A year ago, when Virtu shelved its plans to go public, everyone knew it was only a matter of time. Sure enough, nobody can contain an machine that has Virtu's trading record, which as a reminder, is now one trading loss day in 6 years of trading, or as Virtu said "The overall breadth and diversity of our market making activities, together with our real-time risk management strategy and technology, have enabled us to have only one overall losing trading day during the period depicted, a total of 1,485 trading days." [14]
[14]
It wasn't just Virtu's trading perfection, it was the fact that in a time of collapsing trading revenues for everyone else, Virtu had managed to once again grow its own order frontrunning top-line. As we reported back in February, "not only did Virtu not have a trading day loss in all of 2014, but on its "worst" trading day, the firm made "only" $800,000 to $1,000,000, the highest "worst" bucket in its history, suggesting that even as trading volumes continue to collapse, Virtu gets more and more aggressive with its "strategies", something that can be seen on the chart below showing the increasing preponderance of higher profitable trading days in 2014 vs 2013."
[15]
And, sure enough, earlier today, Virtu's second attempt to go public hit the tape. Here are the terms in the just re-filed S-1:
- VIRTU FINANCIAL SETS IPO TERMS AT 16.5M SHARES, $17-$19 A SHR
- VIRTU FINANCIAL PLANS TO LIST ON NASDAQ UNDER TICKER 'VIRT'
- VIRTU FINANCIAL PLANS TO RAISE UP TO $361.2M IN IPO
- VIRTU FINANCIAL WILL HAVE FOUR AUTHORIZED CLASSES OF COMMON STOCK
- VIRTU SAYS FOUNDER VIOLA, AFFILIATES TO CONTROL MORE THAN MAJORITY OF VOTING POWER OF STOCK
Perhaps the most amusing thing about the IPO is that a year after rooting for IEX and facilitating the publication of Michael Lewis' Flash Boys coupled with a coordinated campaign against HFT, the lead left underwriter on the Virtu IPO is none other than... Goldman Sachs.
[16]
But back to the IPO and the question on everyone's lips: which asset class was responsible for Virtu's trading perfection for yet another year, especially when considering that operating margins declined from 52% in 2013 to 49% in 2014 as a result of a surge in employee compensation costs, which jumped from $78.4 million in 2013 to $103 million on a 2014 pro forma basis. Perhaps the algos have unionized.
It wasn't stocks because adding across the firm's America, EMEA and APAX equity product lines, Virtu revenues actually declined, from $201 million in 2013 to $195 million in 2014.
It also wasn't commodities, where revenue dropped by almost $2 million in 2014 to $93.1 million.
So what was it?
For the answer we go back to a post we wrote in April 2014 "Presenting The Next Market Rigged By High Frequency Trading [17]" which incidentally merely validated what we wrote back in 2012 in "FX Trading Volume Plunges In Disgust Over HFT Dominance [18]."
And sure enough, as expected then, and as just confirmed, the one asset that is responsible for Virtu's trading dominance is no longer stocks, bonds, options or commodities. It is...
[19]
And in case it was not highlighted well enough, here it is again.
[20]
In fact, since the data is as of December 31, and extrapolating these growth rates, it is virtually assured that as of this moment, the primary source of revenue for Virtu is no longer equities but FX!
Why the pivot from stocks to foreign currencies? Simple: with retail now forever done with rigged, manipulated capital markets (at least they get a free drink losing money in a casino) and even banks scrambling to find any volume be it in flow or prop, there is just one remaining "whale" source of dumb money to be front run: central banks.
And as everyone knows, central banks trade mostly in the FX arena, or at least "legally" - when it comes to the NY Fed trading stocks it is still somewhat frowned upon which is why Citadel is tasked with the dirty work on behalf of the Liberty 33 trading desk.
So with Virtu, whose business model is geared to frontrunning whale orders in any market, irrelevant of their nature, now solely focused on clipping pennies ahead of central bank FX orders, it means that there is no longer any space for retail investors in yet one more market, where market wide stop hunts, squeezes and momentum ignition have become the norm, as the only "traders" left are a few central banks and every single algo that hasn't cannibalized itself yet.
So for those who still hope to make money in a market dominated by central banks with unlimited balance sheets, and HFTs whose job is to destabilize the market, good luck.
