visible of which is achieving expense reductions related to execution costs around lower exchange, clearing and other exchange fees.

On Slide 12, we're talking -- we are anticipating $125 million in capital savings from this transaction available over the first 18 to 24 months after the closing. As in the KCG transaction, we expect to release capital from the Americas, Europe and Asia and retain sufficient trading capital to operator business with the substantial regulatory and operating cushion, while contributing to a reduction overall in outstanding indebtedness.

Turning to that outstanding indebtedness on Page 14. We expect pro forma leverage to be 2.8 at inception. And again, as in KCG transaction, we would expect it to be reduced to 2 to 2.5x as capital and expense synergies are realized. And I think, as Doug mentioned, given the trajectory of Q4, we would expect this number at closing to be 2.8 or lower.

So given all that, I will now turn the call back to Doug to touch briefly on some highlights from the third quarter before we go to Q&A.

Great. Thank you very much, Joe. You'll see in the materials we posted, we have information on the third quarter, starting on Page 18. Some key takeaways from our third quarter are the following: We reported $0.22 of adjusted earnings per share and $178 million of a net -- adjusted net trading income.

As you can see on Slide 19, the operating environment from Market Makers was limited in Q3 as U.S. equity consolidated volumes were down 7% versus Q2. Realized volatility in VIX were down 41% and 16% respectively versus Q2, and retail participation as measured by Interactive Brokers share volume disclosure was down 12%.

As you could also see, these metrics have turned around markedly in October versus Q3 and our results have seen material improvement. Also, I would like to highlight that our VES business, as I stated earlier, has improved dramatically as we have migrated to a single, unified technology platform and the VES performance is ahead of the sizable uptick implied by market volumes and volatility in October.

Finally, our operating expenses are on target versus guidance. We are 95% of the way to our run rate expense base in terms of the synergies from the KCG transaction. To date, we have repurchased $61.9 million of Virtu shares of our previously approved and announced $100 million share buyback program. In addition, as Joe noted, during the third quarter, we made $115 million of incremental payments on our term loan, bringing our total prepayment to $750 million, since the closing of the KCG acquisition. And finally, our board has approved a dividend of $0.24 a share for the third quarter.

With that, I will turn the call over to question and answers.

(Operator Instructions) Your first question comes from the line of Alex Kramm from UBS.

I think my first question's a little bit technical and I don't know if Frank is on the line. But would be curious, first of all, if there's any sort of breakup fees. I don't think I have seen it here. And then since there was the first appearance of you and guys talking in the media, I think some other folks have argued that there may actually be other companies that may be more interested in ITG and where may be a better fit. So again, not sure if he is on the call, but any sort of background in terms of others that may have shown up or any sort of breakups would be helpful.

Frank is not on the call. It's just Doug. And I've spent 18 years being an M&A Lawyer, so I'm happy to handle that one. That's an easy one for me. So there are standard deal protections in the merger agreement. There's a breakup fee of approximately 3.75%, plus a reimbursement of fees of $15 million, so a pretty significant amount there. I did not comment and I will not comment on the prior market rumors because it had nothing to do with Virtu. It's around $1 a share, if you will, of breakup expense. So certainly, the news, if you will, Alex, has been out there for a period of time. ITG was represented by the best of the best, JPMorgan and Wachtell Lipton, and so I'm sure they've exercised fully their fiduciary duties and whatnot. And we are unconcerned about that. We're very excited about the transaction. ITG is a world-class organization. It's been a name brand, a household name and a pioneer in the electronification of markets. And so I think we have made a very important strategic acquisition for the firm. And obviously, we're looking forward to the integration period and then, as Joe said, the closing, which we hope will happen as early as possible in 2019 subject to clearance under the Hart–Scott–Rodino Antitrust Improvements Act and also various regulatory approvals and some other closing additions.

All right, fair enough. And then secondly, another quick one, I think. When you did the KCG transaction since then, obviously, you shipped some assets like BondPoint, for example. If I look at you slide, it seems like your pretty excited about all the different assets that ITG owns, but I think there is some of the, I guess, what you call analytics products that they have out there. I mean, there has been pretty big market multiple space for some of those comparable assets. So just wondering, if there's any future opportunities to maybe monetize some other things or if you think this is really -- you need the whole business?

