REUTERS/Brendan McDermid
A Specialist trader for Virtu Financial works at a booth on the floor of the New York Stock Exchange April 16, 2015.
- Virtu Financial, which completed its acquisition of KCG Holdings in July, announced its first joint results Tuesday and the stock popped as much as 18%.
- During an earnings call, Virtu CEO Doug Cifu said the firm brought its headcount down from a combined 1,250 between the two firms to 648. He also suggested that KCG had been poorly run.
- Cifu said the merger is going better than expected.
The writing was on the wall from the beginning.
When Virtu Financial - which had grown to become one of the largest high-speed trading firms in less than a decade - acquired rival KCG in July, there was an understanding that costs and staff were going to be cut fast. Virtu had spent $1.4 billion on its purchase and was already known for a lean business model. Virtu had just 150 staff, compared with 1,100 at KCG. That's to say nothing of KCG's old-fashioned flash with cash reputation.
So there were some easy targets for Virtu chief executive Doug Cifu. Still, the speed and success of Virtu's integration of KCG caught Wall Street off guard this week. After the company reported results for the first time since the purchase closed, the stock soared more than 18%.
The firm posted a net loss of $40 million, due to costs associated with the deal, with revenues of $271.3 million (up 64.6% year-on-year) offset by operating expenses of $317.8 million. But the firm guided to fourth quarter operating expenses of $152 million, with full year 2018 guidance at $503 million. The firm also said it generated $3.1 million in adjusted net trading income per day for August, September and October, and that that figure could grow to as much as $3.6 million per day in time.
And in an earnings call to discuss the results, Cifu said KCG's technology was a mess, it lacked discipline around capital allocation, had multiple unprofitable units, and missed opportunities to expand in areas of strength.
"Harmonize the strengths of both legacy firms"
The ultimate vision of the acquisition, to "harmonize the strengths of both legacy firms," has not changed since the deal closed in July, Cifu said. The backdrop looks the same as well. High-frequency traders continue to struggle amid an environment of low volatility in which the big price swings that traders profit from are harder to come by.
Cifu, however, says the newly combined company is even more optimistic about the merger than it was when the deal was first announced in April.
Since the deal closed, Virtu has done the following:
- Cut staff: Virtu had cut staff almost in half from 1250 total employees (1,100 from KCG and 150 from Virtu) to just 648.
- Sold assets: Virtu has sold off KCG's $400 million bond business to ICE, the owner of the New York Stock Exchange, with the proceeds being used to pay down debt.
- Integrated tech: "We are moving to a single pan-asset, class, and geography integrated technology platform," Cifu said. "From an operational and trading perspective, the legacy Getco and Knight systems were essentially unaware of each other." KCG was formed when two trading firms, Knight and Getco, merged in 2013. According to Cifu the merger translated into redundancies four years later.
- Made changes in Europe: The company has also begun shutting down Neonet, a European business KCG acquired in 2015. KCG's European trading operations lost $2.5 million per month in 2016, according to Cifu.
- Made changes in Asia: "KCG's Singapore and Mumbai offices had 29 employees and generated little to no revenue," Cifu said, adding that Virtu had addressed this issue.
- Shut a unit: GQS, a quantitative proprietary trading unit at KCG that posted a loss in the first quarter and a small gain in the second, has been shut down.
- Taken KCG quant strategies global: "We knew this from due diligence that they candidly had not done a great job taking these quantitative strategies in equities and in futures and in other asset classes around the globe," Cifu said. Virtu rolled these out to Canada, and is now rolling out those strategies to 34 more countries.
- Capital is now deployed with more discipline. "There were just a number of instances around the firm [KCG] where capital was being deployed very, very inefficiently," Cifu said.
Cifu said he expects Virtu will achieve $262 million in gross synergies in 2018, adding that headcount reductions the firm has undertaken will have little impact on revenues.
"As we have previously noted many of the departed employees worked in redundant cost centers or offices that generated little to no revenue, or even lost money trading," Cifu said.
It's working on dozens of new projects
It's not just a question of cutting costs. Cifu also mentioned a "dozens" of new projects underway at the firm that have emerged from collaborations between Virtu and KCG. The company has "generated approximately $14 million of incremental annualized adjusted net-trading income from these growth initiatives alone," according to Cifu.
He added that "the size and scoop of these initiatives is many multiples of what has been achieved to date."
All this has been achieved in a period of historically low volatility, Cifu said, adding that he's "really excited about when - not if but when - volatility comes back." He said:
"When you have a firm that has its fixed cost base under control, and I think we put our money where our mouth is today, and you have a firm that can demonstrably generate net trading revenue in a muted
volatility environment, you have a great model. And the model is, in a famine, we can generate significant returns and then the model scales exceptionally well. That's always been the model of legacy Virtu, and it's the model of the combined firm going forward."