2017 Annual Report
GLOBAL REACH
Virtu provides Market Making, Execution
Services, and Analytics to the Retail and
Institutional Capital Markets
25k+
SECURITIES
36
COUNTRIES
235+
VENUES
MARKET
MAKING
EXECUTION
SERVICES
POST TRADE
ANALYTICS
− Wholesale
− Institutional trading
− Transparent routing
− Customized liquidity
− Algorithmic trading
− Data-driven results
− Lead Market Making
− ETF trading
− Custom TCA
− Disclosed
relationships
− Commission
management
− Market structure
insights
RETAIL WHOLESALE SERVICE PROVIDER
Virtu provided over $300 million in price
improvement to Retail investors in 2017
Price Improvement Provided to Retail Investors
$305M
$262M
$182M
$125M
2014
2015
2016
2017
Market Share of Retail
% of Retail Orders Improved
29%
30%
26%
24%
77%
75%
71%
66%
80%
75%
70%
65%
60%
$350
$300
$250
$200
$150
$100
$50
s
n
o
i
l
l
i
M
$0
35%
30%
25%
20%
15%
10%
5%
0%
2014
2015
2016
2017
2014
2015
2016
2017
All fi gures calculated based on data publicly disclosed pursuant to SEC Rule 605.
37570a1.indd 1
4/19/2018 5:16:13 PM
" Our core principles
are simple and
straightforward: We
believe in transparent
markets where buyers
and sellers can meet
to transact in a fair
and open manner. "
Douglas A. Cifu
Chief Executive Officer
Dear Fellow Shareholder,
2017 was a transformational year for Virtu Financial. We
trace our roots back to the early 1980’s when my partner and
co-founder, Vincent Viola, purchased a membership on the
New York Mercantile Exchange in lower Manhattan and began
his career as a “local” or a market maker in the commodities
trading pits. In those days, price discovery and transferring risk
from buyers to sellers was confined to the floors of exchanges
and took place in trading pits, with transactions taking place
using hand signals, open outcry and paper trading tickets.
Today, over 35 years later, Virtu provides the same price
discovery and risk transference services that the market
makers provided in the pits, only now, price discovery is
enabled by technology and automation housed in data centers
around the world. At Virtu, we deploy technology to provide
prices to investors and other market participants on over 235
venues in 36 countries around the world. We provide two-
sided liquidity in over 25,000 financial instruments across cash,
OTC, and futures markets, including individual stocks and
ETPs in the U.S., Canada, Latin America, Europe, and Asia,
as well as global commodities, such as energy, metals, and
softs, in addition to foreign exchange, options and fixed income
securities.
Our global presence gives us the scale to provide critical
services to the financial markets – efficient price discovery
and risk transference. As a market maker, we do not have a
view on the direction of markets or of market sentiment; our
business is to provide liquidity and enable access to global
market participants.
As a meaningful participant and highly regulated service
provider to the global capital markets, we participate often
in discussions with various constituents including investors,
exchanges, regulators, and other stakeholders regarding
the current market structure and potential enhancements or
changes. We proactively engage with regulators and comment
on proposed changes to legislation and regulation. Our
core principles are simple and straightforward: We believe
in transparent markets where buyers and sellers can meet
to transact in a fair and open manner. This includes price
transparency to all market participants in a centralized manner
as well as disclosure of market data fees, where appropriate.
We believe market participants should employ rigorous risk
monitoring and controls to foster faith in the global markets.
We believe in sound regulation that is principles based and
transparent.
In 2017 we returned to lower Manhattan with the acquisition
of KCG Holdings, formerly known as “Knight Capital”, one of
the premier U.S. based market making firms with a 20+ year
history. The businesses we acquired with the KCG acquisition
are remarkable customer franchises and provide critical
services to the global retail and institutional capital markets.
In particular, we are proud that Virtu now services 1 in 4 retail
orders in the U.S. We help improve the prices retail investors
achieve when transacting and we paid over $300 million in
price improvement to retail investors in 2017.