Look, I think, they are world-class products. Frankly, a couple or 3 years ago, I knew what TCA was obviously but we didn't have any firsthand experience with the analytics world because we were a prop market maker. But when legacy Virtu started its Institutional Agency business a couple or 3 years ago, we first got introduced to this world of analytics products, and everybody but everybody kept talking about the ITG product, it's called ACE. And I actually -- because I've known Frank for a long time and I have great respect for him and like he -- and I called him up about and said, hey, what is this product? Tell me how it works, blah blah. Because all of our clients seem very enamored with it and it seems to be a really important item and a value proposition and it really adds to the suite of product that you're selling. So how does this all work? And he explained it to me. And obviously, as an institutional broker, we wanted to make sure that we represented in the most attractive way with respect to their analytics and we wanted to understand how we were scored and et cetera, et cetera. So we learned a lot about it. So we view it as a really attractive core product. Clients really enjoy it. It's really the gold standard, if you will, for analytics products. The thing that excites us and the thing that Frank and I have spent some time talking about is Virtu is a global market making firm at its core. We have access to 235 different markets in 36 different countries. We know markets and market structure. We do our own TCA with respect to our market making capabilities. We do mark-out analysis on every order that we place into the marketplace. So there's no reason we can't -- as a wholly separate business, walled off appropriately, we'd be happy to offer that service not only in global equities, but also in FX products, in commodities products, in fixed income products. You name a product that can be traded electronically and Virtu's there. And we have an analytic's product today that is bespoke, that is realtime and that is unique to Virtu. We are prepared to expand that offering, Alex, to incremental asset classes and there's not a firm that's better positioned to do that. So we're very excited about that product. I don't want to also leave out the Triton product because it is on 600 desktops right now to the buy side, again, all around the world. So I think it's a very important part and it's a way for us to push our algos and our products and other brokers to the world. So it's all about distribution. We're going to be fully transparent. I think we're going to do everything we can to make those products better because I think they're really an important part of the value proposition that the ITG client see, and we just want to make that experience better.

Your next question comes from the line of Chris Allen from Compass Point.

Just wanted to ask, ITG's core brand has been as an independent agency broker. Obviously, Virtu is a market maker, a little bit different business. And just how do you kind of reconcile potential customer dis-synergies? What's the level of customer overlap? The onetime ITG has gotten in trouble with its customers, obviously, was the project, the Omega issue, where it was kind of hooking in to market making and arguably damage its brands were digging out from there. So just trying to think about how you guys are thinking about potential revenue dis-synergies moving forward. I know you guys have talked about the percent of revenues synergies. But I think the assumption out there for the market, is there going to be at decent level of revenue dis-synergies?

Yes, absolutely. It's a great question. Obviously, we are cognizant of it, and we have great respect for ITG brand as an independent and we're obviously very aware of the foot fault or more that they had in 2015. I think the issue in 2015 was that they were engaged in prop trading and candidly hadn't been upfront with their clients. That's really ultimately what the issue is. And Virtu, and it starts with me, is all about transparency and being very upfront and direct with our -- with any kind of party, not just the customer, any kind of party that we deal with. And so obviously, the universe is going to know and clients will know that we are a very significant prop and retail market making firm, and we always will be. We have been in this business, the institutional business, since 2015 on a legacy Virtu basis. When we acquired Knight in 2017, they had been in business for over 20 years. So this is not a new phenomena. It's also not a new phenomenon that sell side, every bank that we deal with that you are very well aware, has this conflict as well. They've got prop market making. They've got customers and whatnot. And so there are mechanisms in place to make that happen. I would argue this actually makes the offering that much better for a couple of reasons. First is, the same scale technology and understanding of market structure and indeed access to the markets that we use for our market making business is the same basic core DNA, which has to be cutting edge, which has to be updated, hourly and daily and weekly, that we use for our market making business, because if it's not acute and at the tip of the spear, it doesn't make money. We are going to use and we have been using that same infrastructure, that same market structure, that same understanding of how to route orders for our customers. So customers win in this scenario because you now have a firm that is in the market, that does have low latency financial technology. Everything that everyone complains about, use Virtu, you get all those tools. That's the first thing. The second thing candidly is, as I said in my remarks, we're the only firm in the world that I'm aware of that has -- certainly in the United States, that has this unique combination of retail and prop liquidity. And we have been and we will continue to make that unique liquidity available to our customer base, which will expand here. And so overall, this is a win-win. It's all about transparency. It's all about being upfront with the customers, Chris. Is there overlap? Sure there is, but it's not as significant as one would think. We're happy to go through that separately. Obviously, we try to cover the same customers that ITG does, but there's really not a significant overlap. So we modeled $10 million of synergies, which is around 4%, 5% of their institutional business. In the Knight transaction, we had assumed something similar what happened as well and we experienced 0 attrition on the institutional side. So I'm aware that customers will be concerned. I will do my best to be out there and to be transparent and talk to customers as will our entire institutional team. I think ultimately customers will see the value proposition of having a firm like Virtu and its skill set, married with a great firm like ITG.

