The onset of MiFID II played a crucial role in Virtu Financial’s $1.4 billion bid for KCG and its European expansion ambitions, according to CEO Doug Cifu.

Speaking on Virtu’s first quarter earnings call, Cifu explained MiFID II and unbundling requirements provided an opportunity to expand in Europe with the acquisition of KCG, which operates an established European market making franchise.

“Europe is one of the key motivators for us wanting to get into the agency execution business and it was obviously our experiences with order routing for our own selves and how that value proposition really translated to the agency business,” Cifu said.

“With the advent of MiFID II and unbundling, it just seems like the time is really right for a superior execution-only agency offering really to be well accepted by the buy side.”

Last year, it was reported that Virtu began talks with German asset manager Union Investment in which it would execute Union’s trades on an agency basis in Europe.

With the KCG acquisition, Virtu could accelerate these talks and even approach more European buy-side firms.

In February, Virtu said it had European buy-side firms lining up for its market making and technology services ahead of MiFID II.

“The European approach of requiring unbundling of agency services as mandated by MiFID II will only make our non-conflicted routing capabilities more attractive to the buy-side,” Cifu said at the time.

The takeover of KCG will also give Virtu an established business for European exchange traded funds (ETFs), in which KCG is a leading market maker for.

Virtu sealed the $1.4 billion takeover deal with KCG earlier this week after entering into a definitive agreement.

The deal will see Virtu extend its operating model to KCG’s wholesale market making businesses and expand the distribution of its technology and execution services to KCG’s institutional client base.

Virtu said it expects to migrate trading of the combined company onto a single technology, risk management and analytics platform.

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Virtu Financial is to acquire KCG after entering into a definitive agreement in a deal estimated to be worth $1.4 billion or $20.00 per KCG share.

KCG said it had reached the decision following a thorough evaluation and the board of directors concluded the proposal provides compelling value for its stockholders.

“The combination of Virtu and KCG will create a true industry leader with greater diversification and scale,” KCG stated this afternoon. 

The deal will see Virtu extend its operating model to KCG’s wholesale market making businesses and expand the distribution of its technology and execution services to KCG’s institutional client base.

Virtu said it expects to migrate trading of the combined company onto a single technology, risk management and analytics platform.

Doug Cifu, CEO at Virtu, explained KCG “fits perfectly” with Virtu’s strategic priorities to apply market making and technological expertise to its clients.

The combined entity will “expand Virtu’s growing agency execution business by offering clients a combination of Virtu and KCG’s superior algorithms and proprietary analytical tools,” he added.

Virtu said it will fund the takeover with gross borrowings of $1.65 billion and the sale of $750 million of common stock.

Announced in March this year, the deal could create one of the largest global high-frequency trading firms.

Both firms have seen revenues drop across trading and market making business units due to low volatility and decreased trading volumes.

In November, after Virtu announced a 25% reduction in its net trading income, Cifu said: “opportunities for most market participants and for market makers were limited by the depressed global volumes and realised volatility.”

Similarly, KCG’s market making business outside of US equities has struggled over the last year. Speaking on its quarterly earnings call Daniel Coleman, CEO at KCG, explained the non-US equities market making is a “concern and focus for the management team.”

The deal could create a global powerhouse for market making and high frequency trading. Both operate in the same markets, although use slightly different methods.

Following the close of the transaction, Cifu will remain CEO of the combined company and Joseph Molluso, Virtu's chief financial officer will remain CFO of the combined company. 

Former CEO at Nasdaq, Robert Greifeld will also join the board of directors at Virtu immediately after the deal has closed. 

Virtu concluded the merger is expected to close in the third quarter this year and is subject to regulatory approval.

KCG has cancelled its earning’s call due to be held today.

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Virtu Financial has made an unsolicited offer to buy its rival, KCG Holdings, in a deal that could create one of the largest global high-frequency trading firms.

KCG confirmed receipt of the offer to purchase all outstanding shares for KCG’s common stock for $18.50-$20.00 per share, which would amount to around $1.3 billion.

Both firms have seen revenues drop across trading and market making business units due to low volatility and decreased trading volumes.

In November, after Virtu announced a 25% reduction in its net trading income, CEO, Doug Cifu said: “opportunities for most market participants and for market makers were limited by the depressed global volumes and realised volatility.”

Similarly, KCG’s market making business outside of US equities has struggled over the last year. Speaking on its quarterly earnings call Daniel Coleman, CEO at KCG, explained the non-US equities market making is a “concern and focus for the management team.”

