Virtu Financial Inc (VIRT) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Virtu Financial 2019 Fourth Quarter Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Debbie Belevan, SVP of Investor Relations. Thank you. Please go ahead, madam.

Thank you, operator, and good morning, everyone. Thanks for joining us. As you know, our fourth quarter and full year 2019 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.

On today's call, we'll have Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Alex Ioffe, our Chief Financial Officer. They'll have prepared remarks, and then take your questions.

Please note that 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 upon information presented 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 the disclaimers in our press release, and I encourage you to review the description of the risk factors contained in our annual report on Form 10-K and other public filings.

During today's call, we'll refer to both GAAP and non-GAAP results. In addition to GAAP results, we may refer to certain non-GAAP measures, including adjusted net trading income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. Non-GAAP measures should be considered as supplemental to, and not superior to financial measures prepared in accordance with GAAP. You'll find a reconciliation of these non-GAAP measures to the equivalent GAAP terms in the earnings materials, with an explanation of why we deem this information meaningful as well as how management uses these measures.

With that, I'll call -- I'd like to turn the call over to Doug.

Thank you, Debbie. Good morning, everyone. Thank you for joining us today. In my remarks today, I will focus on Virtu's fourth quarter and full year 2019 financial and business performance, 2019 milestones and the progress we've made towards our strategic key initiatives before discussing goals for 2020 and the future of Virtu. Following my remarks, Alex Ioffe, our CFO, will provide additional details on our financials, including an update on our integration-related expenses and expense forecast for 2020.

Turning to our fourth quarter results, which are summarized on Slide 5. I am very pleased to discuss our strong outperformance in the last quarter. We generated $4.08 million per day in the fourth quarter, an increase of [4.6%] over the prior period, despite significantly lower opportunities this quarter, as demonstrated by a 3% decline in U.S. equity average daily volumes and a 35% decline in realized volatility of the S&P 500 index versus the prior quarter.

For the full year 2019, Virtu generated $3.88 million per day of adjusted net trading income. As we pre-announced last week, we also generated between $100 billion and $105 billion (sic) [$100 million and $105 million] of adjusted net trading income, nearly $5 million per day in January, and our robust performance has continued into February. Our outperformance in the fourth quarter and in the start of 2020, is the result of investments we have made in technology, integrating our firms, deploying strategies to new projects -- new products and thereby making previously unaddressable opportunities addressable.

One of the hallmarks of Virtu has always been our relentless effort to invest in scaling and improving our offerings across both our business segments, offerings that are designed to drive organic revenue growth in any environment. We also always focus on cost optimization. To illustrate the benefits of Virtu's operating leverage, this quarter's 5% increase in average daily adjusted net trading income, combined with reduction in expenses, drove a 29% increase in our non-GAAP adjusted earnings per share of $0.27 per share compared to 21% -- $0.21, excuse me, in the prior quarter. On a GAAP basis, we generated basic and diluted loss per share of $0.16 versus $0.04 in the third quarter of 2019, both driven by acquisition-related costs.

I am very proud of our performance in the quarter, as it reflects our disciplined focus on achieving and executing on our strategic and sustainable growth initiatives across both our business segments, even in the face of a difficult operating environment.

For the full year 2019 adjusted EPS was $0.96. And for the fifth consecutive year, we completed our mission to return capital to our shareholders in the form of our $0.24 per quarter dividend.

Our adjusted EBITDA in the fourth quarter was $114 million, an increase of 10% compared to the prior quarter. As you know, our results are primarily driven by our 2 main business segments, Market Making and Execution Services. Slides 9 and 10 provide an illustration of our business today.

In our Market Making segment, our average daily adjusted net trading income increased by 8.5% to $2.4 million per day in the fourth quarter. This increase included a 25% increase in our average daily adjusted net trading income from global equities despite the noted declines in market volumes and realized volatility, specifically, as I just mentioned, a 35% decline in realized S&P volatility, in addition to an 11% decline in realized EURO STOXX and a 15% decline in Nikkei realized volatility compared to the prior quarter. Our enhanced market making performance was driven by improvements we deployed to existing strategies in both our customer and noncustomer market making businesses.

In U.S. equities, we benefited from the introduction of 0 commission training (sic) [trading] and the increase in retail volumes and an increase in our 605 market share in U.S. equities. Our outperformance in global equities this quarter was also boosted by improvements in our European operations, where we achieved significant organic growth as a result of recently relaunched market making strategies that combine the best of Virtu and KCG.

Our Market Making segment's results included a 35% decline in our average adjusted net trading income in Global FICC, stemming from significant declines in market volumes across these asset classes and then realized volatility across FICC globally. Specifically, volatility indices for currencies and commodities, including the CVIX index, JPMorgan G7 FX index and the GS Commodities index declined 36%, 40% and 81%, respectively.

As a reminder, by comparison, the previous quarter experienced the highest level of realized volatility in crude that we have seen in some time. The attacks on Saudi Arabia had significant impacts on the crude markets that make comparison to the third quarter very challenging.

Turning to our Execution Services segment. Our adjusted net trading income was $1.68 million per day in the fourth quarter, a slight 0.5% decline compared to the prior period. As discussed previously, this segment generates revenue that is recurring and relatively stable in nature.

Looking at recent periods, you can see that our adjusted net trading income for Execution Services has been relatively constant between $1.67 million to $1.69 million per day in each of the last 3 quarters.

