Virtu’s overhaul of KCG market making business pays off

Doug Cifu says Virtu is “the ultimate market making firm” following a 50% surge in trading income.

The combination of Virtu Financial’s and KCG’s market making business has proved to be a successful move so far following a surge in quarterly trading revenue.

Virtu’s fourth quarter earnings revealed the market making unit’s adjusted net trading income stood at $204 million, up 50% from the previous quarter.

Speaking on Virtu’s Q4 earnings call, chief executive officer Doug Cifu described the now combined business as “the ultimate market making firm” after it outperformed in the last three months of 2017.

“Our conviction that the two firms market making styles and cultures are remarkably complementary has been proven correct and we believe that there are ample opportunities in front of us to grow revenue further,” Cifu said.

Since it acquired KCG, Virtu has migrated some of the firm’s legacy market making trading strategies onto its platform, and is continuing to migrate KCG inherent quantitative strategies.

Virtu added the move has led to increased efficiency and execution performance which is driving profits for the market making business.

“We continue to enable additional opportunities for internalisation across both firms, thereby being more efficient and intelligent about our hedging activities,” Cifu told investors.

“We are only beginning to achieve trading efficiencies and harmonise the strengths of both legacy firms and we believe there’s a lot of growth ahead for the combined firms as we continue to implement more combined Virtu and KCG style strategies.”

Cifu continued that separately both KCG and Virtu had market making models with problems but from very different perspectives.

Virtu lacked the customer base and had to deal with market making activities in public markets and in dark pools. Whereas at KCG, the market making business struggled continuously following significant drops in quarterly revenues before it finally decided to shut down the business for options and corporate bonds.

KCG’s market making strength, however, was found in its global customer base and franchise with quantitative models that were able to monetise flows in ways Virtu was not.  

“You take that and you combine those two and you’ve got the ultimate market making firm, and that was the theory of the merger,” Cifu concluded.

Virtu completed its $1.4 billion acquisition of KCG in July last year, following an unsolicited bid for the firm in March.

At the time of the bid, both firms had seen revenues drop across trading and market making business units due to low volatility and a dip in trading volumes. 

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