Virtu Financial, Inc. (VIRT) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Leandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Virtu Financial Conference Call announcing 2017 Third Quarter Results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Andrew Smith, Head of Investor Relations, you may begin your conference.

Thank you, Leandra. Good morning, everyone. As you know our third quarter results were released this morning and are available on our website. Today's call may include forward-looking statements, which represents Virtu's current belief regarding future events and are therefore subject to risks, assumptions and uncertainties, which maybe outside the Company's control, and our actual result and financial condition may differ materially from what is indicated in these forward-looking statements. It is important to note that any forward-looking statements made on this call are based on information presently available to the company and we do not undertake to update or revise any forward-looking statements as new information becomes available. We refer you to disclaimers in our press release and encourage you to review the description of risk factors contained in our 10-K and other filings with the Securities and Exchange Commission. In addition to GAAP results, we may refer to certain non-GAAP measures including adjusted net trading income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. You will find a reconciliation of these non-GAAP measures to GAAP terms included in the earnings materials with an explanation of how management uses these measures. When used on this call, adjusted net trading income refers to our trading income net of all interest and dividend income and expenses, and all brokerage and clearing expenses. This will be the first quarter where we report on the combined results for Virtu and KCG. Given that the acquisition closed on July 20, Virtu's third quarter GAAP results will incorporate KCG's results from July 20 until September 30. Speaking and answering your questions today are Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. I would now like to turn the call over to Doug.