Given the contraction of the buy side execution wallet and declining volumes year-over-year, particularly in Europe, our steady performance is especially impressive and is a testament to the value we're bringing to our clients' trading and investment processes and the progress we've made in cross-selling additional products to customers.

Quickly looking ahead to Slide 6, you will see the upwards trajectory of our daily adjusted net trading income over the past several quarters, which has continued into 2020. On expenses, we continue to make progress in integrating and enhancing the various products acquired in the ITG transaction and realizing efficiencies. By the end of 2019, we had exceeded our initial synergy targets several months ahead of schedule. Alex will provide more details, along with 2020 expense guidance, but we remain highly focused, as always, in managing our costs and meeting and outperforming guidance.

As we recently announced, we opportunistically refinanced our term loan just last week to take advantage of lower rates available in the market. I'm pleased to report that this meaningfully lowers our financing costs over the next 5 years to the tune of approximately $11.2 million. Cumulatively, the results of transactions undertaken in the past 2 quarters yielded a total of $26 million in annual interest expense reductions, approximately 23% of the annual interest expense from when we closed the ITG transaction less than a year ago.

In just 2.5 weeks, we'll mark the first anniversary of our transformative merger with ITG. And we witnessed -- as we have witnessed over the last year, the transaction combined 2 highly complementary businesses and created incremental operating scale is allowing both our Market Making and Execution Services segments to continue investing in our offerings.

While we remain open to strategic inorganic growth opportunities, we have successfully invested and launched a number of organic growth initiatives in the first year at little, if any, incremental cost. Each new offering of products that we deliver across our unified global technology platform adds to our scale, further strengthening our sustainable, competitive advantages as well as our client relationships.

The organic and inorganic initiatives we launched in 2019 have enhanced our operating leverage and increased the total addressable market of both of our operating segments. As discussed in prior calls, these and other initiatives are in line with our strategic vision to utilize our unified technology platform to deliver more products, services and data to more markets and clients as we grow our recurring revenues.

As we remain focused on helping our clients meet their trading goals, we will naturally continue to uncover opportunities to strengthen these relationships by offering competitive, transparent and sustainable technology-led solutions. While we have accomplished humbling achievements in short of a year, we remain excited for the new opportunities that await Virtu and our clients around the globe.

Turning to our Market Making segment on Slide 12. We're very pleased to report on our robust outperformance compared to the industry benchmarks for the fourth quarter. Our average daily adjusted net trading income in market making increased by 8.5% to $2.4 million per day in the fourth quarter. As mentioned a moment ago, the environment during the fourth quarter presented reduced opportunities as declines in market volumes and volatilities that we witnessed in the third quarter continued into the fourth quarter. However, despite these declines in opportunities in the period, our outperformance was more than offset by organic growth in both our customer-facing and noncustomer market making businesses.

Turning to Slides 13 and 14. In our customer market making business, we achieved a 12% increase in our market share of marketable Rule 605 order flow as we executed on opportunities to organically grow our results and win larger shares of flow from key brokers on a profitable basis. We also saw significant organic growth in our noncustomer market making business from our focus on investing in recently launched market making strategies in Europe, growth in our ETF block desk globally as well as developing our options capabilities.

Let me talk first about our ETF block business. Overall, our firm-wide footprint in ETF is significant, transacting more than USD 2.5 trillion of ETFs in 2019. The focus on our ETF block desk was a major initiative for us in 2019 that continues to generate significant value, and we are in the early stages in terms of its growth.

In addition to increasing the number of ETPs we quote by over 30%, we grew adjusted net trading income on the desk by over 40% in 2019 compared to 2018. As the largest lead market maker in ETFs in the United States, Virtu is well-known -- is a well-known authorized participant and an onscreen market maker. However, creating a scalable ETF desk to serve the needs of institutions as well as the funds themselves is a relatively new priority for Virtu. Combining the global financial technology of Virtu with the trading and distribution capabilities of KCG and ITG is a winning formula.

Similar to how we are leveraging our trading capabilities and technology to offer more services to more clients across our Execution Services segment, the launch of our global ETF block desk to expand our role across the ETF ecosystem is a great example of an organic growth opportunity that resulted from the combination of Virtu, KCG and ITG. This is an exciting opportunity that favors scaled operators like Virtu, who can leverage a global technology platform and data processing plant to form prices, distribute liquidity and execute on clients' needs. That said, a significant amount of opportunity awaits as we are still developing our offerings in new asset classes like fixed income and our operations outside the United States.

Additionally, favorable regulatory trends such as MiFID II and improving best execution requirements will continue to increase the addressable size of the ETF market. Further still, as the global turnover and AUM of ETFs continues to grow, so does the opportunity for our ETF block desk globally and client demand for our services.

Options. On our last call, I mentioned briefly our expansion into options. I'm pleased to report that our focus on growing our options footprint continues to show results. In 2019, our volume in U.S. cash equity options increased 32%, and the number of symbols we trade increased 30%. The pace of our growth in options is accelerating as our volume in January is up over 50% versus the fourth quarter, and we are now quoting 13% more symbols than in the fourth quarter.

We are still in the very early innings in our expansion into options, and there is a significant amount of runway ahead. As we develop our options capabilities, we expect we will be able to find opportunities to quickly deploy our scalable technology to address incremental markets, including some of the world's largest and most active markets.

In addition to growing these new market making capabilities, we continue to evaluate new markets from multiple perspectives. As a result, we are shortly going to commence being a multi-asset class market maker onshore in India. Markets in India represent significant opportunities in equities and commodities trading, and our onshore operations and registrations will be important to position Virtu for success in this important market. Expanding our ETF block desks, becoming a market maker in options and entering India are all examples of how Virtu is adding incremental organic growth opportunities to our existing fixed cost plant to achieve great operating leverage.