The deal between Virtu and KCG could create a global powerhouse for market making and high-frequency trading. Both operate in the same markets, although use slightly different methods.

Speaking to The TRADE in September last year, Cifu explained the firm faced difficulties when trying to expand into derivatives swaps market making.

“We’ve made some progress, but it’s going slower than expected.

“If you had asked me three years ago what a swaps execution facility (SEF) would look like now and how many would be successful, I would have said there would be more electronic trading, liquidity and swaps executed on SEFs – but that hasn’t happened,” he said.

KCG said its board of directors is reviewing the offer with its financial and legal advisors.

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Virtu Financial has predicted a return to normalised volumes and volatility globally due to Donald Trump’s leadership in the US.

Doug Cifu, chief executive officer at Virtu, stated: “We believe with the new pro-growth and pro-business environment in Washington that the stage is set for return to a more normalised volume and volatility environment globally.”

Virtu Financial reported a 12% decrease in total revenues in 2016 compared to 2015, with fourth quarter revenues dipping 4% compared to the quarter prior.

Full-year net trading income plummeted 17% in 2016 compared to 2015 and fourth quarter net trading income fell 7% compared to the third quarter in 2016.

Cifu described the fourth quarter as “the tale of two very different quarters”, with muted volumes and volatility caused by the US Presidential election.

He added the fourth quarter began similarly to the third, although Virtu benefited from more favourable market conditions that were sustained throughout November and December.

Speaking to The TRADE in September last year, Cifu said Virtu “isn’t in the business of predicting or being notional” when asked about the UK’s decision to leave the European Union.

“We prepared for Brexit months in advance, in case something unexpected happened. I’m proud of how we reacted that day and how resilient the markets were,” he added.

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Virtu Financial has called on the Securities and Exchange Commission (SEC) in the US to ‘study and contemplate’ the operational risk factors associated with exchange-traded funds (ETFs).

The electronic market-maker described ETFs as “an area that deserves a closer look” in a comment letter posted to the SEC earlier this week.

Virtu said it has to make a two-sided market in the ETFs right until the close, while buying and selling other securities, but it “cannot control the number executions as [it] goes into the close, nor anticipate [its] 4pm positions ahead of time with a great degree of accuracy.”

“The accompanying uncertainty is further compounded if we are unable to submit create and redeem orders as close to the market-close as possible,” Virtu added.

The letter also highlighted the slow electronification of the ETF market as another concern, especially when viewed in the context of its rapid growth.

Virtu explained transaction processing infrastructure for creation and redemption processes is not straight through and susceptible to human error.

“It is our view that a robust and automated FIX-protocol based interface to enter, modify or cancel orders for creation or redemption up until the stipulated cut-off will minimise the chance of human error,” it suggested.

In September this year, The TRADE caught up with Virtu Financial’s chief executive officer, Doug Cifu, to discuss the firm’s often misunderstood business model and the SEC’s push for transparency in the treasuries market.

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Market maker Virtu Financial reported its net trading income in the third quarter this year dropped almost 25% to $157 million, amid a depression in market volatility over the last three months.

Overall revenues at Virtu Financial plummeted 24% in the third quarter this year to $165 million, compared to $216 million in 2015. Although, Virtu explained the third quarter results in 2015 included the stock market turmoil of 24 August, so comparing the third quarter this year to last year was a difficult task. 

Chief executive officer at Virtu, Doug Cifu, said on the firm’s earnings call that “opportunities for most market participants and for market makers were limited by the depressed global volumes and realised volatility in the third quarter.”

Cifu added that the decline in Virtu’s trading business was in-line with the broader market.

An analyst asked how the company had remained profitable in its market marking business when some competitors had made losses, to which Cifu replied it was down to Virtu’s business model.

“We’re a passive market maker, we don't do statistical arbitrage and we don't hedge with some other basket of instruments,” he said.

In August this year, JP Morgan announced it had entered into a three-year deal with Virtu Financial, to employ its proprietary trading and order routing technology to trade US government bonds.

Since the announcement of the deal, Cifu said Virtu has received inbound calls from large sell-side institutions.

“It raised a lot of eyebrows… so we've had a number of inbound calls from not surprisingly large sell-side institutions that want to understand what it's all about and there is a little bit of - if it's good for those guys, why wouldn't it be good for us as well,” he explained.