Acquiring KCG was an opportunity for Virtu to transform our
business, move “upstream” as a wholesale market maker, and
apply the technical know-how and trading platform built over a
fifteen year history to KCG’s established client franchise. The
results so far have exceeded our expectations, and we are
confident that the successes we have achieved will continue.
2017 also marked another year of historically low volatility in
the financial markets. The first quarter of 2018 has seen the
return of volatility globally. Unlike the spikes in recent prior
years, this year’s elevated volatility has been more sustained;
if this environment persists, it will be another positive for Virtu’s
continuing results. While there can be no assurances about
the environment going forward, we continue to focus on being
the most technologically advanced and operationally efficient
market maker in the world and building our business to be
successful and profitable in any market environment.
" We continue to focus on being the
most technologically advanced
and operationally efficient market
maker in the world, and building
our business to be successful
and profitable in any market
environment. "
I would be remiss if I did not thank the extraordinary
professionals I have the opportunity to work with on a daily
basis. In our offices around the globe, we seek to employ
talented professionals whose hard work and dedication allows
us to achieve our goals.
2017 was a big year for Virtu. We are positive and enthusiastic
about the future and firmly believe that Virtu’s best days lie
ahead.
Sincerely,
Douglas A. Cifu
Chief Executive Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2017
or
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-37352
Virtu Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
32-0420206
(I.R.S. Employer Identification No.)
300 Vesey Street
New York, New York 10282
(Address of principal executive offices)
10282
(Zip Code)
(212) 418-0100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:95) No (cid:133)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes (cid:133) No (cid:95)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes (cid:95) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes (cid:95) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133)
Accelerated filer (cid:95)
Non-accelerated filer (cid:133)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:133)
Emerging growth company (cid:95)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:95)
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2017 was
approximately $699.7 million, based on the closing price of $17.65 per share as reported by NASDAQ on such date.
As of March 13, 2018, the Company has the following classes of common stock outstanding:
Class of Stock
Class A common stock, par value $0.00001 per share . . . . . . . . . . . . . . . . . . . . . . . . .
Class C common stock, par value $0.00001 per share . . . . . . . . . . . . . . . . . . . . . . . . .
Class D common stock, par value $0.00001 per share . . . . . . . . . . . . . . . . . . . . . . . . .
Shares Outstanding
as of March 13, 2018
91,512,582
17,066,564
79,610,490
Portions of Part III of this Form 10-K are incorporated by reference from the Registrant’s definitive proxy statement (the “2018 Proxy
Statement”) for its 2018 annual meeting of shareholders to be filed with the Securities and Exchange Commission no later than 120 days after the end
of the Registrant’s fiscal year.
VIRTU FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2017
PART I
ITEM 1.
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
ITEM 6.
ITEM 7.
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . .
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . .
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
ITEM 9.
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE . . . . . . . . . .
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
NUMBER
3
4
14
38
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39
40
42
46
73
77
128
128
129
130
130
130
130
130
131
135
Unless the context otherwise requires, the terms “we,” “us,” “our,” “Virtu” and the “Company” refer to Virtu Financial,
Inc., a Delaware corporation, and its consolidated subsidiaries and the term “Virtu Financial” refers to Virtu Financial
LLC, a Delaware limited liability company and a consolidated subsidiary of ours.
2
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
PART I
This Form 10-K contains forward-looking statements, including certain statements contained in the risk factors.