Turning now to revenue synergies specific to our Market Making segment. We continue to benefit from deploying legacy KCG quantitative market making strategies on Virtu technology and incorporating legacy KCG logic into certain Virtu market making strategies. Our Market Making segment achieved over $50 million of adjustable net trading income attributable to organic growth in 2019, driven by enhancements from the combination of KCG and Virtu.

Turning now to our Execution Services business on Slide 15. As you can see, our results for the fourth quarter were nearly flat, and we outperformed compared to the more significant declines in many market volume and volatility benchmarks.

Looking at the market environment for the full year 2019 versus 2018, you can see how the average daily turnover declined significantly across the globe, especially in Europe and APAC, where notional turnover declined 22% and 19%, respectively.

Next, I'd like to update you on the deployment of a number of organic growth initiatives we announced last year, specifically the launch of Virtu Execution Services, our outsourced trading offering, our multi-asset class analytics offering and Triton enhancements and others.

While it's still early days, since launching ECS last fall, we have onboarded clients, and we have many more global clients in the onboarding queue. As a broker-neutral platform, Virtu ECS provides clients with a suite of nonconflicted Execution Services that are scaled to fit their needs. Clients appreciate that we are broker-neutral and the research providers they use like that we are not competing with their research. We are now in the process of building our network of brokers both in the United States and in Europe, and are launching a new sales campaign for 2020 to both build awareness and proactively identify and pursue opportunities.

Audit and alert enhancements. We rolled out many technological enhancements in 2019, but few were as immediately impactful to our clients as the technology upgrades and structural changes we made to reduce latency on our [deposit] alert block crossing platform. As we mentioned on our last call, the upgrades we made reduced latencies by more than 70%, resulting in sustained jump -- a sustained jump in our market share.

Multi-asset class Triton. We continue to deploy our next-generation multi-asset class EMS platform, Triton Valor. Since the end of the third quarter, we have continued to roll out new Valor platforms and a number of migrated firms increased from 14 to over 50.

Analytics. Also on the multi-asset class front, in the fourth quarter, we announced the launch of our new FX benchmarks available within our broker-neutral analytics suite. The new FX benchmarks leveraged Virtu's technology platform and experience as a major liquidity provider to the global FX markets to provide Virtu's unbiased view of fair value for a given currency at any point in time. Our FX TCA clients use the new benchmarks to measure the quality of brokers liquidity and the performance of algorithmic executions with enhanced levels of granularity.

Virtu Capital Markets. Since our last earnings call, our capital markets business has onboard its first set of clients, and conducted its first ATM trades. Virtu Capital Markets continues to focus corporate issuers that are looking for alternatives to tap into our capital markets be it via ATM offerings and stock buybacks.

These are just a few of the initiatives that we are confident that our disciplined, client-centric focus is creating value for both our clients and our shareholders.

On Slide 17 we outlined our path to higher returns. While our plans for Virtu may seem ambitious, we know we have the right level of talent, commitment and client support to be sure we deliver the benefits our clients expect.

As I wrap up my prepared remarks, I want to reiterate how proud we are at the success we have achieved for our company and for our clients in 2019. Moving forward into 2020 across the firm, we are steadfast in our commitment and determination to continuously improve the quality, scalability and reliability of our global multi-asset class offerings. I remain confident we are moving Virtu in the right direction, and we will continue this year as we capitalize and continue to grow momentum generated in 2019. We look forward to providing you with more updates on our next call.

And with that, I'd like to turn the call over to Alex to review the financial details before we open the call up for questions. Alex?

Thank you, Doug. Good morning, everyone. Doug is a hard speaker to follow. Next part of the call will be quieter, but I think equally as exciting to investors. I'm pleased to report a strong quarter and a number of positive developments in the business. Our GAAP results were revenues of $405 million for the fourth quarter and $1.5 billion for the full year. We generated basic and diluted GAAP loss per share of $0.16 in the fourth quarter, and basic and diluted loss per share of $0.53 for the full year, all driven by acquisition-related expenses.

As a reminder, our 2019 results included only 10 months of ITG. ITG transaction closed on March 1 of this year. Removing onetime integration costs and noncash items, normalized adjusted earnings per share was $0.27 for the fourth quarter and $0.96 for the full year. Total dividend for the year was also $0.96 per share.

Adjusted net trading income, ANTI, which is our trading gains, net of direct trading expenses, was $257 million for the quarter or $4.1 million per day, which is 5% better than the prior quarter in unit market conditions. As we recently reported, the first quarter of this year was off to a strong start with ANTI for January estimated between $100 million and $105 million. For the full year, our Execution Services segment comprised 1/3 of our total ANTI as compared to 9.5% for prior year. This shift was in great part due to the acquisition of ITG, which diversified our revenues, while leveraging our core technology.

As Doug mentioned, the fourth quarter demonstrated the leverage and ongoing improvements in our efficiency, a 5% increase in ANTI, coupled with decreases in operating expenses and financing costs yielded 29% increase in normalized EPS from $0.21 in the third quarter to $0.27 in the fourth quarter.

A good story this quarter were improvements in our financing costs. In the past 3 weeks, we took advantage of favorable market conditions. Last week, we launched and priced the refinancing of our term loan. Our $1.95 billion of term loan debt was reduced by -- reduced 0.5% lower from LIBOR plus 350 to LIBOR plus 300 basis points.

