Virtu Financial(VIRT) - 2023 Q4 - Annual Report

PART I This part provides an overview of Virtu Financial's business, including its segments, risk management, competition, intellectual property, human capital, regulatory environment, and corporate history Business Overview Virtu Financial is a leading financial firm leveraging advanced technology to provide global market liquidity and transparent trading solutions across diverse asset classes - Virtu Financial is a leading financial firm leveraging technology to deliver liquidity and transparent trading solutions globally[15] - The company's product suite includes execution, liquidity sourcing, analytics, and broker-neutral, multi-dealer platforms in workflow technology, covering global equities, ETFs, options, foreign exchange, futures, fixed income, cryptocurrencies, and commodities[15] - Virtu operates with two primary segments: Market Making and Execution Services, alongside a non-operating Corporate segment[19] Market Making Segment The Market Making segment provides global liquidity across diverse asset classes, generating revenue from bid/ask spreads, with profitability influenced by trading volumes and volatility - Market Making involves principal trading in cash, futures, and options across global equities, fixed income, currencies, cryptocurrencies, and commodities[21] - Revenue is generated by buying and selling large volumes of securities and financial instruments, earning small bid/ask spreads[24] - Key factors impacting financial performance are overall trading volumes, realized volatility, attractiveness of order flow, and retail participation[25] Execution Services Segment The Execution Services segment provides agency execution and trading venues across global asset classes, earning commissions and leveraging technology for algorithmic trading and analytics - Execution Services offers agency execution and trading venues for global equities, ETFs, fixed income, currencies, and commodities to institutions, banks, and broker-dealers[42] - Services include electronic execution (algorithmic trading, order routing, EMS, ATSs like Virtu MatchIt and POSIT), institutional sales trading, workflow technology (Triton Valor, ITG Net, RFQ-hub), and trading analytics (pre-trade, real-time, post-trade analysis, TCA)[43][45][48][52] - Competition in this segment is based on trading technology, execution performance, costs, client service, market coverage, liquidity, platform capabilities, and anonymity[44] Corporate Segment The Corporate segment manages strategic investments and corporate overhead, encompassing income and expenses not allocated to operating segments - The Corporate segment contains investments in strategic financial services opportunities and manages corporate overhead expenses and other non-operating income/expenses[54] Risk Management Virtu employs a comprehensive risk management framework covering market, counterparty, operational, and regulatory risks, including robust cybersecurity measures - Risk management practices include pre-trade risk controls, model restrictions, aggregate exposure monitoring (e.g., VaR, Equity Betas, Stress/Scenario analysis), and operational controls (e.g., 24/5 system monitoring, automated reconciliations)[57][58][64] - Cybersecurity risk is managed under the Chief Information Security Officer (CISO) with a dedicated Global Security team, involving threat analysis, penetration testing, incident management, and regular system upgrades[60][221][222] Competition Virtu operates in a highly competitive financial services industry, facing rivals in market making and execution services, with its competitive advantage rooted in scalable technology - Competitors in market making include Citadel Securities, Susquehanna International Group LLP, Two Sigma, Jane Street, DRW Holdings, IMC, and Optiver[62] - In execution services, competition comes from agency-only and other sell-side firms for algorithmic execution and smart order routing, and from various exchanges and ATSs for trade execution[63] - Virtu's competitive advantage is rooted in its scalable technology, allowing access to new markets and increased volumes with limited incremental costs[64] Intellectual Property and Other Proprietary Rights Virtu protects its intellectual property and proprietary technology through a combination of legal frameworks and contractual agreements, including confidentiality and access controls - Virtu relies on federal, state, and international laws (trade secrets, trademarks, domain names, patents, copyright, contract law) to protect its intellectual property and proprietary technology[65] - Protection measures include confidentiality, intellectual property invention assignment, and non-competition/non-solicitation agreements with employees and partners, along with controlled access to intellectual property[65] Human Capital Resources Virtu employs approximately 975 full-time employees globally, fostering a culture of excellence and innovation through competitive compensation, benefits, and DE&I initiatives - As of February 2, 2024, Virtu had approximately 975 full-time employees across nine countries, with 71% in the Americas, 19% in EMEA, and 10% in APAC[66] - The company's culture emphasizes excellence, technological innovation, agility, and operational/financial discipline, supported by a flat, transparent, and collaborative structure[67] - Compensation and benefits programs are designed to attract and retain talent, including medical, dental, vision, retirement plans, life/disability insurance, and wellness programs. A DE&I Committee focuses on recruitment, awareness, and mentorship[67][68] Regulation Virtu's global operations are subject to extensive regulation by U.S. and international authorities, with a dynamic environment of rule changes potentially impacting operations and compliance costs - U.S. operations are regulated by the SEC and FINRA (broker-dealer VAL), while international operations are subject to regulators like CBI (Ireland), FCA (UK), MAS (Singapore), SFC (Hong Kong), ASIC (Australia), and CIRO (Canada)[69][72][74][75] - The regulatory environment is subject to constant change, with proposed SEC rule changes (e.g., Rule 615, Regulation Best Execution, tick size, ATS definitions) and ongoing MiFID II review in Europe potentially altering market structure and increasing compliance costs[79][81][83] - Failure to comply with laws and regulations can result in administrative/court proceedings, censures, fines, penalties, suspension/expulsion, and revocation of licenses[78] Corporate History Virtu Financial has over 20 years of experience in electronic trading and market making, completing its