You should not place undue reliance on forward-looking statements because they are subject to numerous uncertainties
and factors relating to our operations and business environment, all of which are difficult to predict and many of which
are beyond our control. Forward-looking statements include information concerning our possible or assumed future
results of operations, including descriptions of our business strategy. These forward-looking statements can be identified
by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “believe,” “expect,”
“anticipate,” “intend,” “plan,” “estimate,” “project” or, in each case, their negative, or other variations or comparable
terminology and expressions. These statements are based on assumptions that we have made in light of our experience in
the industry as well as our perceptions of historical trends, current conditions, expected future developments and other
factors we believe are appropriate under the circumstances. As you read and consider this Form 10-K, you should
understand that these statements are not guarantees of performance or results and that our actual results of operations,
financial condition and liquidity, and the development of the industry in which we operate, may differ materially from
those made in or suggested by the forward-looking statements contained in this Form 10-K. By their nature,
forward-looking statements involve known and unknown risks and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future. Although we believe that the forward-looking
statements contained in this Form 10-K are based on reasonable assumptions, you should be aware that many factors
could affect our actual financial results or results of operations and cash flows, and could cause actual results to differ
materially from those in such forward-looking statements, including but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
reduced levels of overall trading activity;
dependence upon trading counterparties and clearing houses performing their obligations to us;
failures of our customized trading platform;
risks inherent to the electronic market making business and trading generally;
increased competition in market making activities and execution services;
dependence on continued access to sources of liquidity;
risks associated with self-clearing and other operational elements of our business;
compliance with laws and regulations, including those specific to our industry;
obligation to comply with applicable regulatory capital requirements;
litigation or other legal and regulatory-based liabilities;
proposed legislation that would impose taxes on certain financial transactions in the European Union, the
U.S. and other jurisdictions;
obligation to comply with laws and regulations applicable to our international operations;
enhanced media and regulatory scrutiny and its impact upon public perception of us or of companies in our
industry;
need to maintain and continue developing proprietary technologies;
failure to maintain system security or otherwise maintain confidential and proprietary information;
the effect of the Acquisition of KCG (as defined below) on existing business relationships, operating
results, and ongoing business operations generally;
the significant costs and significant indebtedness that we incurred in connection with the Acquisition of
KCG, and the integration of KCG into our business;
3
•
•
•
•
•
•
•
•
•
•
•
•
the risk that we may encounter significant difficulties or delays in integrating the two businesses and the
anticipated benefits, costs savings and synergies or capital release may not be achieved;
the assumption of potential liabilities relating to KCG’s business;
capacity constraints, system failures, and delays;
dependence on third party infrastructure or systems;
use of open source software;
failure to protect or enforce our intellectual property rights in our proprietary technology;
risks associated with international operations and expansion, including failed acquisitions or dispositions;
the effects of and changes in economic conditions (such as volatility in the financial markets, inflation,
monetary conditions and foreign currency and exchange rate fluctuations, foreign currency controls and/or
government mandated pricing controls, as well as in trade, monetary, fiscal and tax policies in international
markets) and political conditions (such as military actions and terrorist activities);
risks associated with potential growth and associated corporate actions;
inability to, or delay, in accessing the capital markets to sell shares or raise additional capital;
loss of key executives and failure to recruit and retain qualified personnel; and
risks associated with losing access to a significant exchange or other trading venue.
We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or
circumstances that may arise after the date of this Form 10-K.
ITEM 1. BUSINESS
Overview
BUSINESS
We are a leading financial services firm that leverages cutting edge technology to deliver liquidity to the global
markets and innovative, transparent trading solutions to our clients. We believe that our broad diversification, in
combination with our proprietary technology platform and low-cost structure, enables us to facilitate risk transfer
between global capital markets participants by supplying execution services and competitive liquidity in over 25,000
securities and other financial instruments, on over 235 venues, in 36 countries worldwide while at the same time earning
attractive margins and returns.
Technology and operational efficiency are at the core of our business, and our focus on market making and
order routing technology is a key element of our success. We have developed a proprietary, multi-asset, multi-currency
technology platform that is highly reliable, scalable and modular, and we integrate directly with exchanges and other
liquidity centers. Our market data, order routing, transaction processing, risk management and market surveillance
technology modules manage our market making and institutional agency activities in an efficient manner that enables us
to scale our activities globally across additional securities and other financial instruments and asset classes without
significant incremental costs or third-party licensing or processing fees.
We believe that technology-enabled market makers like Virtu serve an important role in maintaining and
improving the overall health and efficiency of the global capital markets by continuously posting bids and offers for
financial instruments and thereby providing market participants a transparent and efficient means to transfer risk. All
market participants benefit from the increased liquidity, lower overall trading costs and improve execution certainty that
Virtu provides.