We paid one issuer discount for only 12.5 basis points. In conjunction with the repricing, Moody's issued a corporate family rating for Virtu, which [was a] much higher than the existing term loan issuer rating, while reaffirming the issuer rating. The corporate family rating reflects Virtu's quoting Moody's franchise as a technology-driven provider of market making and related execution services, et cetera. We are pleased to have this rating.

In addition, at the end of January, we did a fixed to floating interest rate swap to lock in a lower interest rate for 5 years on $1 billion of our term loan. The fixed to floating LIBOR swap was in addition to the $525 million swap, we did effective beginning in the fourth quarter, concurrent with the conversion of 6.75% senior secured notes to an upsized term loan and a subsequent pay down of net $25 million of the term loan.

Cumulatively, we paid down $75 million of term loan since the ITG acquisition. As a result of these actions, as you can see on Slide 19, we'll pay a fixed effective rate of 4.37% for 5 years on $1.5 billion of our debt. The remaining $400 million of the outstanding term loan will remain floating and indexed to LIBOR, but at a spread that is now 50 basis points less. As we reported last night, and Doug mentioned earlier, cumulatively, the result of the new financing transactions undertaken in the past 2 quarters and debt pay down yielded a total of $26 million in annual interest expense reductions or approximately 43% lower annual interest expense run rate. These savings amount to approximately $0.10 per share in earnings.

For convenience, on Slide 20, we added a recap of the key terms and covenants of our term loan. Some investors had questions on this. Please note that there are no ongoing leverage covenants or interest coverage covenants on this loan.

Okay, switching to expense synergies. Our integration with ITG is proceeding well, as can be seen on Slide 21. Through the fourth quarter, we realized $137 million of synergies, slightly above our original total synergies target of $133 million, but we are not done. We are on track to reach the higher end of the increased synergies guidance of $182 million by the end of 2020. This would put us on an operating expense run rate of $155 million per quarter compared to a premerger combined run rate for Virtu and ITG of $200 million for the quarter.

The $155 million per quarter gives us an average run rate for the year. We expect continuous improvements throughout the year, with the last quarter of this year, or the exit quarter, expenses being lower than average.

Annualized. We expect our total adjusted operating expenses to be $620 million this year, down 22.7% from $802 million spent by Virtu and ITG in 2018, last full year before the merger, and this yields the $182 million of savings that I mentioned a couple of minutes ago.

Wrap up. For your convenience, on Slides 23 and 24 in the earnings supplement, we presented a GAAP P&L in order to show direct expenses below corresponding revenues to then show adjusted net trading income, which is a key measure we use to track our business. We then show the rest of the GAAP P&L, then we layer in EBIT, EBITDA and adjusted net income and adjusted EPS to give you a congruent view of these key measures. We present these measures -- we presented these measures in the past, but we think this layout is easier to follow, and as part of our efforts to make Virtu easier [towards the step].

In the next few months, we will start publishing monthly data to provide you, the investors, a view into our monthly market making activity, and we will plan to include notes about key developments in our business with these releases.

Finally, we declared [customer] a $0.24 dividend for the quarter, which will be paid on March 13.

Now I would like to turn the call over to the operator for questions and answers.

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

I guess the first question is on the market making results, Doug. And Slide 13, which shows the Rule 605, the marketable volume. I guess it seems like it's highly correlated with your results showing volume and market share improvement from 2Q? And I guess could you go a little bit deeper on what might be the drivers of that? And then I know we get some other extraneous factors like the 0 commissions. And how sustainable is it going forward, I guess?

Yes. Good question. So a couple of things. One, I've always said on these calls, and I've said in my investor rounds, that market share is not the be all, end all. Market share with profitability is the be all, end all. So we could have a significantly larger market share across the various asset classes and geographies in which we participate but that would entitle tightening bid offer spreads and property and liquidity at a price that's not ultimately profitable to the firm. We think we can do that very well, and better than competitors, because we've got a scaled fixed cost plant, et cetera, et cetera. You guys know the story.

Obviously, U.S. equities is our largest asset class, and it's the largest asset class in the world. So we spend a lot of time iterating on it and improving. Within U.S. equities, our customer-facing segment, or the Rule 605 segment, is a significant portion of our business. It's what we acquired as part of the Knight transaction. And as we've said many times on these calls and in sessions with investors, we spend a lot of time investing in, one, replatforming those strategies and migrating them to Virtu technology. And some of the Virtu post-trade analytical solutions we think that help the trading. And then as well, constantly iterating on the strategies to make them better, to more performance and give a better results to our end users in the form of price improvement, but also enable the firm to be profitable.

As part of that, obviously, we're competing with great firms to get market share from the 200-odd retail brokers. So if we can do that in a profitable way, we'll do that and think of that as same-store sales. Part of the strength of the combination of Virtu is our ability to internalize a lot of that flow across desks and across asset classes. We've got a lot of noncustomer market making business. And once we've internalized that order, it's -- we can do with it as we choose because we've given the customer price. So those are the kind of antecedents, if you will, and the rationale for the combination of the business. And so we've done better internally by investing.

Certainly, from a macro perspective, Rich, and you hit on it, the implementation by the large retail brokers of 0 commissions has driven more retail volumes. So retail volume, overall, was up, and that benefits the firm because that's more of an addressable marketplace.