Thank you, Andrew. Good morning everyone and thank you for joining us today. It's been a bit over three months since Virtu closed the acquisition of KCG and this morning we reported our first period with combined results, which includes KCG's results beginning July 20 through September 30. I'll spend the majority of my prepared remarks bringing you all up to speed on our integration efforts and our progress so far and then turn the call over to Joe Molluso to talk about our synergy and capital achievements to date. Despite the slow start for the quarter we've seen the powerful potential of the Virtu, KCG combination beginning to come into focus. I'll begin on Slide 3 of the earnings presentation. If we look at the first three whole months as combined firm, from August 1 through October 31, the trailing three months adjusted net trading income for the combined firm is $203.3 million. These results are even more perfect if we consider the context in which they had taken place. An environment of ultra-low insight and realized volatility in conjunction with the muted global trading volumes persisted during the quarter and we're only beginning to achieve trading efficiencies and harmonized the strength of both legacy firms. An approximately of $3.1 million of adjusted net trading income per day in this environment, coupled with our demonstrated ability to manage the expense and capital base, we're off to a great start in this game changing combination of these two firms. As a result of changes which we'll discuss in a moment, the net revenue picture of the combined firms has stabilized over the three months and that stability together with the amount of excess capital present at legacy KCG makes us confident that we will be capable of generating earnings and cash flow well in excess of what we need to meet our capital requirements and pay the existing $0.24 quarterly dividend for the foreseeable future. In addition, we remain excited about the numerous global growth initiatives for the combined firm, which we'll quantify and discuss today. Our results for Q3 are in the press release, and as you can see this quarter in particular was a bit messy given the stub period and the various purchase accounting adjustments required by GAAP. In light of that complexity, we're providing an extensive earnings presentation with supplemental disclosure to deliver enhanced clarity and transparency into how the operations of the combined company are shaping up. This includes, monthly adjusted net trading income results, to highlight how our combined operations have performed recently. I'll use the remainder of my time here to review the key strategic benefit we expect to see from the merger and then discuss our vision, progress to date and the next step for fully leveraging the strength of the combined firm. In short, we had even more conviction today than we did when we announced the merger on April 20, about our ability to deliver the following strategic benefits. First, leverage our existing scale and achieve greater cost efficiencies through our global presence in 36 countries. Second, improve KCG's wholesale market making in the US and in Europe, by integrating Virtu's extensive lucrative provisioning capabilities and skills, financial technology with the best in class KCG customer franchise's and the vast experiences as a quantitative firm. Third, grow distribution of combined firms' agency execution capabilities in the United States and Europe by delivering Virtu's transparent and efficient order routing capabilities to KCG's robust client franchise. The combination allows us to raise the profile and understanding the Virtu's order routing and trading capabilities particularly in a post mid for two [ph] environment where these skills are already being incorporated into our customer offering. hit the ground running I would provide an early progress report on the integration. As we said on our last call, we hit the ground running on day one with our detailed plan that we developed ahead of the deal closing. We believe that we are building the only true scaled global market making and institutional agency firm that combines deep customer relationships and the quantitative trading skills that have evolved over the last 20 years at KCG, with the world class technology and market structure expertise of legacy Virtu. Getting this integration right is our greatest opportunity to benefit our shareholders, customers and employees. Going forward, Virtu's leading proprietary trading technology will power our expanded product and service offering. Migrating all of our global trading on to Virtu's proven platform underpins and the scale and efficiency we expect to gain from the merger and/or our unique hallmark of Virtu. In addition to migrating our technology and trading efforts, since the deal closed in late July, we have restructured our business developments and sales operations to leverage our expanded products and geographic reach and consolidated offices in locations where there was overlap and our cross-training our expanded global customer-facing sales force to more efficiently reach customers and improve their experience. Response from our customer base has been universally positive as they appreciate the value that a more efficient and scale firm can add to the financial markets. We created the earnings presentation to provide an update on integration and guidance on the results we expect going forward. Let's turn to Slide 4 titled Integration Update. The takeaways here are as follows. First, the legacy KCG wholesale market making in Virtu market making businesses are extremely complementary and symbiotic and we remain excited about the numerous revenue growth opportunities. Virtu's technology has already enhanced the customer experience on the market making institutional side and has already borne fruit as we have migrated some of the legacy KCG strategies on to the Virtu platform. Similarly, KCG's quantitative tools and expertise are making the Virtu's strategies more competitive and profitable. There are literally dozens of trading integration products underway across the firm with many achieving real tangible P&L, none of which were mild at the time of closing. These improvements are evident in our August, September, and October results as illustrated on Slide 5 of the earnings presentation. To date we have generated approximately $14 million of incremental annualized adjusted net trading income from these growth initiatives alone. The size and scope of these initiatives is many multiples of what has been achieved to date. Second, technologically we are moving to a single pan asset class and geography integrated technology platform. From an operations and trading perspective, the legacy get-go and nice systems were essentially unaware of each other. Legacy KCG had at least three independent trading systems in addition to separate back-office platforms that were largely disconnected. This setup is markedly different from legacy Virtu and we would not believe in operating multiple trading or back-office systems as a rule because supporting separate systems requires expensive overhead and infrastructures is operationally risky and limits opportunities for internalization. This integration is already underway. Third, risk parameters and risk tolerance for the respective firms had been harmonized and we do not view the wholesale market making or agency execution businesses as inherently more risky given the volume of customer flow being serviced by legacy KCG. Fourth, as we have peeled back the various parts of the legacy KCG business, it has become clear that the core wholesale market making business is significantly less volatile than the consolidated results KCG had reported. We will provide data to demonstrate this fact in a few slides, but legacy KCG operated certain prop, quant [ph] strategies that took relatively more risk over significantly longer time horizons, required significant capital, and generated volatile results as compared to its core customer-focused market making businesses and this is the story of the consistency of the actual underlying market making business. Most importantly, these strategies had very little to do with legacy KCG's primary mission of serving customers and has significantly deteriorated more recently in less