IPO in 2015 and expanding through significant acquisitions like KCG and ITG - Virtu Financial has over 20 years of experience in electronic trading and market making[88] - The company completed its IPO in April 2015, with Class A common stock trading on Nasdaq under 'VIRT'[88] - Significant acquisitions include KCG Holdings, Inc. in July 2017 and Investment Technology Group, Inc. (ITG) in March 2019, expanding its electronic trading and market making business[91] Risk Factors Virtu Financial faces diverse risks including business, operational, legal, regulatory, and organizational factors, such as dependence on market conditions, platform failures, intense competition, and significant regulatory uncertainties - Revenues and profitability are highly dependent on trading volume, volatility, and retail participation, which are subject to external factors and prone to significant fluctuations[103] - Significant risks include dependence on trading counterparties and clearing houses, potential losses from customized trading platform failures or market risk, and substantial competition from other market makers and execution service providers[104][105][112] - The company is exposed to extensive legal and regulatory uncertainties, including pending SEC rule changes (e.g., Proposed Rule 615, Regulation Best Execution), MiFID II reviews, and potential financial transaction taxes, which could adversely impact operations and profitability[159][162][166][176][177] - Organizational risks include being a holding company dependent on subsidiary distributions, control by the Founder Post-IPO Member (86.5% voting power), and substantial obligations under tax receivable agreements[185][187][197][199] Unresolved Staff Comments This section confirms there are no unresolved staff comments to report Cybersecurity Virtu maintains a comprehensive Cybersecurity Program, led by a CISO and Global Security team, which includes threat analysis, incident management, and regular external evaluations - Virtu's Cybersecurity Program is managed by a Global Security team and CISO, who reports directly to the CEO and periodically to the Board's Risk Committee[221][224] - The program is based on threat analysis and includes standards for penetration testing, endpoint protection, incident management, access controls, and vendor risk assessment[222] - Regular evaluations by internal and external experts, including penetration and vulnerability testing, help assess effectiveness and improve security measures[223] Properties Virtu's headquarters are in leased New York City office space, supplemented by additional leased offices across the U.S., Canada, Europe, and Asia-Pacific - Headquarters are in leased office space at 1633 Broadway, New York, NY 10019[227] - Additional leased offices are maintained in the U.S., Canada, Europe, and Asia-Pacific, supporting all business segments[227] Legal Proceedings Legal proceedings information is incorporated by reference from Note 14, 'Commitments, Contingencies and Guarantees,' in the Consolidated Financial Statements - Legal proceedings information is detailed in Note 14 'Commitments, Contingencies and Guarantees' of the Consolidated Financial Statements[228] Mine Safety Disclosures This section confirms there are no mine safety disclosures to report PART II This part covers Virtu Financial's market for common equity, shareholder matters, issuer purchases, management's discussion and analysis, market risk disclosures, and financial statements Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Virtu Financial's Class A Common Stock trades on Nasdaq, with the company returning excess cash to stockholders through quarterly dividends and a significant share repurchase program - Class A Common Stock trades on Nasdaq under the ticker symbol 'VIRT'[231] - The Board of Directors has adopted a policy of returning excess cash to stockholders, paying quarterly cash dividends of $0.24 per share in 2023, 2022, and 2021[233] Share Repurchase Program Summary (Inception through December 31, 2023) | Metric | Amount | | :--------------------------------- | :------------------- | | Total authorized for repurchase | $1,220.0 million | | Repurchased shares (Class A Common Stock & Virtu Financial Units) | 43.6 million shares | | Total value of repurchases | $1,109.6 million | | Remaining capacity for future purchases | $110.4 million | Q4 2023 Class A Common Stock / Virtu Financial Units Repurchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------- | :------------------------------- | :--------------------------- | | October 1, 2023 - October 31, 2023 | 1,039,179 | $18.01 | | November 1, 2023 - November 30, 2023 | 661,261 | $17.70 | | December 1, 2023 - December 31, 2023 | 731,810 | $19.44 | | Total Q4 2023 | 2,432,250 | $18.36 | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Virtu Financial's financial performance, condition, and liquidity, detailing revenue, expenses, segment results, non-GAAP measures, and critical accounting policies for 2023 and 2022 Overview Virtu Financial is a technology-driven financial services firm providing global liquidity and transparent trading solutions through its Market Making, Execution Services, and Corporate segments - Virtu Financial leverages technology to deliver liquidity and transparent trading solutions globally, covering over 50 countries and multiple asset classes[252] - The company's integrated, multi-asset analytics platform provides pre- and post-trade services, data products, and compliance tools[252] - Business operations are segmented into Market Making, Execution Services, and Corporate, with technology and operational efficiency as core elements[253][256] Market Making Segment (MD&A) The Market Making segment provides liquidity across over 25,000 financial instruments on more than 235 venues, with profitability driven by bid/ask spreads and influenced by trading volumes and volatility - The Market Making segment provides liquidity across over 25,000 financial instruments on over 235 venues in 36 countries[257] - Profitability is driven by buying and selling large volumes of securities and earning small bid/ask spreads[257] - Financial performance is most impacted by overall trading volumes, realized volatility, order flow attractiveness, and retail participation[258] Execution Services Segment (MD&A) The Execution Services segment provides client execution services and trading venues across global asset classes, earning commissions and offering proprietary technology, workflow tools, and trading analytics - Offers client execution services and trading venues for transparent trading in global equities, ETFs, fixed income, currencies, and