The other significant part of a 0 commission world is flow segmentation. So when you have brokers now that are not getting paid on a per trade basis, their interests are 100% aligned with the market maker, not just Virtu, but our competitors, to segment flow, which may be more toxic, may be more professional in nature and candidly, more difficult for a market maker to handle. We don't have any magic elixir around large correlated orders that really are more institutional in nature than retail. And so when you align the interest of the retail broker with the market maker, you can have a better performance. We can allocate our price improvement dollars more adroitly to real -- true retail orders that are deserving of those dollars and not get run over, frankly, by orders that may come through a retail pipe but look, feel and smell an awful lot like an institutional order. So that's a long-winded answer to your question of the various inputs that led to a better performance. And that has continued in the first quarter, Rule 605 volumes are all public. You can see that the 0 commission phenomena has driven more interest. Some of that also is when you see stock like Tesla, that retail, in particular, is very interested in, you'll see a spike in activity.

That's helpful on the segmented flow. I guess my one follow-up would be on the expense side. And Alex, you talked about -- glad you pointed to the very low end of the expense range, high end of the synergy range. But as -- and you talked about an exit quarter that was low. Because if you look at the quarter, the $159 million of adjusted expenses. So that's only slightly, $16 million higher than that $620 million. And -- but you did say it was a quarter that you exit low. So can you just talk about what the incremental expenses that are coming out? Whether it be, I guess, from ITG in 2020? And how the fourth quarter might be an exiting low quarter?

Right. So we expect to make improvements throughout the year, which is why I referred to the exit quarter being lower. For example, communications and data expenses. We expect a meaningful amount of savings as a final run rate at the end of this year, but we're layering in these savings or expectation of these savings across the year, 3% this quarter, 5% next quarter, so forth.

Similarly, we find ourselves an accidental landlord as a result of 2 acquisitions, so we have quite a few office spaces that we no longer need, but have to rent out. That takes time, and that gets layered into the results across the year. And there are other similar examples.

Your next question comes from Ken Worthington with JPMorgan.

This is actually Jenny Ni filling in for Ken Worthington. I'm wondering maybe more comments on the competitive landscape. We are seeing more electronic market makers and high-frequency trading firms reducing staff in light of the really challenging market conditions given low volatility. Does this, at all, change your competitive landscape? And where do you see competition going forward?

Yes. Thank you for your question. I mean, really, what you're seeing playing out is what we have been talking about really since we went public, which is the Virtu story. It's all around scale. When Vinnie and I envisioned this firm a dozen years ago, the mantra was get big and be multi-asset class and multi-geographic as quickly and as -- in as low a cost manner in which you can because we recognized that bid offer spreads were going to collapse. We weren't thinking about commission wallets, but commission wallets were going to compress. And so we built a very large fixed cost plant, a technological company, a financial technology company, that can process a lot of widgets across asset classes and geographies, right? We did that on purpose because if you're only focused in a single asset class or if you're waiting for volatility or if you have a quant strategy that's working in a particular marketplace, those things are going to ebb and flow, but ultimately, your costs are going to continue to get -- to increase. Look at what the exchanges are doing. Look at the need to invest in new technologies, around microwave, et cetera. And so if you don't have that global scale, if you're not truly a multi-asset class, you're very strategically limited in what you can do.

And so you've seen -- I'm not going to comment on specific firms because I have no information other than what I read in the paper the same way you do. But if you look at a firm that is limited only to U.S. equities, or a firm that's focused on fixed income or just FX, or limited only to the United States, I would argue that they're very strategically challenged over the next 3 to 5 years and scale in firms like Virtu. And there are other firms that get this mantra as well. Firms like Virtu are not only going to be the survivors, but we're going to be -- we're going to prosper, because we've built this fixed cost plant. We have always, always managed it for times of a famine. And when there's times of feast, you see the outsized returns that we can generate.

And as Alex just mentioned, regardless of what 2020 brings in terms of opportunity set on the revenue side, I can promise you that there's one thing that we control with costs. And we will exit 2020 with a significantly lower cost base than when we entered it. And all of those incremental dollars will provide significant operating leverage and operating scale to our model. So that's really what you're seeing. That theme will continue, because the world is just getting more and more competitive, and you need to continue to invest in these new technologies, which aren't cheap.

And your next question comes from Dan Fannon with Jefferies.

I guess, my first question is on options. Curious as to kind of what's changed to allow you to grow at the rate you are? Is it more just -- we, obviously know industry volumes are up, but you're, obviously, participating in that more so than a year ago?

No. I mean, Dan, that's a great question. I think it's really 2 things. One is, as I just mentioned, the scale of the firm. We are global, and so we are in all these different marketplaces. But more importantly, we invested in the last 18 to 24 months in a scalable options architecture. Transacting and being a market maker in a quote-based as opposed to an order-based marketplace is very, very different. And so we had to take our -- our architecture, which is really geared more towards the order-based environment, i.e., the equities markets of the world and the future markets of the world, and transform that into a truly scaled options-capable firm. We have a lot of competitors that have years and years of a head start, and so we're playing a little bit of catch up. But most importantly, we have the scale. So we have the low latency connectivity that one needs between Chicago and New York. We have a low latency connectivity around Europe and in Asia, in the Korean market. We're connected to all these places. So the incremental cost of us getting into these various options markets around the world is, frankly, de minimis, once we have the technological footprint.

So we made that investment over the last 2 years. We feel very good about where we are from a technology perspective. We know that we are ahead of the pack when it comes to latency and risk management and cost of execution. So now it's just a question of having the right personnel rolling out these strategies to these options markets, which is not an easy circus trick in and of itself. But I'm very, very optimistic that we can grow this business organically.

