Virtu Financial (VIRT)

[Doubledown22]

Virtu Financial Inc., one of the world’s biggest high-frequency trading firms, is trying to break into China.
By Bradley Hope And Chelsey Dulaney
http://www.wsj.com/articles/virtu-financial-first-quarter-earnings-rise-nearly-49-1430903850

Updated May 6, 2015 12:40 p.m. ET

Chief Executive Officer Douglas Cifu told analysts Wednesday that Singapore’s state investment firm Temasek Holdings, which owns about 10% of Virtu, was providing the trading company with introductions to potential partners in the world’s most populous country. Virtu is also exploring the possibility of trading commodities and currencies in China, he said in an interview.

With a longtime aversion to foreign traders playing a bigger role in its markets, China has been seen by many in the proprietary trading world as a hitherto insurmountable challenge.

But China’s exchanges have cautiously been testing the waters for allowing greater involvement in trading from foreign firms. Several including the Shanghai Stock Exchange have run mock options trading experiments with several high-frequency trading firms over the past two years. Options trading hasn’t yet been approved by the China Securities Regulatory Commission, however.

Mr. Cifu said it was a big opportunity for Virtu. On some days, the Shanghai Commodities Exchange trades volume that is “within spitting distance” of the Chicago Mercantile Exchange, the biggest futures market in the world, Mr. Cifu said. “It’s a great marketplace in the abstract, but obviously there are a lot of devils in the details that you have to work out,” he said.

The pursuit of new markets—including China and India—comes as Virtu reported its best ever quarter since the firm’s founding in 2008.

Earnings rose 49% as it benefited from higher volumes and volatility during the first three months of the year. The company, which began trading on the Nasdaq Stock Market last month, had especially strong performances in its global commodities and currencies businesses.

Mr. Cifu said the firm was “consistently profitable” during the quarter, including when the Swiss franc surged after Switzerland’s central bank unexpectedly scrapped a cap on the franc’s exchange rate against the euro. Many market participants lost significant amounts of money that day.

Virtu makes markets—meaning it simultaneously offers to buy and sell securities in the hope of capturing a tiny spread between those prices—on more than 200 exchanges and other private venues around the world.

Earlier this year, T. Rowe Price Group started sending a small portion of its stock market orders to Virtu for execution, The Wall Street Journal reported last week. However, Mr. Cifu said the firm had no plans to expand into the execution business.

“We’ll see where it takes us,” he said of the pilot, which also involves agency brokerage Themis Trading LLC. “We’re very proud that a world-class investor would see fit to experiment with a firm like Virtu.”

Virtu’s reliance on ultrafast telecommunications networks and computer algorithms to do its trading has sparked criticism in the past year from some market participants and observers. T. Rowe Price is among the critics of the way the market structure can unfairly benefit such firms.

Its initial public offering was seen as an important test of how global investors view the controversy around high-speed, computerized trading. The offering priced last month at $19 a share, and Virtu’s stock closed Tuesday at $21.79.

For the quarter ended March 31, profit rose to $72.8 million from $48.9 million a year earlier. Total revenue rose 28% to $221.5 million.

In its global currencies business, net trading income more than doubled to $42.2 million, excluding certain items. Adjusted net trading income grew 15.5% in its global commodities business and 78.3% in its Asia-Pacific equities business.

Mr. Cifu said Virtu couldn’t expect the same volatility in future quarters. “The core strength of the firm is diversification” in asset classes, he said.

Write to Bradley Hope at [e-mail] and Chelsey Dulaney at [e-mail]


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