volatile markets. We have made significant progress with respect to synergies. At the announcement of this transaction, we predicted we would achieve $208 million of annualized synergies net of anticipated revenue losses. We now believe that by the end of 2018, we will have achieved $262 million in gross synergies with minimal impact on revenue base overall and almost no impact on the revenue base we view as part of the core business. Headcount at legacy KCG peaks at 1100 around the second quarter of 2016, while legacy Virtu was 150. Today our combined company has a headcount of 648 persons, excluding BondPoint and Neonet employees. The headcount reductions have not and will not adversely impact revenues. As we have previously noted, many of the departed employees worked in redundant call centers or offices that generated little to no revenue or even lost money trading. We believe the streamlining achieved to date is enhancing the customer experience and has improved our operating performance. Our 605 and 606 reports indicate our market share with the retail brokers remains largely unchanged. How has this been achieved? Well, consider the following. KCG counted 7% of its revenues outside the United States in 2016, yet 23% of the headcount outside the United States on the same date. Legacy KCG's European trading operations alone had been losing approximately $2.5 million per month in 2016. We have streamlined the legacy KCG European business to become a more focused client service organization and we are fully committed to a client-facing European operation. We have begun the process to shut down Neonet, which was acquired by KCG in 2015 and contributed to the losses in Europe. KCG's Singapore and Mumbai offices had 29 employees and generated little to no revenue, yet required meaningful capital and operational expense. With regard to communications and data processing, we have begun dismantling the duplicative technological footprints and we will achieve the synergies as outlined at the time of the acquisitions. We also note an increased interest in examining the market data and technological costs among industry participants. These trends can only help us as we attempt to make our business even more efficient. We have consolidated redundant office space. We will further reduce operating cost as we continue to consolidate back-office functions, clearing operations in overhead departments and all of these systems will be migrated to a single efficient Virtu quality process supported by a common infrastructure. Turning to the achievements with regard to the capital structure, when the deal was announced on April 20th, we had identified $440 million in capital of the combined company that we could use to rapidly pay down debt and help return the combined company to its current capital structure on a pro forma basis. At the time we estimated that we would be able to release and repay the $440 million of debt within 12 to 18 months after closing. I am pleased to say that we are well ahead of the schedule and have made voluntary repayments totaling $200 million towards our term loan within the first three months post-closing. In addition, we made a strategic decision to divest of our fixed income platform BondPoint. We felt this business could be best positioned to grow in the hands of a strategic acquirer. We were very pleased with the competitive bidding process, I believe, that ICE is the perfect acquirer for BondPoint, its clients, and employees. Jeff Sprecher and his team at ICE are world-class and will grow BondPoint to the benefit of our mutual customers. We will use the net proceeds approximately $250 million to further pay down our loan. In terms of the overall capital position, we provided a snapshot in the prepared materials, which Joe will review. In summary, we had trading capital of $1.3 billion as of September 30, approximately $500 million more than is required to operate the combined business. Our trading capital, even assuming for the reduction of $240 million to reduce debt, remains well above what is required to operate our businesses. We have been able to manage the capital base efficiently and through capital synergies by combining the businesses. However, historical capital usage in the legacy KCG business was higher due to certain cross trading strategies that required significant capital as detailed on Slide 7 of the earnings presentation. We will continue to return capital to shareholders through our quarterly dividend from a combination of excess cash on hand and earnings for the foreseeable future. As we generate excess cash, we will continue to be mindful of our primary mission of returning capital to our investors through increased dividends and share buybacks. Now, I would like to turn to Slide 5 and highlight some recent trends in adjusted net trading income. We are providing detailed monthly results in adjusted net trading income here to highlight the trends and give you a clearer picture of what the business is capable of producing in a given environment. Adjusted net trading income for the entire quarter including the KCG's stub period of July 1 to July 19 was $173 million. This differs from the reported number because of the first 20 days of July before the transaction closed. July was an extraordinary slow and disappointing month of distorted results. Again, we owned the legacy KCG business beginning July 20 and as a result, none of the improvement to our combined trading had been implemented. August, September, and October are the first three months we assumed full operational control at KCG. We averaged $3.13 billion per day in adjusted net trading income over this trailing three-month period. Note that the average achieved in this three-month period takes place in an environment of historic lows in a realized volatility and the monthly results were very similar ranging from $64 million to $70 million. Therefore, we think this is the representative run rate of what the business should produce in this environment. It is important to note that we are only beginning to apply some of the technology internalizations and other efficiencies to our business. In addition to the numerous growth opportunities from the combined firms, we remain excited by our growth opportunities in Asian equities in particular and the opportunities presented to us in Europe as a result of mid for two. If you turn to Slide 6 titled Target Cost and Synergies Summary, you will see that we are providing some detailed expense guidance. Joe will go through these in more detail. If you apply these expense targets for cash and total expenses, we expect that the 2018 full year expense base for the combined companies should be between $490 million and $515 million. This translates into $262 million in overall synergies. I'm going to turn the call over to Joe. Before I do that, I want to summarize what we have accomplished in the three months since this transaction has been closed. We have de-risked the overall business by paying $200 million of our term loan ahead of schedule, saving us $10 million per interesting year. We have also shuttered what we're effectively poor performing in capital intensive quant-style strategies embedded in the business. This reduces earning volatility and releases capital. We have managed headcount down to 648 people net of divestitures from a combined peak of 1250 people. We have improved operating efficiency. We've agreed to sell BondPoint for $400 million to ICE subject to customary condition. This will reduce debt by $250 million saving additional $13 million of interest per year. We are winding down the operations of Neonet and we are stopping the bleeding in Europe and Asia. In sum, we are executing on our synergy plan significantly ahead of schedule. In closing, I would be remiss if I felt to thank all that combines our two teams. Our ability to hit the ground running on day one is a credit to the sustained efforts of the legacy Virtu and KCG's integration planning and preparation prior to the close. While these are still very early days, a shared spirit of excellence has inspired our teams to bring forth the best of each culture to make our combined company the best it can be. We could not be more excited about the opportunities that lie ahead., now that we are operating as one company and one team. Joe?