commodities[260] - Revenue sources include commissions from algorithmic trading, order routing, institutional sales trading, and matching client orders in ATSs (POSIT Alert, Virtu MatchIt, POSIT)[260] - Also generates revenue from proprietary technology, workflow tools (EMS, OMS, network connectivity), and trading analytics, as well as capital markets agency business[260] Corporate Segment (MD&A) The Corporate segment includes strategic financial services investments and corporate overhead expenses, along with other non-operating income and expenses - The Corporate segment includes strategic financial services investments and corporate overhead expenses, as well as other non-segment specific income and expenses[261] Credit Agreement Virtu Financial entered a Credit Agreement on January 13, 2022, for a $1.8 billion term loan and $250 million revolving facility, used for debt refinancing, share repurchases, and general corporate purposes - On January 13, 2022, Virtu Financial entered into a Credit Agreement for a $1,800.0 million senior secured first lien term loan and a $250.0 million revolving facility[263][344] - Proceeds were used to repay outstanding debt from the Acquisition Credit Agreement, cover fees, fund share repurchases, and for general corporate purposes[263][344] - The term loan matures in January 2029 with annual 1.0% amortization, and the revolving facility terminates in January 2025[348][546] Amended and Restated 2015 Management Incentive Plan The Amended and Restated 2015 Management Incentive Plan authorizes grants of stock options, RSUs, and other awards based on 26 million shares of Class A Common Stock - The plan, effective since the IPO and amended through June 2, 2022, authorizes grants of stock options, restricted stock units, and other awards based on an aggregate of 26,000,000 shares of Class A Common Stock[265][635] - Non-qualified stock options for 9,228,000 shares were granted at the IPO price, vesting in equal annual installments over four years and expiring within 10 years[266] Amended and Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan Upon the ITG Acquisition, Virtu assumed the Amended and Restated ITG 2007 Omnibus Equity Compensation Plan, converting its awards to Virtu Class A Common Stock - Upon the ITG Closing Date, Virtu assumed the Amended and Restated ITG 2007 Omnibus Equity Compensation Plan and its awards[267][649] - Assumed awards relate to Virtu's Class A Common Stock, with share numbers adjusted by an Exchange Ratio, and performance share units converted to service-based vesting restricted stock unit awards[267][649] Components of Our Results of Operations This section details Virtu's key revenue and expense components, including market making and execution services revenues, operating expenses, and segment-level income before taxes Consolidated Income Statement Summary (Years Ended December 31, in thousands) | Metric | 2023 | 2022 | 2021 | | :------------------------------------------------- | :--------- | :--------- | :--------- | | Revenues: | | | | | Trading income, net | $1,301,344 | $1,628,898 | $2,105,194 | | Interest and dividends income | $462,566 | $159,120 | $75,384 | | Commissions, net and technology services | $455,598 | $529,845 | $614,489 | | Other, net | $73,865 | $46,949 | $16,418 | | Total revenue | $2,293,373 | $2,364,812 | $2,811,485 | | Operating Expenses: | | | | | Brokerage, exchange, clearance fees and payments for order flow, net | $508,358 | $619,168 | $745,434 | | Communication and data processing | $230,760 | $219,505 | $211,988 | | Employee compensation and payroll taxes | $394,039 | $390,947 | $376,282 | | Interest and dividends expense | $500,467 | $231,060 | $139,704 | | Operations and administrative | $98,972 | $86,069 | $88,149 | | Depreciation and amortization | $63,306 | $66,377 | $67,816 | | Amortization of purchased intangibles and acquired capitalized software | $63,960 | $64,837 | $69,668 | | Termination of office leases | $455 | $6,982 | $28,138 | | Debt issue cost related to debt refinancing, prepayment and commitment fees | $8,317 | $29,910 | $6,590 | | Transaction advisory fees and expenses | $314 | $1,124 | $843 | | Financing interest expense on long-term borrowings | $99,294 | $92,035 | $79,969 | | Total operating expenses | $1,968,242 | $1,808,014 | $1,814,581 | | Income before income taxes and noncontrolling interest | $325,131 | $556,798 | $996,904 | | Provision for income taxes | $61,210 | $88,466 | $169,670 | | Net income | $263,921 | $468,332 | $827,234 | | Noncontrolling interest | ($121,885) | ($203,306) | ($350,356) | | Net income available for common stockholders | $142,036 | $265,026 | $476,878 | | Earnings per share (Basic) | $1.42 | $2.45 | $3.95 | | Earnings per share (Diluted) | $1.42 | $2.44 | $3.91 | - Trading income, net, accounted for 57% of total revenues in 2023 (vs. 69% in 2022), primarily from bid/ask spreads in market making activities[275] - Commissions, net and technology services revenues are affected by institutional client transaction volumes, commission rates, platform experience, and volume-based fees[277] Non-GAAP Financial Measures and Other Items Virtu utilizes non-GAAP financial measures like Adjusted Net Trading Income, EBITDA, and Normalized Adjusted Net Income to evaluate operating performance, adjusting GAAP results for specific costs - Non-GAAP measures include Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS, and Operating Margins[294] - These measures are used by management and investors to analyze and benchmark performance, providing indicators of general economic performance unaffected by certain costs or items[294] Adjusted Net Trading Income, EBITDA, and Adjusted EBITDA Reconciliation (Years Ended December 31, in thousands) | Metric | 2023 | 2022 | 2021 | | :------------------------------------------------- | :--------- | :--------- | :--------- | | Adjusted Net Trading Income | $1,210,683 | $1,467,635 | $1,909,929 | | EBITDA | $560,008 | $809,957 | $1,220,947 | | Adjusted EBITDA | $567,967 | $859,123 | $1,301,233 | | GAAP Net income Margin | 11.5% | 19.8% | 29.4% | | Non-GAAP Net income Margin | 21.8% | 31.9% | 43.3% | | EBITDA Margin | 46.3% | 55.2% | 63.9% | | Adjusted EBITDA Margin | 46.9% | 58.5% | 68.1% | Normalized Adjusted Net Income and EPS Reconciliation (Years Ended December 31, in thousands, except per share data) | Metric | 2023 | 2022 | 2021 | | :------------------------------------------------- | :--------- | :--------- | :--------- | | Normalized Adjusted Net Income before income taxes | $405,367 | $700,711 | $1,153,448 | | Normalized provision for income taxes (24% rate) | $97,286 | $168,171 | $276,827 | | Normalized Adjusted Net Income | $308,081 | $532,540 | $876,621 | | Weighted Average Adjusted shares outstanding | 167,782,513 | 177,688,188 | 191,958,870 | | Normalized Adjusted EPS | $1.84 | $3.00 | $4.57 | Financial Performance: 2023 vs. 2022 Total revenues decreased by 3.0% in 2023, driven by lower trading income and commissions, while operating expenses increased by 8.9% due to higher interest and dividends expense Total Revenues by Segment (Years Ended December 31, in thousands) | Segment | 2023 | 2022 | % Change | | :-------------------------- | :--------- | :--------- | :--------- | | Market Making | $1,843,523 | $1,812,839 | 1.7% | | Execution Services | $446,542 | $514,241 | (13.2)% | | Corporate | $3,308 | $37,732 | (91.2)% | | Consolidated Total Revenues | $2,293,373 | $2,364,812 | (3.0)% | - Trading income, net, decreased by $327.6 million (20.1%) to $1,301.3 million in 2023, primarily due to lower spread opportunity and decreased quality of order flow in customer market making[308] - Interest and dividends income increased significantly by $303.5 million (190.8%) to $462.6 million, driven by higher interest rates on cash collateral and dividends on trading assets[309] - Commissions, net and technology services revenues decreased by $74.2 million (14.0%) to $455.6 million, attributed to reduced institutional investor commissions and declining engagement[310] - Adjusted Net Trading Income decreased by $257.0 million (17.5%) to $1,210.7 million[312] - Total operating expenses increased by $160.2 million (8.9%) to $1,968.2 million, mainly due to a $269.4 million (116.6%) increase in Interest and dividends expense, partially offset by lower brokerage fees and debt issue costs[313][318] - Provision for income taxes decreased to $61.2 million (effective tax rate of 18.8%) in 2023 from $88.5 million (effective tax rate of 15.9%) in 2022[326] Liquidity and Capital Resources Virtu maintains strong liquidity through cash, credit facilities, and prime broker financing, managing long-term debt and tax receivable agreement obligations while meeting regulatory capital requirements Key Liquidity and Capital Resources (as of December 31, in thousands) | Metric | 2023 | 2022 | | :------------------------------------------------- | :--------- | :--------- | | Cash and cash equivalents | $820,436 | $981,580 | | Borrowings under prime brokerage credit facilities | $175,300 | $212,900 | | Long-term debt outstanding (aggregate principal) | $1,751,800 | $1,826,700 | | Remaining capacity for share repurchases | $110,400 | $110,400 | | Tax receivable agreement obligations | $216,500 | $238,800 | - Primary sources of future liquidity are cash flows from operations and financing activities[331] - U.S. broker-dealer subsidiaries (VAL, RAL) and foreign subsidiaries are subject to regulatory capital requirements, which they met as of December 31, 2023[336][338][657][658][662] Cash Flows Summary (Years Ended December 31, in thousands) | Activity | 2023 | 2022 | 2021 | | :--------------------------------- | :--------- | :--------- | :--------- | | Net cash provided by operating activities | $491,777 | $706,803 | $1,171,626 | | Net cash used in investing activities | ($94,484) | ($29,530) | ($87,349) | | Net cash used in financing activities | ($585,032) | ($735,745) | ($957,859) | | Net increase (decrease) in cash and cash equivalents | ($182,782) | ($82,711) | $113,948 | - Cash used in financing activities in 2023 was primarily for $306.1 million in dividends/distributions and $229.0 million in treasury stock purchases[357] Critical Accounting Policies and Estimates Financial statement preparation requires significant management estimates for fair value, revenue recognition, share-based compensation, income taxes, and goodwill/intangible asset impairment assessments - Critical accounting policies involve significant judgments and estimates for fair value of trading assets/liabilities, revenue recognition, compensation accruals, capitalized software, income tax, tax receivable agreements, leases, and litigation accruals[364][365] - Financial instruments are classified into a three-level fair value hierarchy based on input observability (Level 1: quoted prices in active markets; Level 2: significant observable inputs; Level 3: significant unobservable inputs)[367][467] - Revenue recognition policies detail how trading income, interest/dividends, commissions, workflow technology, and analytics services are recognized, including considerations for variable consideration and performance obligations[368][369][370][371][372][373][374][375][376] - Goodwill is assessed for impairment annually (July 1st) and on an interim basis, using qualitative or quantitative assessments based on reporting unit fair value[383][389][480] Quantitative and Qualitative Disclosures About Market Risk Virtu is exposed to market risks from financial instrument value changes, managing these through market making strategies, proprietary risk management tools, interest rate swaps, and daily foreign currency hedging - Market risks include changes in financial instrument values due to market prices, interest rates, and currency rates[393] - Market making strategies are designed to minimize capital at risk by continuously quoting two-sided markets and hedging positions across various financial instruments[394] - Proprietary risk management tools, including strategy lockdowns and daily stress event calculations, are used to manage market risk continuously[396][399] - Interest rate risk on long-term borrowings is managed using floating-to-fixed interest rate swap agreements, designated as cash flow hedges[402] - Foreign currency risk, arising from international operations and non-U.S. dollar denominated revenues (16.2% of total revenues in 2023), is mitigated through daily hedging practices[405][406] Financial Statements and Supplementary Data This section presents Virtu Financial's audited Consolidated Financial Statements for 2021-2023, including statements of financial condition, comprehensive income, equity, and cash flows, with an unqualified opinion from PricewaterhouseCoopers LLP - Includes audited Consolidated Statements of Financial Condition, Comprehensive Income, Changes in Equity, and Cash Flows for the years ended December 31, 2023, 2022, and 2021[411][414] - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[415] Notes to Consolidated Financial Statements These notes provide detailed information on Virtu Financial's organization, accounting policies, financial instrument valuations, revenue recognition, debt, equity, regulatory requirements, and commitments - Virtu Financial, Inc. is a Delaware corporation and a holding company, owning approximately 57.8% of