Got it. And then just a follow-up, I just want to clarify on the expense guidance. Obviously, the slide says $620 million to $650 million, but, I think, for prepared comments, you said $620 million is the target, the low end?

That's right.

Yes.

And your next question comes from Ken Hill with Rosenblatt.

Just had a question. It's on the preliminary results, you guys kind of mapped out the adjusted net trading income for January at $100 million to $105 million. I was hoping you could kind of parse apart maybe what parts of that were related to some of the volatility? Or -- and what was kind of maybe more of a kind of ongoing portion of your business and the run rate moving forward? And then also, got to ask if you could you provide any color on the February activity through the first part of the month here?

Yes, yes. Well, look, I mean, it's always difficult to separate the wheat from the chaff, right? I mean, clearly, volumes in 2020 are higher than volumes in -- for the -- certainly, for the fourth quarter and for the vast majority of 2019, and that helps us.

I would comment and note, however, that realized volatility has not significantly spiked. You would think, given the macro events out there, with this horrible virus that's circumnavigating the world, et cetera, that you would see a spike -- a significant spike in realized volatile. You've seen some of it, but it hasn't been as dramatic as one would think. And so I'm very bullish on our performance. We continue to do well in global equities and in the other asset classes. The Execution Services business has seen an uptake -- an uptick, excuse me, and a lot of that is volume-driven.

And I did say -- so that's kind of the color I can give you there. Obviously, the quarter is still -- has about 35-ish or so trading days to go. So I don't want to prognosticate it too much on where it's going to end up. I did say, in my prepared remarks, that February has continued the pace of January, which is good for us to see. But again, it's still less than half of the way through the quarter. But I'm very optimistic and bullish about our performance. I think, 2020, because of all these macro events, we've got a U.S. election going on, we've had this contagion issue, and it just seems like there's going to be more volume and volatility. For the first time in Europe, we had a week where the notional turnover was more than 30 billion. I thought Europe had forgotten had a trade for a while. So you're seeing glimmers of a resurgence of a marketplace, coupled with our organic growth and our better performance, really, that's -- and our reduction in cost, that's the multiplier effect from the Virtu model.

Got it. I just had one also on kind of capital. With the refinancing complete, I know you mentioned some changes in covenants going forward with leverage ratios. Can you talk about the capital priorities? And maybe any additional appetite for kind of acquisitions in the space right now?

Yes. Just for clarity, there were no covenant changes, okay? I think there was confusion, I'll put it nicely, from the last call, that somehow Virtu had maintenance covenants. We do not have and have never had any maintenance covenants. So the maintenance -- the leverage targets that I annunciated are just that. They're just targets. They're just targets. There's 0 financial exposure, if you will, to Virtu. The loans are extended to 2026, right? We just repriced them. Again, reduced our interest burden by $26 million in the last 6 months. So from a capital structure perspective, this firm is in great shape.

That being said, as historically we did in the Knight transaction, and we announced when we bought ITG, that we thought they were $125 million of capital synergies. We've already paid back $75 million from the ITG transaction. You can look at our balance sheet, which we put out today, there was a significant amount of cash on the balance sheet. At the end of the year, a good chunk of that is excess. And as we continue to combine broker-dealers, from a regulatory perspective, both here and abroad, we will free up that cash and pay back term debt. I'm not a guy that likes to have lot of debt against the company, but given our performance and given the friendliness, if you will, of fixed income market, I feel very, very confident about our capital structure.

Alex, I don't know if you want to add anything?

That's pretty much it.

And your next question comes from Alex Kramm with UBS.

Just wanted to ask the January, February first quarter question a little bit different. Can you maybe just talk about how the mix may have changed a little bit? Or if it's basically consistent with the fourth quarter? And I'm asking, for example, because energy volumes have been really rock-solid in the first quarter so far. And I know that's historically been an area where you've made a lot of money. So just curious if you can give us a little bit more color on maybe some of the other businesses? And how they're trending?

Yes. This is -- I guess the problem with giving January numbers because we were doing a financing. I give a little bit, you guys always want more. Right, Alex?

Always.

Look. I mean -- The mix of -- yes. Exactly. Exactly. And I appreciate. You got a job to do. I get it. I get it. Look, I mean, our market making business was up substantially from the fourth quarter, not surprisingly. And a lot of that is still driven by U.S. equities, because that's a large portion of the marketplace. You can see what the 605 volumes are. It's no surprise. It will be no surprise to you that the performance in that segment of our business continues to proceed. I think, I'll highlight again our European equities business, post-MiFID II, it was really kind of kick in the teeth, having dark pools and broker crossing networks effectively being outlawed by MiFID II. And so we see -- we continue to see growth and an uptick there.

On the Execution Services side, I commented before that a lot of that is volume driven, right? And Europe really had a down year last year in terms of volumes that really impacted, particularly the historical ITG business, which was very dependent on European volumes, particularly in our Alert product in Europe. And so you've seen a bit of resurgence there as European volumes, again, kicked back to more than 30 billion notional turnover per day. So -- and as well, Asia Alert has experienced an uptick as well.

So I think it's really all of those things. Again, the quarter is less than halfway done, so I don't really want to comment more on it. I just wanted to give you guys a sense because we had disclosed January as part of our refinancing efforts that we are seeing a resurgence of opportunity set across the market.