Thank you, Doug. I will now continue with the earnings presentation of our results. Slides 8 and 9 present a snapshot of how we will report results as a combined company. We are reporting results in two main business segments, Virtu Market Making and Virtu Execution Services. We are also including all of the global volume information we have disclosed previously for the market as a whole. In the Market Making segment we will report Global Equities including Americas Equities and rest of the world and global fixed income currencies and commodities. This aligns much better with how we manage the segment and then the legacy Virtu reporting of six categories or the legacy KCG presentation of aggregate market making activities. On Slides 8 and 9, we show you how these results would have looked pro forma on an adjusted net trading income basis. On Slide 9, you can see the same results for 2017 on an adjusted net trading income basis and pro forma results for the trailing three months that show the uptick in the results that Doug mentioned, as a result of the integration and the improvements that have begun to take effect. Turning to the next two slides, we have prepared an analysis, which explains part of the reason for the historic volatility of legacy KCG's market making results, which Doug alluded to in his remarks. If you look at the results on Slide 10, you can see that the GQS trading, a subset of the historical market making division, contributed 21% of the market making group adjusted net trading income in 2015, 11% overall in 2016 deteriorating from 15% in the first half to 3% in the second half and 4% overall in 2017. A great portion of this business was a quantitative portfolio risk book. Its size was typically $1.5 billion to $2 billion long short and used approximately $130 million of capital. We determined the characteristics of this business did not fit with our mission to serve customers. And such we have shut down most of it, while retaining the portion most suited to appropriate risk in capital usage, as well as consistent results. Slide 11 shows that if you exclude GQS trading for year-over-year change in market making adjusted net trading income would have been down 11% and 21% respectively from 2015 to 2016 and year-to-date 2017, while realized volatility for those corresponding periods was down 15% and 47% respectively. Turning to Slide 12, we are providing to you some detail of expense targets we have for the combined business going out to 2018 and 2019. As stated on Slide 4, our original synergy estimates included $180 million for occupancy overhead and compensation and $70 million for technology communications and data processing. Looking at the guidance we are providing for 2018, we would target around $438 million of cash operating expenses and $65 million of depreciation and amortization synergies. So, on the same basis as the original estimate, we would arrive at $262 million in total synergies realized in 2018. Assuming further that the run rate achieved in Q4 2018 continues throughout 2019, target operating expenses would be $395 million, and depreciation and amortization would be $60 million, which would imply in annualized synergy savings of $310 million as described on the table on Slide 12. Our revenue to synergy estimate, as Doug described, has been reduced from $42 million to $7 million. We are able to target these enhanced synergies because our initial assumptions regarding headcount, technology spending, occupancy costs, and other expenses were conservative. Obviously being on the inside, we can provide better guidance now that we have a more complete understanding of the business and execute on our plan. Turning to specific results for Q3, you can see the snapshot of the GAAP results on Slide 13. These results include a division of revenue and expenses between the pre-July 20 period and post-July 20 period and appropriate purchase accounting adjustments. All of these moving pieces led to the reported GAAP loss of $40.4 million. When you normalize for these expenses on Slide 14, you get an adjusted EPS figure of $0.08. This is again the GAAP loss of $0.17 per share. If you look at page 14, the FX relate mainly items that are a consequence of a merger such as one-time professional fee expenses, expenses related to the capital raise occurred in connection with the transaction, and items that are distorted as a result of the transaction such as legacy KCG compensation. All right. So, we've talked about revenues, expenses, picture clarifying. Finally Slide 15 and 16 talk about capital. On Slide 15, you can see a snapshot of the trading capital at September 30, 2017. You can derive our trading capital from the balance sheet and you can see that trading capital balance at September 30 is $1,358 million. It is important to note that the nature of this trading capital is the same as reported by legacy Virtu. It's highly liquid and converts to cash in a trade date to settlement date cycle. Turn to Slide 16, we should take away the following. This business remains well capitalized, even over capitalized, but even accounting for the additional $240 million that we are promised for debt reduction, there remains a significant amount of excess capital, in this slide, $268 million to $368 million excess. This excess capital will allow us several options, reduce debt further, maintain our dividend, and depending on the circumstances even consider share repurchases at the appropriate time. I would also note that we target having $941 million in total debt by the end of 2018 taking into account the remaining amount of the $240 million of capital return in the net proceeds from the sale of BondPoint and application of tax receivables. Finally, given the robust credit markets, there may be an opportunity to reduce the cost of our debt further through opportunistic refinancing and/or re-pricing. With that I will turn the call back to the Operator to open it up for Q&A.