Virtu Financial LLC as of December 31, 2023, and acting as its sole managing member[444] - The company operates through two segments: Market Making and Execution Services, with a non-operating Corporate segment[448] - Consolidated financial statements are prepared in accordance with U.S. GAAP, requiring management estimates for fair value, goodwill, taxes, and other items[449][453] 1. Organization and Basis of Presentation Virtu Financial, Inc. is a Delaware holding company, owning 57.8% of Virtu Financial LLC, providing global liquidity and trading solutions through its Market Making, Execution Services, and Corporate segments - Virtu Financial, Inc. (VFI) is a Delaware corporation and a holding company, owning approximately 57.8% of Virtu Financial LLC as of December 31, 2023, and is its sole managing member[444] - The company provides liquidity and transparent trading solutions across global markets, with product offerings in execution, liquidity sourcing, analytics, and workflow technology[445] - Key acquisitions include KCG Holdings, Inc. (2017) and Investment Technology Group, Inc. (ITG) (2019), expanding its electronic trading and market making business[446] 2. Summary of Significant Accounting Policies This note details Virtu's significant accounting policies, covering estimates for fair value, goodwill, taxes, EPS calculation, financial instruments, property, capitalized software, leases, and revenue recognition - Financial statements require management estimates for fair value of trading assets/liabilities, goodwill, intangibles, compensation, capitalized software, income tax, tax receivable agreements, leases, and litigation accruals[453] - Earnings per share (EPS) is calculated using both basic and diluted methods, applying the two-class method for participating securities[454][455] - Financial instruments are measured at fair value using a three-level hierarchy (Level 1: active market quotes; Level 2: observable inputs; Level 3: unobservable inputs)[466][467] - Revenue recognition policies are detailed for trading income (net basis, trade date), interest/dividends (accrual basis), commissions (trade date, net of third-party research payments), workflow technology (license fees, connectivity fees), and analytics (subscription fees, bundled arrangements)[483][484][485][486][487] - Goodwill is assessed for impairment annually (July 1) and on an interim basis, while finite-lived intangible assets are amortized over their estimated useful lives[479][481] 3. Earnings per Share This note reconciles net income to net income available for common stockholders and details basic and diluted EPS calculations for 2021-2023, applying the two-class method Net Income Available for Common Stockholders (in thousands) | Metric | 2023 | 2022 | 2021 | | :--------------------------------------- | :--------- | :--------- | :--------- | | Income before income taxes and noncontrolling interest | $325,131 | $556,798 | $996,904 | | Provision for income taxes | $61,210 | $88,466 | $169,670 | | Net income | $263,921 | $468,332 | $827,234 | | Noncontrolling interest | ($121,885) | ($203,306) | ($350,356) | | Net income available for common stockholders | $142,036 | $265,026 | $476,878 | Basic and Diluted Earnings Per Share | Metric | 2023 | 2022 | 2021 | | :--------------------------------------- | :--------- | :--------- | :--------- | | Basic earnings per share | $1.42 | $2.45 | $3.95 | | Diluted earnings per share | $1.42 | $2.44 | $3.91 | | Weighted average common shares outstanding (Basic) | 94,076,165 | 103,997,767 | 117,339,539 | | Weighted average common shares outstanding (Diluted) | 94,076,165 | 104,422,443 | 118,423,928 | - The computation of EPS applies the two-class method due to restricted stock awards (RSAs) and restricted stock units (RSUs) that entitle recipients to non-forfeitable dividends[455] 4. Tax Receivable Agreements Virtu has Tax Receivable Agreements (TRAs) requiring payments to pre-IPO equity holders, representing 85% of cash tax savings from favorable tax attributes, with obligations totaling $216.5 million as of December 31, 2023 - Virtu entered into Tax Receivable Agreements (TRAs) to pay certain pre-IPO equity holders 85% of cash tax savings from favorable tax attributes[511] - These tax attributes arise from reorganization transactions, exchanges of membership interests for Class A or Class B Common Stock, and payments made under the TRAs[511] Tax Receivable Agreement Obligations and Related Deferred Tax Assets (as of December 31, in thousands) | Metric | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | TRA obligations | $216,500 | $238,800 | | Related deferred tax assets | $135,700 | $162,100 | | Expected annual payments (next 15 years) | $0.1 - $22.1 million | $0.1 - $22.1 million | 5. Goodwill and Intangible Assets Virtu's total goodwill was $1.15 billion as of December 31, 2023, with no impairment, and total intangible assets were $257.5 million, primarily customer relationships and technology Goodwill by Segment (as of December 31, in thousands) | Segment | 2023 | 2022 | | :---------------- | :--------- | :--------- | | Market Making | $755,292 | $755,292 | | Execution Services | $393,634 | $393,634 | | Corporate | $0 | $0 | | Total Goodwill | $1,148,926 | $1,148,926 | - No goodwill impairment was recognized for the years ended December 31, 2023 and 2022[516] Intangible Assets (as of December 31, 2023, in thousands) | Asset Type | Net Carrying Amount | Useful Lives (Years) | | :-------------------------- | :------------------ | :------------------- | | Customer relationships | $248,771 | 10 to 12 | | Technology | $2,533 | 1 to 6 | | Favorable occupancy leases | $718 | 3 to 15 | | Exchange memberships | $3,998 | Indefinite | | Other | $1,500 | Indefinite | | Total Intangibles | $257,520 | | - Amortization expense for finite-lived intangible assets was $64.0 million in 2023, with an expected $50.8 million in 2024[519][520] 6. Receivables from/Payables to Broker-Dealers and Clearing Organizations This note summarizes receivables from and payables to broker-dealers and clearing organizations, including amounts due from/to prime brokers, deposits, and unsettled trades, with balances netted by counterparty Receivables from Broker-Dealers and Clearing Organizations (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Due from prime brokers | $208,639 | $560,111 | | Deposits with clearing organizations | $182,008 | $146,927 | | Net equity with futures commission merchants | $166,808 | $137,312 | | Unsettled trades with clearing organizations | $1,096 | $87,145 | | Securities failed to deliver | $148,822 | $149,747 | | Commissions and fees | $30,351 | $33,943 | | Total