Got it. Just one quick follow-up. ITG has been looking to diversify into other asset class such FX and fixed income in recent periods. But really, at the end of the day, it's an equity shop, obviously, and you get to even bigger equities. I mean, have we thought about that from an asset class perspective and you sort of diversify away from equities over time?

Yes -- No, I think it's great. I mean we've seen a lot of organic growth in our equities business. You'll see hopefully a further manifestation of that in the fourth quarter. So this is an asset class that we enjoy where we're knowledgeable or a market leader in. I think the most important thing is the -- and I will talk about the ITG U.S. franchise, but ITG really has a first rate franchise in Canada, in Europe and in Asia, throughout Pan-Asia. And that's really the diversification, if you will, that we get from this transaction. We have a smaller European institutional business. We have nothing in Canada and nothing in Asia. The unique thing about this transaction is we've been an ITG customer since the first day we started Virtu basically. We have been a consumer of their analytics products. We've been a market maker in all deposit pools around the world. Our experience in POSIT Canada has been nothing but fabulous. They're one of the best run exchanges, dark pools, whatever you want to call quality, of the 235 that we interact with. It's that level of interaction that has really got us excited about the transaction. So I'm not at all concerned about a further concentration in global equities. Obviously, this is not market making, it's institutional, so it's very different. And it's, I think, very synergistic for the reasons that I described before in terms of our ability to provide unique liquidity to the end users. And again, at the end of the day, as you did say, ITG has tried to get into other asset classes, both as an agency broker and as well as analytics provider, and Virtu is going to accelerate that growth. So we're very excited about it. I think the most important takeaway, Chris, is that we really are diversifying our revenue base. Pro forma, it's around 37%, 38%, will be non-transactional revenue. Obviously, we love legacy Virtu and Knight and the transactional revenue and -- but it will mute some of the volatility in terms of our earnings to bring us a real consistency to our results hopefully in 2019 and beyond.

Yes. I think, Chris, the thing I'd add at it -- sure, I think it's more concentrated in U.S. equities in equities globally, which we're not concerned about, but it's also diversifies us significantly geographically, right? So Virtu's standalone business, depending on what period you're looking at, is under 15% outside the U.S. And obviously, ITG's global franchise, we'll get to about 20% to 25% outside the U.S.

(Operator Instructions) Your next question comes from the line of [Tony Reiner] from [Opticals].

Two quick just touchpoint questions. Is there dividends -- are you able to see dividends on this? Is it a new dividends kind of a deal?

Our dividend policy will continue, yes.

And you mentioned quickly break fees, is there a reverse break fee on it?

No.

And there are no further questions at this time. I would now like to turn the call back to Doug for closing comments.

Operator, hold on, Alex is back in the queue. We could -- I'm happy to take a call, a follow-up from Alex, if he has one. I see him on the queue line.

Your next question comes from the line Alex Kramm from UBS.

Yes, I mean, listen, since this is an earnings call and there's not a lot of questions being asked, I mean, maybe you can talk a little bit about the fourth quarter. When you gave some coming attractions already or you noted a little bit of that, that things are going well. But anything else you can add? I mean, I think CBOE on the call, for example, highlighted the increased volatility in single dispersions, single stocks trading. I mean, any sort of color that we should think through in terms of how the base business is doing and what we should be focused on?