[Operator Instructions] And your first question comes from the line of Rich Repetto with Sandler O'Neill. Your line is open.

Yeah. Good morning Doug. Good morning Joe. First thanks for all the increased - the disclosure of the monthly disclosure as well as the transparency both on the revenue and the expense side. But the first question is, Doug, you increased the cost synergies as well as the net synergies as well and I'm just trying to gage your confidence level. In the beginning your estimates were driven by I guess with due diligence and now after having KCG directly under your control for three and a half months. So, the confidence level that you can attain these cost synergies and actually net synergies.

Well Rich, thank you. Yeah, we are very, very confident - highly confident in the number is. The one thing I have learned over the ten years of operating these businesses is that you can do everything you can to generate net revenue, but you can't control cost. There is one thing we were very good at a legacy Virtu was - and it comes from our DNA from founder Vinnie, which is you got to know every penny of everything that's going on here and we are revealing [ph] in the details of every costs and that's the history of Virtu. I think as a public company we have pretty good track record - yeah, explaining what our cost were going to be and how they were going to increase and obviously there were certain things out of control and markets data et cetera that we've talked about. But when it comes to really understanding the push and pulls, head count, office space, all of our technology spend, what our footprint is going to be like, we have a lot of experience around that. This is not our first significant acquisition. We bought a company called Madison Tyler in 2011 just to add technology integration. It has working in place to go through it all and make sure that we are extracting all the synergies. So, Joe and I the management team here are very confident in those numbers.

Okay, thank you. And then I guess my one follow-up would be both on the GQS, I guess. I mean, I'm covering KCG for a while, I knew nothing about this, but can you talk about - I guess the question is overall capital. When you look at the reduction in your trading capital, can that be - there is no burn on that in regards to having to pay down debt. That capital can be used for anything you want and then the BondPoint, would you expect raise from bond point. I know capital is fungible, but as at sales that has to be transferred to debt pay down correct versus the just reduction in trading capital.

Yeah, I will answer - you asked two questions, I will answer the second on first, which is yes, the net proceeds of BondPoint after obviously paid quarter level taxes, where we used to repay debt that is $400 million purchase price and corporate taxes at least today we have 35%, so you guys can do the math. Roughly $250 million in amortization goes straight to repay our term loan that is incremental to the $440 that we announced when we did the transaction, 200 of which is already been paid. And then you asked a question in the GQS and capital and what not and the answer is yes, there were a number of where our sell say [ph] quant driven strategies here that just took a lot more risk and frankly their returns most recently the second half of 2016, we put in the supplemental materials and 2017 we were very poor so what we did was extract the portions of those strategies that made sense and bent in the customer book. So, we are not actually losing any [indiscernible] strategy performing better with significantly smaller books sizes and therefore significantly smaller capital. And to there is just a number of instances around the firm where capital is being to put very, very and inefficiently. Again, it goes back to differences of the two firms. Legacy Virtu as you know Rich as you know Rich because you've covered it was never over capitalized that was the mater again from our founder and myself which was capital is very important and it should be husbanded and if it is not needed trading, it should be returned investors and the shareholders. And when you manage capital with that level of efficiency, you run more efficient from not the standard that we have applied here, and it turns out as we got into the weeds of KCG, there were some significant amounts of excess capital. We estimated at least $500 million of excess capital today that after we paid all the transaction expenses and paid $200 million of term loan off and that's incremental to the BondPoint proceeds and incremental to the $50 million of tax payment we are going to receive from CBOE as a result from the sale of Hotspot. So, there is a lot of excess cash floating around here as we have said time and time again we are going to use that to return our leverage ratios to a number we are comfortable and somewhat between 2 and 2.5 times EBITDA and then the remainder will go to satisfy - continue to satisfy our debt payments and then to the extent if there's excess as I said in my prepared remarks, I'm a big believer in returning capital to shareholders.

Okay, great. And thanks again on the detailed disclosure. Thank you.

Thank you, Rich.

You next question comes from the line of Alex Blostein with Goldman Sachs. Your line is open.

Hi, good morning guys. So, two revenue related question, one is kind of what's within your control and one perhaps that's outside. So, guess the first one, $3.1 million of kind of daily trading revenues today. That was pretty clear from the slides kind of in the near time in the run of business. Do you guys mention you realized some of the revenue synergies already, but it sounds like there is more to go, so Doug, assuming the Virtu environment now I think is better which we help it does, where could that 1.3 million go just kind of what's within your line aside on the potential additional revenue synergies from KCG and then I have a follow up.