Receivables | $737,724 | $1,115,185 | Payables to Broker-Dealers and Clearing Organizations (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Due to prime brokers | $780,310 | $229,424 | | Net equity with futures commission merchants | ($36,059) | ($32,381) | | Unsettled trades with clearing organizations | $313,875 | $38 | | Securities failed to receive | $104,702 | $70,576 | | Commissions and fees | $4,884 | $6,186 | | Total Payables | $1,167,712 | $273,843 | - Outstanding borrowings from prime brokerage credit facilities ($175.3 million in 2023) are netted within these balances[522] 7. Collateralized Transactions Virtu engages in collateralized transactions, including securities borrowing/lending and repurchase agreements, with $3.18 billion in securities received as collateral and $1.23 billion in owned financial instruments pledged in 2023 - Virtu conducts securities borrowing and lending activities and enters into repurchase agreements, involving the receipt or posting of cash and/or securities collateral[459][460][461][523] - Substantially all securities received as collateral are permitted to be sold or repledged[459][523] Fair Value of Collateralized Transactions (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Securities received as collateral | $3,177,974 | $1,485,087 | | Financial instruments owned and pledged | $1,230,859 | $963,071 | 8. Borrowings Virtu's borrowings include short-term facilities and $1.75 billion in long-term debt as of December 31, 2023, primarily from its First Lien Term Loan Facility, with interest rate swaps managing associated risk Short-term Borrowings, Net (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Broker-dealer credit facilities | $0 | $0 | | Short-term bank loans | $0 | $3,944 | | Total Short-term Borrowings, net | $0 | $3,944 | - Virtu maintains uncommitted ($400 million) and committed ($650 million) broker-dealer credit facilities, with no outstanding borrowings as of December 31, 2023[529][533] Prime Brokerage Credit Facilities (as of December 31, in thousands) | Metric | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Financing Available | $599,180 | $591,000 | | Borrowing Outstanding | $175,256 | $212,912 | | Weighted Average Interest Rate | 7.96% | 7.42% | Long-Term Borrowings, Net (as of December 31, in thousands) | Category | Maturity Date | Interest Rate (2023) | Outstanding Principal (2023) | Outstanding Principal (2022) | | :--------------------------------------- | :------------ | :------------------- | :--------------------------- | :--------------------------- | | First Lien Term Loan Facility | Jan 2029 | 8.46% | $1,727,000 | $1,800,000 | | SBI bonds | Jan 2026 | 5.00% | $24,816 | $26,693 | | Total Long-Term Borrowings, net | | | $1,751,816 | $1,826,693 | - In December 2023, Virtu terminated previous interest rate swaps and entered into a new two-year $1,525 million floating-to-fixed interest rate swap at 7.5% to hedge its First Lien Term Loan Facility[548][549] 9. Financial Assets and Liabilities This note details financial instruments measured at fair value, with $6.13 billion in owned instruments and $6.07 billion in sold instruments as of December 31, 2023, including the $81.8 million Level 3 JNX Investment Financial Instruments Owned, at Fair Value (as of December 31, 2023, in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total Fair Value | | :--------------------------------------- | :--------- | :--------- | :--------- | :---------------- | | Equity securities | $710,699 | $1,844,106 | $0 | $2,554,805 | | U.S. and Non-U.S. government obligations | $521,542 | $1,775,177 | $0 | $2,296,719 | | Corporate Bonds | $0 | $1,232,097 | $0 | $1,232,097 | | Exchange traded notes | $10 | $18,055 | $0 | $18,065 | | Currency forwards | $0 | $377,279 | $0 | $22,581 | | Options | $3,485 | $0 | $0 | $3,485 | | Total Financial Instruments Owned | $1,235,736 | $5,246,714 | $0 | $6,127,752 | Financial Instruments Sold, Not Yet Purchased, at Fair Value (as of December 31, 2023, in thousands) | Liability Type | Level 1 | Level 2 | Level 3 | Total Fair Value | | :--------------------------------------- | :--------- | :--------- | :--------- | :---------------- | | Equity securities | $1,447,726 | $1,165,091 | $0 | $2,612,817 | | U.S. and Non-U.S. government obligations | $181,393 | $1,891,556 | $0 | $2,072,949 | | Corporate Bonds | $0 | $1,358,522 | $0 | $1,358,522 | | Exchange traded notes | $0 | $21,104 | $0 | $21,104 | | Currency forwards | $0 | $339,085 | $0 | $2,774 | | Options | $3,186 | $0 | $0 | $3,186 | | Total Financial Instruments Sold, Not Yet Purchased | $1,632,305 | $4,775,358 | $0 | $6,071,352 | - The JNX Investment, a Level 3 equity investment in Japannext Co., Ltd., had a fair value of $81.8 million as of December 31, 2023, valued using discounted cash flow and market approaches[557][558] 10. Derivative Instruments Virtu uses derivative instruments for trading and hedging, with a new $1.525 billion floating-to-fixed interest rate swap designated as a cash flow hedge in December 2023 to manage interest rate risk Fair Value of Derivative Instruments (as of December 31, 2023, in thousands) | Derivative Type | Financial Statement Location | Fair Value (Assets) | Notional (Assets) | Fair Value (Liabilities) | Notional (Liabilities) | | :--------------------------------------- | :--------------------------------------- | :------------------ | :------------------ | :----------------------- | :----------------------- | | Equities futures | Receivables/Payables from broker-dealers | ($741) | $1,944,872 | ($558) | $501,978 | | Commodity futures | Receivables/Payables from broker-dealers | ($7,017) | $6,489,328 | ($4) | $25,462 | | Currency futures | Receivables/Payables from broker-dealers | $707 | $6,964,937 | $12,031 | $1,518,087 | | Fixed income futures | Receivables/Payables from broker-dealers | $1 | $5,989 | $165 | $82,044 | | Options | Financial instruments owned/sold, not yet purchased | $3,485 | $1,167,643 | $3,186 | $1,173,351 | | Currency forwards | Financial instruments owned/sold, not yet purchased | $377,279 | $33,579,641 | $339,085 | $33,560,544 | | Interest rate swap (hedging) | Payables to broker-dealers | $0 | $0 | $7,661 | $1,525,000 | Net Gain (Loss) from Derivative Instruments (Years Ended December 31, in thousands) | Derivative Type | Financial Statements Location | 2023 | 2022 | 2021 | | :--------------------------------------- | :--------------------------------------- | :--------- | :--------- | :--------- | | Futures | Trading income, net | $297,345 | $257,258 | $283,482 | | Currency forwards | Trading income, net | ($150,071) | $12,492 | $1,077 | | Options | Trading income, net | $21,224 | $30,339 | $95,828 | | Interest rate swap on term loan | Other, net | ($1,720) | ($1,879) | ($1,871) | | Terminated interest rate swaps | Financing interest expense on long term borrowings | ($3,994) | $0 | $0 | | Total (not designated as hedging) | | $162,784 | $298,210 | $378,516 | | Interest rate swaps (designated as hedging) | Other comprehensive income | ($35,990) | $106,329 | $44,541 | - In December 2023, the company terminated two existing interest rate swap arrangements and entered into a new two-year $1,525 million floating-to-fixed interest rate swap, designated as a qualifying cash flow hedge[548][549][572] 11. Variable Interest Entities Virtu holds noncontrolling interests in five unconsolidated Variable Interest Entities (VIEs) and consolidates a joint venture for a multi-asset request-for-quote platform where it holds a 51% controlling interest - Virtu holds noncontrolling interests in five unconsolidated Variable Interest Entities (VIEs), including JVs for microwave communication networks, derivatives trading technology, an equities exchange, and a cryptocurrency trading platform[575][576][577][578] - The company accounts for its interests in these unconsolidated VIEs using the equity method, with exposure generally limited to the carrying value of the equity investment[579][580] - A JV formed in Q2 2022 for a multi-asset request-for-quote communication platform, in which Virtu holds a 51% controlling interest, is consolidated[581] 12. Revenues from Contracts with Customers This note disaggregates Virtu's revenues from customer contracts by service type and recognition timing, totaling $455.6 million in 2023, with commissions recognized on trade date Revenues from Contracts with Customers by Service (Years Ended December 31, in thousands) | Service Type | 2023 | 2022 | 2021 | | :--------------------------------------- | :--------- | :--------- | :--------- | | Commissions, net | $326,660 | $398,270 | $474,710 | | Workflow technology | $90,654 | $91,667 | $98,486 | | Analytics | $38,284 | $39,908 | $41,293 | | Total Revenue from Contracts with Customers | $455,598 | $529,845 | $614,489 | Timing of Revenue Recognition (Years Ended December 31, in thousands) | Timing | 2023 | 2022 | 2021 | | :--------------------------------------- | :--------- | :--------- | :--------- | | Services transferred at a point in time | $2,221,137 | $2,295,054 | $2,737,230 | | Services transferred over time | $72,236 | $69,758 | $74,255 | | Total Revenues | $2,293,373 | $2,364,812 | $2,811,485 | - Commissions, net, are recognized on a trade date basis as performance obligations for trade execution and clearing services are satisfied[582] - Analytics products and services can be paid for through variable bundled arrangements with trade execution services, with commissions allocated based on stand-alone selling prices and a calculated ratio[589] 13. Income Taxes Virtu's 2023 income tax provision was $61.2 million, with an 18.8% effective tax rate influenced by various factors, and $167.9 million in deferred tax assets, including a full valuation allowance Provision for Income Taxes (Years Ended December 31, in thousands) | Category | 2023 | 2022 | 2021 | | :--------------------------------------- | :--------- | :--------- | :--------- | | Current provision (benefit) | $45,947 | $85,077 | $134,275 | | Deferred provision (benefit) | $15,263 | $3,390 | $35,395 | | Total Provision for Income Taxes | $61,210 | $88,466 | $169,670 | Effective Tax Rate Reconciliation (Years Ended December 31) | Factor | 2023 | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | :----- | | Tax provision at U.S. federal statutory rate | 21.0% | 21.0% | 21.0% | | Less: rate attributable to noncontrolling interest | (8.7)% | (8.3)% | (7.7)% | | State and local taxes, net of federal benefit | 3.5% | 2.5% | 3.0% | | Foreign taxes | 6.9% | 5.1% | 3.0% | | Foreign tax credits | (3.8)% | (2.8)% | (1.8)% | | Effective tax rate | 18.8% | 15.9% | 17.0% | Deferred Income Tax Assets and Liabilities (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Total deferred income tax assets | $167,945 | $190,809 | | Total deferred income tax liabilities | $34,286 | $44,351 | | Unrecognized tax benefits | $6,802 | $6,614 | - A full valuation allowance was recorded against non-U.S. net operating loss carryforwards ($57.1 million in 2023) as their realization is not more likely than not[604] 14. Commitments, Contingencies and Guarantees Virtu is subject to various claims, lawsuits, and regulatory investigations, including an SEC action and stockholder lawsuits, though management believes the ultimate outcome will not materially impact the business - Virtu is subject to claims, lawsuits, regulatory examinations, and investigations, including an SEC action alleging violations of federal securities laws regarding information barriers (2018-2019)[610] - Related stockholder lawsuits (Hiebert v. Virtu Financial, Inc., City of Birmingham Retirement and Relief System v. Virtu Financial, Inc.) allege false and misleading statements[611] - Other ongoing litigation includes In re United States Oil Fund, LP Securities Litigation (crude oil ETF trading), Iron Workers Local No. 55 Pension Fund v. Virtu Financial, Inc. (books and records inspection), and Mallinckrodt PLC, et al. v. Argos Capital Appreciation Master Fund LP et al (alleged fraudulent transfers)[612][614][615] - Management believes the ultimate outcome of these matters will not have a material adverse impact on the business, financial condition, or operating results, despite the inherent difficulty in predicting litigation outcomes[617] 15. Leases Virtu leases corporate office space, data centers, and technology equipment, with operating lease ROU assets of $229.5 million and liabilities of $278.3 million as of December 31, 2023 Lease Assets and Liabilities (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Operating lease right-of-use assets | $229,499 | $187,442 | | Operating lease liabilities | $278,317 | $239,202 | | Finance lease ROU assets (net) | $29,076 | $15,172 | | Finance lease liabilities | $29,609 | $15,323 | Weighted Average Lease Terms and Discount Rates (as of December 31) | Metric | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Weighted average remaining lease term (Operating) | 5.25 years | 6.21 years | | Weighted average remaining lease term (Finance) | 3.5 years | 2.84 years | | Weighted average discount rate (Operating) | 6.40% | 5.43% | | Weighted average discount rate (Finance) | 5.51% | 3.92% | Future Minimum Lease Payments (as of December 31, 2023, in thousands) | Year | Operating Leases | Finance Leases | | :--------------------------------------- | :--------------- | :--------------- | | 