Yes, great question. Yes, I did give some highlights, in particular, our excitement about the Execution Services business which is, it goes without saying, it's a commission-based business, right, so it's highly dependent on volumes in particular. But what my remarks and what I said was relative to the volumes, particularly in VES, we outperformed. And I give a lot of credit to our guys, Steve Cavoli in particular, in terms of having now fully integrated in the U.S. and in Europe, our institutional sales technology with the KCG one. And now we're offering a truly homogenized product with access to our unique liquidity as well. So I think that's been a bit of a game changer. In terms of the market making segment, again, you can look at the same metrics that I look at out in terms of volumes, right? From October to the third quarter, they've been elevated as well, the VIX. But also more importantly, which I always reference to you guys is to realized volatility, vis-à-vis October as compared to the third quarter, is up pretty significantly around 200%, right? So again, don't just take our third quarter earnings and multiply them by 200%, right? It's a little more nuance than that. But I would say as a general matter and as well, you can look at the retail volumes that IBKR puts out. I don't know, have they put out October? They have. It's actually gone down a little bit. So all that being said, the environment in October and the first couple of days here in November is, as I said in my remarks, materially better than it was in the third quarter. We don't do guidance because if I did it every time I would give it, I would be wrong. It's one of the reasons, I guess, we're doing this acquisition on some levels. In the first quarter, I talked about how the market was better and I think people misconstrued what that really meant. And so at the end of the day, it's early in the quarter. We are about a third away through. We're happy with the return of volatility. We will see what happens from the midterm elections last night. Obviously, a little bit of mixed message and it looks like the marketplace is up. But we continue to pound away here in terms of getting the final KCG synergies. And obviously, we're very excited to undertake this integration project.

All right. And then maybe just like a last quick one here. I don't think I saw it in the presentation either but, Joe, interest rate assumptions for this deal, if look at the last page, obviously, you show a net interest. But I think...

LIBOR plus 300.

I am sorry?

LIBOR plus 300.

Okay. All right. Sorry if I missed that.

No, you didn't miss it.

No problem.

The next question comes from Chris Allen from Compass Point.

Just wanted to follow up just on the recent market deal roundtable and the broker disclosure changes coming out of the SEC. Basically, just wondering how you guys are thinking about how it plays out moving forward.

Sure. So good question. Obviously, I was there. I was on the first panel, and I thought there was some productive back-and-forth. And obviously, there was some emotion and whatnot. I think, at the end of the day, this isn't really about Virtu. It's about the industry. We submitted a letter with 23 other great firms. It was a cross-section of retail institutional. IEX as an exchange. We submitted that letter a little over a year ago. And basically, what we asked the SEC at that time was to undertake a review of market data and connectivity costs to just ensure that they were in compliance with the mandates of the Securities Exchange Act of 1934, which with respective to core products, as you very well know, requires that the cost be approved, if you will. And then with respect to noncore products, arguably the propsies and connectivities, that they'd be -- I'm paraphrasing somewhat, that they'd be fair and reasonable. Our goal ultimately is transparency. We're not and anti-exchange. We value the exchanges, their business partners with ours -- with us. We do a lot of business with them, both here and abroad, and other asset classes. So this isn't about a fight between brokers and exchanges. It's just really a fundamental fight about fairness, compliance with the mandates of the Securities Exchange Act. And we are not focused on who made more money, this and that and all the noise and the nonsense around 5 banks made this kind of money come, all that kind of stuff. That's completely irrelevant to us. There's a statute here. There's a commission that rule 5 to 0 that they thought some of these -- that at least 2 of the filings were not consistent with the mandates of the 34 Act. Obviously, that's been appealed to the D.C. Circuit Court of Appeal, and we will see where that ends up. In my prior life, I was a lawyer, so I've read the statue. I've read the opinion, and my view for what it's worth is that SIFMA and the brokers are on the right side of 34 Act. But obviously, ultimately, that will be turned out. How that impacts Virtu is -- like what I've always said is we're happy to pay a fair cost for a product. We have been doing that for the last 11 years. It's a large part of our cost basis, and all we're asking for is continued transparency and fairness around that. And so as the products cost more, if they cost less, we just want to pay a fair price. So I'm under no illusion that there's going to be some massive rollback of prices. I would like that to be the case because I think it's the fair thing to do, but I think the markets ultimately will determine that. But I'm reasonably optimistic that over the next couple 3 years, as this plays out in the District Court and ultimately back, if it's remanded back to SEC, that there will be a significant review here of not just those 2 filings but the hundreds of filing requests that happened since 2013. And as a result, I think we won't see the step increases in U.S. equities that here before we have experienced. And ultimately, I think that's the right thing and it's the right examination of the marketplace. So I tried very hard not to raise my voice and not to get too heated when I was down there, and I'm going to continue to do that, which needs to be an intelligent thoughtful discussion among market participants. Certainly when our customers come into Virtu and have questions around cost and transparency, we do everything we possibly can to explain why we're charging in what we do and what are services for. That's all the exchanges customers are asking for. And it's not Virtu, it's all of our retail friends. It's all of our institutional customers. It's everybody that accesses the market pretty much is saying the same thing. So I think the right thing to do would be to have that intelligent conversation around transparency and fairness. And ultimately, I think that's where this ends up. But we'll see, we'll see. I know lawyers are now involved and whatnot. And being a former lawyer, I know how that all goes.