Yeah, it's a great question, obviously it's a difficult one to put my finger on exactly and the reason, I gave the examples in the earnings presentations was to make it very clear and tangible. So those are three or four of the - of a dozen revenue enhancing projects that we have going on between the two legacy firms. To date the run rate on those is $14 billion as I said in the script. I think it's many multiples of that and so is it a $100 million of incremental revenue I know that might be a little high, but right now it's days, its real tangible results that we are already seeing from being more intelligent around the Virtu strategy. By taking the KCG strategy to markets, we are here to for they didn't have efficient access like Canada and Europe and Asia and things along those lines. So, to that 3.1 become 3.4 or 3.5, 3.6, yeah, I think that definitely was in the realm of possibility. November continues - the net rating trading revenues continues to grow in November which I am excited about. So, I am thinking of the date, November 7 or 8. But this is in a flat non-volatile market place. I should also point out that some of the legacy Virtu efforts in Asia continue to bear fruit and we have improved our trading there and there's significant opportunities around being a systemic internalizer in Europe, which we are very excited about and we are poised already up and running as an SI. So, I think obviously you guys will all come up with your models in your conclusions. But it's not reasonable Alex, to assume even in a flat volume and volatility environment. There is room for growth, obviously we have all talked many times about volumes and volatility and how that is an exponential factor to our performance and that's the Virtu model right, keep your fixed cost manageable, be able to generate an impressive EBITDA margin in a famine environment and then when inevitably markets come back all of that incremental net trading revenue net effect is dropped to the bottom line. And so, this model will continue to scale with exceptionally well. I hope I answered both of your questions, is that right.

Yeah, you definitely did, you actually held on the second one a little bit, but I wanted to follow up just around of it to - again you kind of highlighted on that in the prepared remarks, but we're also getting a little bit closer to the deadline here. As you guys talk to your European customers, any updated thoughts on the opportunities both for the Global Execution Services, so kind of through unbundling and ultimately on the market make as well given the systematic in internalize or opportunities that you mentioned.

Yes, thank you yeah, I mean I have been all over since closing actually before the closing. I have met with probably our top 50 to 60 customers. I have been to London, Dublin all around the United States meeting with our big retail customers or institutional customers. I had the privilege to being over in London a couple of weeks ago spending time with both our retail broker dealer partners over there as well a significant institutional self-side firms that we have the pleasure of providing agency services for. And it is a lot of uncertainty over there, but is certain is that in an unbundled environment where firms are looking for best execution, where they are looking for all around and capabilities. Where they are looking for most importantly for post trade transparency, where did you send my order and why did you send there. There is another firm that has the complement of technology and order routing understanding that Virtu does. That was the legacy Virtu agency offering that we talk about a couple of four quarters ago. And applying that transparency in that infrastructure to Europe in an unbundled environment, to me is a game change and the response from the institutional client has been terrific. We've had a number of them come to the offices in London and in Dublin and look at the technology and the tools that we have in that come away very, very impressed. So, I am excited about. I think that secondly as a firm that also has the lever of being a prop trading firm, I think people has overstated, I don't SI liquidities can be 40% of the market or any think crazy like that, but I do think it's going to fill in the niche of the broker for profiting that works which affectively has at January 3 and no longer permitted. And so, we have a live SI stream. We are going to have them single tasked in ETS, our core strength. We are going to either distribute it directly to some of our broker dealer partners or we are going to use broker dealer partners like we have announced in internet and [indiscernible] and we are going to allow them to re distribute it if you will to their customers. So again, we are agnostic as to the formal distribution. We are a great firm that can provide a bit of after spread and we are happy to have it distributed directly or indirectly, but it is all set to significant opportunity. We will effectively have another distribution mechanism for our prices.

Great, thanks for all the color in both questions.

Thank you.

Your next question comes from the line of Chris Allen with Rosen Black [ph]. Your line is open.

Good morning guys. I guess, I just wanted to ask a little bit about the expense outlook and I may have missed this, I apologize. So, there are a couple different things this morning. But just the guidance range, is that just really depending on the competitions level relative to revenues. I am just trying to think about if the current revenue environment persists or if you see a vast improvement like coming how material or change when we see in the expense outlook moving forward.

All right, it's a really good question Chris. If for our stand point, it's a bottoms up. That is kind of sanity checked by a ratio. If you look at, if can make some assumptions around three to three and a half million a day, you are going from at the high teens to low twenties in the comp ratio. So, we are comfortable with that which within in terms of the guidance, but we are and not ever really targeting a fixed pool based on a ratio. Because we don't think at the formal way, we think of the firm from a bottoms up stand point and then sanity check it as a ratio.

