Volatility and volume drive market makers profits, which are being aggressively returned to shareholders

One of only two listed market makers in the world, Virtu Financial is the only listed liquidity provider in the United States – and they account for a whopping 9% of US stock trading.

They operate in the murky world of dark pools, where wide spreads and increased volatility are the conditions in which they thrive. As a facilitator of trades through the New York Stock Exchange (NYSE), Nasdaq and Chicago Board Options Exchange (CBOE), Virtu takes orders from brokers who receive them from traders, and attempt to fill the order at a better price than what is available in the bid/offer spread through an order they might have from another broker – and clip some of the difference.

The activity in US stock trading that occurs in this ‘off-exchange’ manner has been growing for many years, and has experienced a surge in the last few years that has furthered fueled the values of firms like Virtu and Citadel. Off-exchange trading accounted for 36.8% of total volumes between 2018-19, a figure that grew to 44.5% in the first half of 2021.

Andrew stated that “What these guys benefit from are two things. First of all, a large bid/offer spread, that tends to be brought about by higher volatility, and secondly – volume.” This is especially true when the market is running hot.

Andrew explained that “They make enormous returns on invested capital (ROIC) when times are good”, which was particularly evident during the end of 2020 and start of 2021 – where ROIC cracked over 40%.

To grasp just how much money this can mean for Virtu, a crucial metric to gauge is their adjusted net trading income (ANTI). Since they got to their current structure, this figure has averaged around US$6 million per day. However, in the last week of March 2020, when the covid flash crash had bottomed out and markets were surging – their daily ANTI spiked to more than US$33 million. When retail investors were flooding into the market, including pumping meme stocks like GameStop – Virtu was raking in almost US$12 million of ANTI a day.

On top of yielding around a 5.6% dividend, the company has been aggressively buying back stock for the past few years – totalling almost 15% of their total shares on issue since the end of 2020.

There’s 163 million shares on issue, with around 94 million that are publicly traded. The business was founded by billionaire American businessman Vincent Viola, who remains their major shareholder. While Virtu is currently earning around a third of what it was at its peak, and SEC investigations into the operations of market makers will likely result in reforms that will weigh on earnings going forward – Andrew believes there will be no armageddon scenario for the company and their strict capital management will see them through to a better market and ultimately stronger earnings.

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Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position. Any advice contained within this presentation is general advice and does not consider your personal circumstances, you should consider whether it is appropriate for you. 

The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.

Past performance is not a reliable indicator of future performance.