And there are no further questions at this time. I will now turn the call back over to Doug for closing comments.

Actually, I'm sorry, operator. We just noticed that Zach from Morgan Stanley is now in with the call and with a question. Can we have Zach's question and then we'll end the call.

Your next question comes from the Zach Feierstein from Morgan Stanley.

Just want to see what do you think it takes in your view to succeed and win long term in the Agency Execution Services business given that's not really in your historical DNA?

Yes, sure. Well, it's a great. Obviously, it is in the Knight DNA, right? So Knight has been in the business for a really long, long time. I think ultimately what you're seeing in the Institutional Agency business is the same thing that we have been experiencing for the last 10 years or so in the market making segment, which is that the marketplace, market participants, competitive forces, the complexity of the market is demanding technological evolution, automation, efficiency and scale. That's really where the business has gone. Commission -- prices and commissions are not going to back up in the same way that bid offer spreads are not going to back to a quarter, right? So the model of Virtu was always about scale, efficiency, applying technology to a pretty simple function being a financial intermediary, being transparent about it and using technology automation and scale to be a profitable enterprise because you can deliver those services globally across asset classes. The exact same principles apply to the Institutional Agency business. So we're going to be scaled. We're going to be automated. We're going to be efficient. We're going to be virtuous. We're going to be transparent. We're going to provide the best possible service we can because ultimately, this isn't rocket science, right? We're going to make it. It's a simple proposition. A client has an interest in accessing a market and we're going to do it in the most efficient, transparent and understandable way and simplest way to that client. And then we're going to explain to the client what we did, and then we're going to be compensated for that. That's the business model, and we're going to do that across asset classes and across geographies. And so we think, with the right firm to do that, we think we have acquired today the premier brand with literally thousands and thousands of customers around the globe that have that trust around what ITG has been doing. And so all we're going to do is take that trust and extrapolate it using technology, automation, transparency to have the end product and the solution to be that much better for the end users. So the same philosophy that we've applied to the market making segment, we're going to apply now to this institutional agency offering. It's really all about trust, transparency and using technology to enable a client’s interest, full stop.

Just one more for me. I think, Joe, you mentioned the KCG deal got you 58% like in the cost synergies and modeling about 30% of the ITG expense base initially. Could you help us understand the -- just what the GAAP is there and maybe if there is upside potentially, where that would come from?

Well, it's a different business, as you point out. I think that there was a number of different businesses at KCG, the old GETCO business that really wasn't integrated fully when we closed and you had the legacy, the GQS business that we pointed out in some of the subsequent materials when we close. So I think there was just a bunch of different verticals. I think this is a more concise business and more global business. So we're -- we don't have -- we have good solid businesses in Europe and Asia, but ITG's global franchise is more extensive than ours. So I think we are looking at that and trying to look at what's achievable in front of us, and we feel very good about the number we're putting here.

Thank you. Thank you, and operator, I'll wrap up now. Thank you, everybody, for taking the time this morning to hear about our story. Obviously, as I've said 73 times today, we're very, very excited about this acquisition. ITG is truly a fabulous global brand with some terrific people. We look forward to getting to know them and to integrating them into the Virtu family. So thank you, everybody, for your time this morning.

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