Yeah, I think that's what Joe made, is that Joe made which is - this is not old Wall Street firm. So, like if our revenues go up and double, sure would be a little more data around the place, yes, but there is no formulae here and I can now announce, and this is also Virtu style in terms of competition. We are competing people fairly, but at the end of the day this is not a strong system, there is no stock traders here, it is all about the firm and the financial technology and we have some great people here, but don't think of expenses ranching up proportionate to revenue, they won't.

Got it and then just if guess is a follow up just on the sequential improvement by a month that we saw through October and you may have provided us, again I apologize if I missed it, any color in terms of what actual costs that you are kind of seeing that in and or it was kind of more broad based just you are kind of realizing some of the benefits from combining the two firms.

Yes, it's the latter. It's combined the benefits of two firms. So, I would say it's a more a new list of equities than it is another asset classes, but so for example we are running today smarter FX strategies, thanks to outside the quite genius some of the KCG guys, we got some really talented quantitative folks - quantitative strategists here at KCG that at legacy Virtu we just never had. And so those - that intelligence, if you will is making the Virtu classic market making strategies a little more patient, a little more intelligence and therefore more successful and so candidly about a third of that was in our FX line of business and maybe a third of that outside of U.S. equities because we're now we are running some KCG quant strategies. As I said in other markets palaces and the remainder was U.S. equities, probably more legacy Virtu than legacy KCG Chris, just in the sense that again the legacy Virtu strategies, we are just feel to offer market making type strategies and I having a little more intelligence and little more smarts from the twenty plus years at KCG being a confront has really helped the Virtu strategies. We are excited about that.

Great, thanks guys. I'll get back I in the queue.

Thank you, Chris.

Your next question comes from the line of Ken Worthington with JP Morgan. Your line is open.

Hi, good morning and thank you for taking my questions. And given the divesture of BondPoint, can you help us understand what revenue and expenses will be forgone with that sale.

Yeah, BondPoint never really published its revenue numbers, I think there have been some estimates that your colleagues have made that you look at the volume and look at the pricing card and get something in the mid-twenties, $20 million of revenue so that's ball park correct, and I think the margin on it is consistent with the overall margin for kind of legacy Virtu. So, it's more like a 50% margin EBITDA business.

But I think the important point is that Joe, also we are using the proceeds to pay our bank debt, so from a net, net a neutral reserve.

Yeah, from a EBITDA we look at this deal as earnings neutral, EBITDA neutral and obviously we are required to use the proceeds to pay down debt, so we are going to do that, and it helps us to deliver, it helps us - there we are seeing the more benefits because obviously as we do evermore we are able to go to the credit markets and potentially over our cost of debt. So, we don't really look at that at the bottom point of sale and just in the prism of kind of EBITDA [indiscernible] although in those prisms we worked is pretty neutral.

And is BondPoint incorporated into the expense synergy numbers or is this incremental to the numbers that you gave us.

We never - importantly we did not assume any BondPoint synergies in our expense estimates and as important in the revenue to synergy. So, we did not assume revenue to synergies from BondPoint as well. So, $7 million of revenue to synergies got nothing to do with BondPoint.

Okay, excellent thank you. And then you talked about the $14 million of incremental revenue from the merger of KCG and Virtu. Can you flush those out, like where are you getting example enhancements and maybe just if you can give us some anecdotes to help - to add some colors that will helpful too.