And I think, look, at some point, we're going to soon, as I've mentioned, we're going to be putting out monthly revenue capture -- an index, if you will, that is bespoke to Virtu to give you guys a little more insight into the business. Alex is working on that. And once we get our 10-K filed, we'll sit down with you guys and kind of take you through that. So we give a little more clarity into how we're performing month-to-month, and you can see the capture ratios. Then you can ask me all kinds of great questions going forward.

All right. Fair enough. And then I guess secondly, to stay consistent with always wanting more. You have that impressive ETF slide, obviously, in your deck, but the one thing that's missing is any sort of revenue indication. So I assumed it's pretty small still, but maybe you can just tell us how much roughly this business is contributing today to the overall business? And then maybe more importantly, like, how do you view the total addressable market there, maybe in terms of revenues? And how you really think you're going to be gaining share? Is it just to being better than others in terms of technology? Is it being aggressive on price? So a little bit more color would be helpful.

Yes. Yes, sure. I mean, look, in fairness, when you have a company that's got more than $1 billion in net revenues, things are going to look small in comparison. I'm very proud of the business. It is a single-digit percentage of what we do, right? So it's an 8-figure business, and it grew 40% last year. It was an 8-figure business the year before, right? So it's not an insignificant business in this grand scheme of things, it's Virtu's style and that it's not overstaffed and it's scaled and use of technology and good risk management and all those kind of things. And I'm a big believer in the gross -- the growth -- excuse me, of passive products around the world, and we've been a valued partner, frankly, with ever -- of every ETF issuer there is out there.

And so the addressable market is large. You're very familiar with it. There is a number of competitors out there. And if you look at the total addressable market of being -- Andrew is telling me somewhere in the neighborhood of $25 billion to $30 billion globally -- trillion, excuse me. During the year, we -- around 10% of that pass through the Virtu pipes, either on a screen or through an RFQ system and whatnot. So it's really building up that capability. We've never been an RFQ or block style market maker at legacy Virtu. Knight never really did it in any meaningful way outside of the United States. And so we're very confident that we've built a product suite in the United States that's very successful. The revenue number I gave you is from before is 99% U.S.

And as we move that product to Europe and to Asia, in a Virtu style way, i.e., with just a handful of people, we think we can be competitive for 2 reasons. One, we have the lowest fixed cost plant out there; and two, thanks to our great friends at ITG in Europe and in Asia and here in the United States, we have an unbelievable distribution network. We have very, very talented ITG, former ITG employees in the U.S., Asia and in Europe, in particular, that have real subject matter expertise in the ETP market and have real distribution.

Our friends at ITG were, as I like to refer to them, is sort of like a human RFQ machine before Virtu got involved with them. They had a significant ETF business, I give them all the credit in the world, without a principal trading capability. So marrying Virtu's principal trading capability, with the trusted distribution capabilities and network that the talented people had at ITG, and I've neglected to include Canada as well, it would be, in Canada, where there's a significant ETF market, and ITG previously had been a bit of a market maker up in Canada, that's a recipe for success.

So combining the technology and risk management of Virtu, with the acumen around actually how to trade blocks and respond to RFQs that Knight brought and marry that with the distribution of ITG, I think that's a game-winning formula.

And your next question comes from Kaimon Chung with Evercore.

So I appreciate your comments on the performance of Global FICC. Maybe I'm just looking to get a little more color, just what drove the softness there? Particularly maybe provide any color on the progress with the cross-sell opportunities with MarketAxess, such as like your eNAV product? And I know you touched upon your ETF offering.

Yes, I'm sorry, the first part of the question was about Global FICC and the performance in the fourth quarter. Is that what you're asking me?

Yes. And then just -- maybe just an updated progress of the cross-sell opportunities there with your MarketAxess partnership.

Sure, sure. Got it. Yes, so look, I mean, the fourth quarter was disappointing in terms of the performance of Global FICC. However, if you look at the indices, right? Particularly around volatility, it was -- the opportunity set was very muted, to put it, mildly.

I mean, the -- I think this is -- someone told me this is the lowest volatility that one has ever seen in the FX market in something like 20 years in the fourth quarter. So we're not alone in that paradox of trying to squeeze -- juice out of a lemon that, unfortunately, was not a very robust lemon in the fourth quarter. So I think that's a little bit the marketplace. Look -- But again, I come back to, hey, we're a scaled, very efficient market maker. So our FX business, although it struggled, it's got a dozen people in it globally. So it was still, if you will, a very large contributor to the bottom line here.

In terms of new products and the eNAV product, in particular, the sales effort there has been nothing short of terrific. Our friends at MarketAxess are very enthusiastic about it. I think it's a unique product because, frankly, from what I'm told, no one else really has something that is as real-time and robust. And so the MarketAxess Virtu partnership is working out to be everything I thought it was going to be and then some.

And then just maybe shifting gears. I just wanted to get your thoughts on things like fractional shares and direct indexing? And how you foresee that impacting business longer term?

Yes, good question. So look, I mean, all of these things are intended to drive more participation into the capital markets, right? And we encourage those things as long as they're done in a thoughtful, transparent way, where investors know what they're getting themselves into. So fractional shares is, obviously, a symptom of a marketplace where you have companies that are not doing stock splits, right? And people find it challenging to come up with a couple of thousand dollars to buy Amazon, that type of thing. So that's, obviously, a good incentive, from our perspective, right? Because it's driving new participants into a marketplace where, hopefully, they will get experience and then become more significant participants in a marketplace. Those are all good things more perspective. So we work very, very closely with our retail partners to ensure that they have a product that they can offer to their end users, that is as transparent and efficient as possible so that these new participants can enter into the marketplace in a way that they feel good about.

