Virtu Financial (Virtu), a multi-asset high-frequency trading firm filed papers for an Initial Public Offering (IPO) to the state regulator, opening up the secret world of computer driven trading. Virtu, a profitable market maker on global financial instruments expects to list on NASDAQ.
Virtu Financial’s filing outlined the firm’s business, disclosing sensitive company data not seen before. The firm disclosed its earnings, revenue and expenditure. In addition, the firm reported its profitability, in the filings it states: “As a result of our real-time risk management strategy and technology, we had only one losing trading day during the period depicted, a total of 1,238 trading days.”
Virtu Financial, founded in 2008 by industry veteran Vincent Viola, the former chairman of the New York Mercantile Exchange, is regarded as a prominent player in the world of ultra-fast electronic trading. The firm trades in global markets in both OTC and exchange traded instruments. Virtu, a high-frequency trading firm, has been in the firing line like rival KCG for its computer driven trading strategies. KCG, the US market maker faced difficulties after the costly glitch in the summer of 2012.
Knight Capital’s merger with competitor Getco finalized when Getco offered to pay $3.75/share to Knight Capital’s shareholders, for a total value of $1.4 billion. Getco beat competitor Virtu financial whose bid was rejected by Knight Capital. The IPO is expected to raise $100 million.
The IPO filings submitted to the SEC had the company’s full results; “For the years ended December 31, 2013 and 2012, our total revenues were approximately $664.5 million and $615.6 million, respectively, our net income was approximately $182.2 million and $87.6 million, respectively.”
The Virtu IPO comes as a shining star in a period of difficulty for the FX marketplace, the fixing issues coupled with FX probes has dented the credibility of FX trading. The IPO signals the direction the market is taking with emphasis on reducing risk, Virtu’s secret trading business will adopt industry standard rulings in relation to transparency. OTC markets have been in the firing line since the infamous G20 meeting which found the product as a key culprit behind the 2008 global recession. Rushi Parikh, a London-based dealer commented: “The news of banks suspending traders doesn’t do any favours to the sector.”
High-frequency trading has also been in the firing line with market participants and politicians labelling the trading approach as detrimental to the market, however academic research carried out in the UK and studies undertaken by regulators in Australia have shown that HFT can add value to the market by creating liquidity. Practitioners have looked at the weaknesses and measures such as circuit breakers which can potentially prevent major disruptions. Jake Loveless, CEO of Lucera, commented about the current state of affairs to Forex Magnates: “Vincent and the entire team at Virtu are known in the industry for providing high quality, transparent pricing for multiple assets. Bringing additional transparency to the HFT space will only help everyone, and bring to light the business of a modern electronic market marker.”
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HFT firms operate under strict confidentiality protocols and have a tendency to limit the amount of information they share with financial services’ participants. In the filing Virtu details the way it operates in the market, the document reads: “We refer to our market-making activities as being “market neutral,” which means that we are not dependent on the direction of a particular market and do not speculate. Our strategies are also designed to lock in returns through precise and nearly instantaneous hedging, as we seek to eliminate the price risk in any positions held.”
Virtu’s explanation is a positive for the high frequency trading environment, it removes misconceptions that were highlighted during the flash crash and Knight capital’s $440 million glitch. The market has welcomed Virtu’s IPO as it reinforces the role of fair, clear and transparent practises. James Sinclair, CEO of MarketFactory opines: “A US public listing of Virtu, with all the rigorous disclosures that go along with it, will support what we all want – an orderly market that is so, and seen to be so.”
The firm describes its revenue generation technique, primarily volume driven, the firm adds: “Our revenue generation is driven primarily by transaction volume across a broad range of securities, asset classes and geographies. We avoid the risk of long or short positions in favor of earning small bid/ask spreads on large trading volumes across thousands of securities and other financial instruments. In order to minimize the likelihood of unintended activities by our market-making strategies, if our risk management system detects a trading strategy generating revenues outside of our preset limits, it will freeze, or “lock down,” that strategy and alert risk management personnel and management.”
Virtu Financial plays a key role in market-making activities in global markets, it covers 210 exchanges and markets in 30 countries. Twenty percent of the firm’s trading revenues derive from FX trading, in the filing the firm states that it deals with a number of high-end institutions, including: CME, ICE, Currenex, EBS, HotSpot, Reuters, FXall and LMAX.
Ongoing investigations in the way professionals in the industry have conducted themselves is a net positive for the industry as regulators are assessing the shortfalls in the market. Regulations in the US have favored firms such as Virtu. Under the Dodd-Frank legislation, the Volcker Rule is applied to banks whereby proprietary trading is restricted.
On the other hand, Simon Wilson-Taylor, CEO and President of Molten Markets, disagrees with the concerns raised about transparency in the FX markets, he states in a comment to Forex Magnates: “I actually dispute the notion that the FX markets have not been transparent. Provided that you have access to a wide variety of liquidity sources the FX market has always been transparent, and more liquid than any other market.
However, the FX market is always evolving, now with a significant shift towards continuous electronic trading steadily replacing a more voice and capital-based risk-transfer model. This evolution is fueled by, and benefits, a major non-bank liquidity provider like Virtu who have done an exceptional job of navigating the difficult waters of competing with and yet complementing the traditional FX banking sector.”