2024 | $76,295 | $11,264 | | 2025 | $70,210 | $7,677 | | 2026 | $67,220 | $6,683 | | 2027 | $31,278 | $5,513 | | 2028 | $28,022 | $1,941 | | 2029 and thereafter | $55,296 | $0 | | Total Lease Payments | $328,321 | $33,078 | 16. Cash This note reconciles cash, cash equivalents, and restricted cash, totaling $855.5 million as of December 31, 2023, as presented in the Consolidated Statements of Cash Flows Cash, Cash Equivalents, and Restricted Cash Reconciliation (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Cash and cash equivalents | $820,436 | $981,580 | | Cash restricted or segregated under regulations and other | $35,024 | $56,662 | | Total cash, cash equivalents and restricted cash | $855,460 | $1,038,242 | 17. Capital Structure Virtu has four classes of common stock, with the Founder Member controlling 86.5% of voting power, and has authorized 26 million shares for awards and repurchased $1.11 billion in shares/units through December 31, 2023 - Virtu has four classes of common stock: Class A and C (one vote per share), and Class B and D (ten votes per share)[633] - The Founder Member controls approximately 86.5% of the combined voting power of common stock[633] - The Amended and Restated 2015 Management Incentive Plan authorizes 26,000,000 shares of Class A Common Stock for various awards[635] - Through December 31, 2023, the share repurchase program has bought back approximately 43.6 million shares of Class A Common Stock and Virtu Financial Units for $1,109.6 million, with $110.4 million remaining capacity[638][639] - A warrant issued to the Founder Member to purchase 3,000,000 shares of Class A Common Stock at $22.98 was fully exercised on December 17, 2021[641] 18. Share-based Compensation This note details share-based compensation, with 1,511,776 stock options outstanding at $19.00 weighted average exercise price and $55.2 million in unrecognized RSU compensation expense as of December 31, 2023 Stock Option Activity (Years Ended December 31) | Metric | Number of Options (2023) | Weighted Average Exercise Price Per Share (2023) | | :--------------------------------------- | :----------------------- | :--------------------------------------- | | At December 31, 2022 | 1,521,776 | $19.00 | | Granted | 0 | $0 | | Exercised | 0 | $0 | | Forfeited or expired | (10,000) | $0 | | At December 31, 2023 | 1,511,776 | $19.00 | RSU and RSA Activity (Years Ended December 31) | Metric | Number of RSUs and RSAs (2023) | Weighted Average Fair Value (2023) | | :--------------------------------------- | :----------------------------- | :----------------------- | | At December 31, 2022 | 3,954,833 | $28.13 | | Granted | 3,763,217 | $19.28 | | Forfeited | (187,053) | $26.45 | | Vested | (2,627,823) | $23.46 | | At December 31, 2023 | 4,903,174 | $23.90 | - Total unrecognized share-based compensation expense related to unvested RSUs was $55.2 million as of December 31, 2023, to be recognized over a weighted average period of 0.9 years[652] 19. Property, Equipment and Capitalized Software Virtu's net property, equipment, and capitalized software totaled $100.4 million as of December 31, 2023, with $25.6 million in depreciation and $37.7 million in capitalized software amortization in 2023 Property, Equipment and Capitalized Software (as of December 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :--------- | :--------- | | Capitalized software costs | $136,873 | $242,769 | | Leasehold improvements | $22,188 | $18,370 | | Furniture and equipment | $309,083 | $284,818 | | Less: Accumulated depreciation and amortization | ($367,779) | ($460,763) | | Total net property, equipment and capitalized software | $100,365 | $85,194 | - Depreciation expense for property and equipment was $25.6 million in 2023[656] - Amortization expense for capitalized software was $37.7 million in 2023[656] 20. Regulatory Requirement Virtu's U.S. and foreign regulated subsidiaries met all capital requirements as of December 31, 2023, with VAL maintaining $28.7 million in special reserve bank accounts for customers U.S. Subsidiaries Regulatory Capital (as of December 31, 2023, in thousands) | Subsidiary | Regulatory Capital | Regulatory Capital Requirement | Excess Regulatory Capital | | :--------------------------------------- | :----------------- | :----------------------------- | :------------------------ | | Virtu Americas LLC (VAL) | $412,626 | $1,000 | $411,626 | | RFQ-Hub Americas LLC (RAL) | $1,425 | $15 | $1,410 | Foreign Subsidiaries Regulatory Capital (as of December 31, 2023, in thousands) | Region/Subsidiary | Regulatory Capital | Regulatory Capital Requirement | Excess Regulatory Capital | | :--------------------------------------- | :----------------- | :----------------------------- | :------------------------ | | Canada (Virtu Canada Corp) | $14,630 | $189 | $14,441 | | Ireland (Virtu Europe Trading Limited) | $86,370 | $27,821 | $58,549 | | UK (Virtu ITG UK Limited) | $2,040 | $955 | $1,085 | | Asia Pacific (Virtu Financial Singapore Pte. Ltd.) | $126,022 | $73,407 | $52,615 | - VAL maintained $28.7 million in special reserve bank accounts for the benefit of customers as of December 31, 2023[658] 21. Geographic Information and Business Segments Virtu operates globally, with U.S. operations generating $1.92 billion in 2023 revenue, and its Market Making, Execution Services, and Corporate segments are evaluated on a pre-tax basis Total Revenues by Geographic Area (Years Ended December 31, in thousands) | Geographic Area | 2023 | 2022 | 2021 | | :--------------------------------------- | :--------- | :--------- | :--------- | | United States | $1,920,748 | $1,914,223 | $2,260,750 | | Ireland | $206,507 | $222,178 | $305,509 | | Others | $166,118 | $228,411 | $245,226 | | Total Revenues | $2,293,373 | $2,364,812 | $2,811,485 | Total Revenue and Pre-tax Earnings by Segment (Years Ended December 31, in thousands) | Segment | Total Revenue (2023) | Pre-tax Earnings (2023) | | :--------------------------------------- | :------------------- | :---------------------- | | Market Making | $1,843,523 | $315,602 | | Execution Services | $446,542 | $10,440 | | Corporate | $3,308 | ($911) | | Consolidated Total | $2,293,373 | $325,131 | - Management evaluates segment performance on a pre-tax basis, with segment assets and liabilities not used for this evaluation[668] 22. Related Party Transactions Virtu engages in ordinary course transactions with affiliates, including $1.5 million in net payables in 2023, and payments to JNX and joint ventures, with a Founder Member warrant exercised in 2021 - As of December 31, 2023, Virtu had net payables of $1.5 million to its affiliates[670] - Payments to J