So all of those initiatives are ultimately products that we work with our retail partners to help fashion, and ultimately, we think are beneficial for our business.

Your next question comes from Alex Blostein with Goldman Sachs.

This is Sheriq filling in for Alex. Can you talk about the M&A opportunities that you're seeing? And where -- what you've been focused? Is it more on the market making side? Or is it on the agency side?

Yes. So obviously, we're a public company. This is an FD compliant forum, so there are no plans or nothing pending right now. I think, look, what I've said in prior calls is I'm very comfortable where the firm is right now. We have a large suite of products. On the institutional side, we cover everything from pre-trade to post-trade and everything in between, other than exchange. And we own a piece of an exchange, as you guys know.

On the market making side, we're global and multi-asset class, and we firmly believe we can get into every other asset class we want to be in, in an organic fashion. We're doing that in fixed income. We're doing it in options.

If there is an opportunity to accelerate that growth by doing something that is strategic and accretive, right, to my shareholders, I'll always look at it. So not surprisingly, because we have a currency and we have a track record of execution, and Mr. Rosenthal has joined us for -- this is one of his purposes and mandates here. We've been inundated with opportunities, and we will continue to be inundated with opportunities because the world is getting a lot more efficient. And as I was asked in a prior question, there are firms that will -- are struggling and will continue to struggle.

Again, we're not going to do anything that we don't feel really good about that is not keenly additive and strategic to what we're trying to do. And if not, either immediately or very imminently accretive to our shareholders. We don't need to do anything, right? So we're going to be an opportunistic purchaser. I'm a big believer in doing that because I think we can create a lot of value for our shareholders. But ultimately, that's the beginning, middle and end of every discussion. How does this benefit Virtu? How is it going to make us a better firm? Does it provide us an opportunity set we, otherwise, wouldn't have available to us? And from a financial perspective, is it accretive to our results? And we have the capacity to do this. We have a currency, and we've got borrowing capacity to do this, and that's the important mandate for our firm.

And your last question comes from Chris Allen with Compass Point.

I wanted to drill into a little bit those share gains, in the 605. I was wondering if you were doing anything differently to gain incremental share? Or competitors were pulling back? And whether you think that was due to the market environment or something specifically from a competitive perspective?

Yes, it's a good question. I mean, it's always hard, Chris, to say, again, is it wheat or chaff, right? Is it the fact that we've gotten better, right? And so we can sustain a more acute price improvement schedule, i.e., we're collapsing the bid offer more? Or is it a competitor, frankly, just has had enough because they're losing money in providing this price improvement?

I think it's probably both. I want to repeat again for the umpteenth time. This is a very competitive, very difficult business to be in. If you're not scaled, if you don't have the benefit of 20 years of Knight Capital, and if you don't have a low latency, very adroit technology platform, you can't be in this business. We are providing real price improvement, right? Better than the national best bid or best offer to like 99%-ish or so of the orders that we -- that come to Virtu. And then I'll have the final numbers, but we provided somewhere in the ZIP code of $350 million or more of price improvement in 2019. In 2018, that was $433 million.

So anybody that thinks that these orders come in, and we just kind of clip $0.01 on them, is spending way too much time on Twitter, right? This is a very, very difficult business to be in. And so yes, competitors ebb and flow. But ultimately, because we're a scaled firm, that's multi-asset class that can internalize a lot of this and have great people and great models and now great financial technology, we think that ultimately scale begets scale. And we're going to continue to be a winner in this space.

And just one quick follow-up. I was wondering if there's any kind of market anomalies that you guys have been benefiting from recently? I'm thinking specifically about Tesla, which you mentioned earlier. I know you guys are set up to take advantage of these anomalies. I was wondering, again getting back to the question of sustainability moving forward?

No. I mean, I wouldn't call Tesla a market. I mean, it trades the way it trades, right? I don't comment on individual stocks. And I have no, frankly, clue, why it trades the way it does. I'm a micro market structure person. I think people overstate, "Oh, my god, that's great because Tesla's trading." When it has really sharp moves like that. It's not the easiest thing in the world for a market maker to handle, right? I mean, again, we don't have a magic elixir around predicting the direction of markets. It's a very, very challenging thing to do. So there are plenty of times where we might have a portfolio that's long something and the stock moves the other way, and we lose a whole bunch of money, right?

So it's not like a single instrument ends up being a significant part of what we do, it's really the full compendium of all those instruments. The reason I mentioned Tesla is because it did drive a significant amount of volume. That's really the key. This firm is really about spread capture, right? And about volume and then volatility.

So when there's more volume -- when I look on the screen, and we print a $7.4 billion share day or an $8 billion a day, and Europe is doing 32 billion, God forbid, 38 billion notional, maybe it will hit 40 billion again, right? That's a good thing, ultimately, for the firm. And we've invested a lot of money, time and resource over the last 3 years to ensure that we continue to get better qualitatively. And then quantitatively, that we're there to capture this volatility and volume as it appears episodically around the globe.

There are no more questions at this time.

All right. I want to thank everybody for their participation. I would be remiss if I did not thank Andrew Smith, for his many dedicated years in Investor Relations. He's now been taken over by Deborah, who's now going to be providing that. But Andrew is still with the firm, still deals a lot of market structure and runs a lot of products for us. So thank you, Andrew, and I look forward to talking with you guys next quarter. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.