Yeah, sure, good question. I think I alluded to some of this in answering Chris Allen's question. But I am happy to do it again, which is the 14 million that's run rate and that's really as said in my prepared remarks again sort of the tip of the ice in my view because we got a dozens of other projects rough working right now all of which produce negotiable revenue, but I am very excited of that. So here is an example legacy Virtu is a FX market maker as you are well aware quoting on the bid in the offer one of its things are office we get listed obviously as a non-directional trader, you have to make decision when do you go and cover, when do you balance. We are trying to make a check. Well often times it turns out because we didn't have the quantitative stimulation environment experience of legacy KCG firm and I can't compliment those guide and I am really pressed with this goals set here. We would balance early, and a position was being revered and we held on to position first second or five seconds or in on some cases half a second we would have made three checks or not walk the tech and so of slaying that quantitative intelligence and is not just the FX, but that's where we try it first just because we have the most data and a lot of volume. It turns out that it makes the Virtu strategies a lot smarter, and so as we said in the presentation on page 4 that's already realized $8 million that one little nugget alone has realized $8 million of annualized trading, so apply that across - there's a lot of future strain, there's a lot of these changes in the 36 countries that we trade in and so obviously we are going in and out of other exchanges in it, do you ever work spot exchanges in FX as well. So, we are going to become a smarter market making firm, the ladies do firm well. The second area which is outlined on Page 4 as well, is how do you take the KCG quant strategies and expand it around the world? We knew this from due diligence that they candidly had not done a great job, taking the quantitative strategies in equities and in future's and in other extra classes around the globe. That's what Virtu is all about, we've got streamlined, low cost, low life legacy connectivity to 35 countries outside the United States and so we've already achieved $4 million of run rate revenue, synergy is there in one country up in Canada. So, when the process is rolling out strategies out to another 34 countries. Third area again on page 4, was getting back to how Virtu would effectively cover and balance in US equities or across foreign equities, when it had an ADR position or an ordinary position, needed to balance. Again, because we were risk [indiscernible] capital styling firm, when the folks started moving away from us, we will merely cover into the market either crossing us by the time its strategic paying exchange fees. Well that tends to on balance reduce your opportunity cost, if you can be more intelligent about how you trade, if you have the benefit and the bounty of customer information and customer was, you can be more intelligent. This is exactly what we thought would be the case for us. Looking at it from the outside of the due diligence that we were excited at, it turns out when we turn these things on and we've already done it in two limited areas and generated at least $2 million in that trading revenue. So, these are three concrete examples of new revenues that have been created simply by combining frankly I'll say the genius of the KCG firm and acquaints strategies and the efficiency understanding of market structure virtually. Can't wait for the reasons peanut butter cup commercial, you take chocolate and peanut butter and at the end of the day end up with a great candy, that's what the firm is.

Alright, thank you for taking my redundant question, I appreciate it.

Your next question comes from the line of Kaimon Chung with Evercore ISI. Your line is open.

Hi, looking at the prospects, can you just give us a sense of how legacy Virtu and KCG did separately may be just what the trading income did and may be whether your head count stands as well?

On slides 8 and 9 we've got that, to make that segment breakout, legacy Virtu everything other than the technology services and the HC execution services is in Virtu market making. So, all those legacy categories are in the new Virtu market making bucket and the agency's execution win in Virtu execution services and for KCG, we by and large, maintain the division of the market based execution services. So, we are one firm now, we are going to report as one firm, we are reporting the head count as one firm and on the headcount, they were so desperate, [indiscernible] Virtu's head count hasn't fluctuated too much, so you can be exact that the economy. On the business segment side, we have these two buckets, we actually pick this as a much more appropriate presentation. We'll consider different ways to look at it going forward, in terms of metric, the underling metrics haven't changed, but we look at a market the equities rest upon equities. The fixed income commodities options business that's very consistent with wealth, further report that agency and technology, commission and fee businesses that we are in the bucket, and that's how we are going to report. So, we're not going to specifically break those two down.

Okay, thanks for that. And, I think Alex touched upon this, but maybe I'll ask you in a different way. Realize volatility hit lows and so, you don't pick up in Q3 run rate. But, what's your sense of normalized volatility levels and what will take you up back there? I appreciate the privacy we make with the decision integration, but, what things share with us to give us a confidence that you are more on level to that, no more volatility level in the same way or better, than the volatility in the past?

Yeah, it's a great question and I think the thing that's most striking about the result which I was very excited about was, if you look at what happened to real life volatility from August to October, I think it went down to I'd would say historic low realized volatility with sub five, which is pretty sorrowing in terms of the lack of inter day action in the market place and in that environment, we had a very fine month in October. So, to me if that's the base line of what the firm can generate on a consolidated basis, when you've got to realize volatility in single digits but even sub five. I'm really excited about, when, not if, but when volatility comes back. I don't want these calls, and I don't want to talk about the capacity, the genius around volatility at range could come back and why it has. It's been muted lately; I think smarter people like me can do that, unless you can have your own view on that. What I'm saying is that when you have a firm that has its fixed cost base under control, I think we put our money where our amount is today and have a firm that can demonstrably generate net training revenue in a muted and volatility environment. You have a great model and the model is in a famine we can generate significant returns and then in a feeds model [ph] exceptional as well. That's always been the mode of legacy Virtu and it's the model of the combined firm going forward.

Thank you.

I would now like to turn the call back over to Douglas Cifu for closing remarks.

Thank you, operator, thank you everybody for joining us today, I hope you can tell by my excitement and sound of my voice, we are very excited here about the way the transaction has come together, I think culturally the firms are fitting in exceptionally well. We've got a lot of work to do, both on the expense side and we've got a lot of roadway ahead of us in terms of growing the firm. I thank you all for your continued support and interest in my company. Thank you everybody, have a great day.

This concludes today's conference call, you may now disconnect.