One month ago, when looking at Virtu's S-1 just before the HFT company went public, we broke down the company's revenues and found something fascinating. This is what we said [7]:
Which asset class was responsible for Virtu's trading perfection for yet another year. 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?
The answer, by a wide margin, was FX or as Virtu defines it "Global Currencies."
The punchline: "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!"
Today, Virtu released its first public financials since going public, and our speculation has been proven correct: FX is now the largest revenue generator for VIRT, amounting to 28.4% of revenues in the quarter ended March 31, at $42.2 million, well above the $29.1 million generated from trading America Equities and the $34.7 million from global commodities.
In fact, as the chart below shows, on an LTM basis, FX is now not only the biggest revenue item for the world's dominant HFT firm at $131.1 million, but is also the fastest growing source of profit, rising 103% on a year over year basis!
[8]
Some more details as broken down by Bloomberg [9]: "Virtu’s chief executive officer, Douglas Cifu, highlighted a “particularly strong performance in global commodities and global currencies” in Wednesday’s statement. Virtu’s average daily net trading income rose 40 percent to $2.4 million in the three-month period. Total trading profit in the quarter climbed 40 percent to $148 million."
And as we predicted in 2012 [10], it is all about FX:
The $5.3-trillion-a-day foreign-exchange market is becoming an increasingly important arena for the HFT firm. Earnings from currencies surged 66 percent between 2011 and 2013, while profit from equities grew just 6.4 percent, the company said in a filing in March last year.
To explain this dramatic shift we once again go back to a month ago when we wrote the following [7]:
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.
Good luck indeed, because while mere mortals lose money on every HFT-induced, momentum ignited stop hunt, for HFTs this is nothing but pure trading perfection as Virtu's result continues to demonstrate: over 6 years now with just one trading day loss. And all of it "perfectly legal."
Oh, and when the USD flash crashes again, expect some trader in Thailand operating out of his parents' basement to once again be scapegoated for disrupting yet another market that now has zero liquidity thanks to HFTs.