In September this year, The TRADE spoke with Cifu about the JP Morgan deal and Virtu Financial’s often misunderstood business model.

Read the full interview here. 

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In August this year, JP Morgan announced it had entered into a three-year deal with Virtu Financial, to employ its proprietary trading and order routing technology to trade US government bonds.

Virtu’s chief executive, Doug Cifu, described the collaboration of trading and technology with JP Morgan at the time, as a “natural progression”, adding that the US bank has been a “key partner since our founding.”

The Trade spoke with Cifu about its often misunderstood business model, its move into the derivatives swaps market, and European regulation.

Hayley McDowell: How is Virtu Financial changing the game in trading technology?  

Doug Cifu: There’s a big misconception about high frequency trading (HFT) and Virtu Financial. We’re an electronic market-making firm that makes money because we are very good at understanding market structure, with very robust and scalable technology and good risk systems.

Following the announcement of the transaction with JP Morgan, large institutions look at what we are doing and see how we can enable them to access the market effectively with good smart order routers (SOR). They understand we specialise in accessing the market, and ask how can we work with them in some way, which makes sense for us.

Even before the deal with JP Morgan, large institutions approached us knowing the world has changed and they have to be more efficient. Other institutions have approached us enquiring along the lines of what we are doing with JP Morgan.

Providing our technology effectively in the equity market by becoming an agency broker and routing orders for large buy-side institutions is symptomatic of large financial institutions working with a firm like Virtu – which is very much a financial technology company – that understands markets very well.

T. Rowe Price was very critical of HFTs around the time of Michael Lewis’ ‘Flash Boys’ and we reached out to institutions and regulators to show them our tools and explain how we access the market.

We were completely transparent with firms and regulators from Europe, Japan and all over the world. Afterwards, many understood we are a unique, agile technology company rather than just a market-maker.

It’s a part of how Virtu is evolving and is indicative of how large institutions recognise they must adapt around technology and work with firms like us to achieve that.

HM: Virtu has been very open with its push into the derivatives swaps market. Has there been any progress with this?

DC: We’ve made some progress, but it’s going slower than expected.

If you had asked me three years ago what a swaps execution facility (SEF) would look like now and how many would be successful, I would have said there would be more electronic trading, liquidity and swaps executed on SEFs – but that hasn’t happened.

So, until big buy-side institutions start trading more electronically, as they have done in equities and the currency markets, that market place isn’t going to work for us. There wasn’t a regulatory barrier for us, but more operational.

HM: Recently, Virtu supported the Securities and Exchange Commission’s (SEC) push for transparency in the US treasuries market – do you think more could be done to improve this?

DC: Treasuries are a major asset class, so to us, why wouldn’t you have real-time reporting or use the TRACE system already in place? I have heard that some think it could put people off trading large sizes, which frankly is rubbish.

Virtu believes that where there is transparency and a fair market, people can compete. It is not a coincidence that JP Morgan is transacting in the dealer-to-dealer market in US treasuries – the market has become very efficient.

As it has become more efficient, the US treasuries market has become more competitive so there’s no real reason to not have real-time reporting requirements.

It wasn’t just Virtu who highlighted this, but other non-bank liquidity providers like KCG and Citadel.

We think the same thing – we want competition and to create a level playing field like the equities market, where everyone has access to the same prices at the same time.

HM: What are your thoughts on European regulation like MiFID II?

DC: MiFID II has some pros and cons – but the good news for Virtu is that we are strong believers in being regulated and registered.

We went to the Central Bank of Ireland in 2010 and said, “we are here, and want to be regulated by you.” They sort of scratched their heads and said, “what do you guys do again?”

We report to regulators and have done for a very long time, and this allows us to passport into other jurisdictions. Some of the MiFID II rules – like dark pools – I really do understand but it won’t really affect Virtu.

Although it will encourage more ETF trading and electronic trading, which is good news for us, and the marketplace. There will be more price discovery and centralised order books with ETFs, ultimately making the market more efficient.

Overall, I’m supportive but there are some things around the edges that I would probably change.

HM: What were your thoughts on Brexit?

DC: Virtu isn’t in the business of predicting or being notional, so we prepared for Brexit months in advance, in case something unexpected happened.

I’m proud of how we reacted that day and how resilient the markets were.

Compared to 24 August - when the US equities market almost fell apart and we saw a flash crash –we were well prepared and traded an awful lot on the day of the Brexit announcement.

We managed a tonne of risk that day, and we did so flawlessly. 

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