4
As described in “Acquisition of KCG” below, on July 20, 2017 (the “Closing Date”), we completed our all-cash
acquisition (the “Acquisition”) of KCG Holdings, Inc. (“KCG”). KCG was a leading independent securities firm
offering clients a range of services designed to address trading needs across asset classes, product types and geographies.
KCG combined advanced technology with specialized client service across market making, agency execution and trading
venues and also engaged in principal trading via electronic market making.
Prior to the Acquisition, Virtu operated as a single reportable business segment. As a result of the Acquisition,
beginning in the third quarter of 2017, we have three operating segments: Market Making, Execution Services, and
Corporate. Our management allocates resources, assesses performance and manages our business according to these
segments.
We primarily conduct our Americas Equities business through our three SEC registered broker-dealers. We are
registered with the Central Bank of Ireland and the Financial Conduct Authority (“FCA”) in the UK for our European
trading and the Monetary Authority of Singapore and Australian Securities and Investments Commission for our Asia
Pacific trading. We register as a market maker or liquidity provider and/or enter into direct obligations to provide
liquidity on nearly every exchange or venue that offers such programs. We engage regularly with regulators around the
world on issues affecting electronic trading and to advocate for increased transparency. In the U.S., we conduct our
business from our headquarters in New York, New York and our trading centers in Austin, Texas and Chicago, Illinois.
Abroad, we conduct our business through trading centers located in London, England, Dublin, Ireland and Singapore.
Market Making
Our Market Making segment principally consists of market making in the cash, futures, and options markets
across global equities, options, fixed income, currencies and commodities. As a leading, low-cost market maker
dedicated to improving efficiency and providing liquidity across multiple securities, asset classes and geographies, we
aim to provide critical market functionality and robust price competition in the securities and other financial instruments
in which we provide liquidity. This contribution to the financial markets, and the scale and diversity of our market
making activities, provides added liquidity and transparency, which we believe are necessary and valuable components
to the efficient functioning of market infrastructure and benefit all market participants. We support transparent and
efficient, technologically advanced marketplaces, and advocate for legislation and regulation that promotes fair and
transparent access to markets.
As a market maker, we commit capital on a principal basis by offering to buy securities from, or sell securities
to, broker dealers, banks and institutions. We engage in principal trading in the Market Making segment direct to clients
as well as in a supplemental capacity on exchanges and on alternative trading systems (“ATSs”). As a complement to
electronic market making, our cash trading business handles specialized orders and transacts on the OTC Bulletin Board
marketplaces operated by the OTC Markets Group Inc. and the Alternative Investment Market of the London Stock
Exchange (“AIM”).
We make markets in a number of different assets classes, which are discussed in more detail below. We register
as market makers and liquidity providers where available and support affirmative market making obligations.
We provide competitive and deep liquidity that helps to create more efficient markets around the world. We
stand ready, at any time, to buy or sell a broad range of securities, and we generate revenue by buying and selling large
volumes of securities and other financial instruments and earning small bid/ask spreads. Our market structure expertise,
broad diversification, and execution technology enables us to provide competitive bids and offers in over 25,000
securities and other financial instruments, at over 235 venues, in 36 countries worldwide.
We believe the overall level of volumes and realized volatility in the various markets we serve have the greatest
impact on our businesses. Increases in market volatility can cause bid/ask spreads to widen as market participants are
more willing to transact immediately and as a result market makers’ capture rate per notional amount transacted will
increase.
5
We believe that the most relevant asset class distinctions and venues for the markets we serve include the
following:
Asset
Classes
Americas Equities . . . . . . . . . . . . . . . . . . . . . . .
Percentage of
Adjusted Net Trading
Income(1)
(Year Ended
December 31, 2017)
Selected Venues in Which We Make Markets
50 %
BATS, BM&F Bovespa, CHX, CME, MexDer,
NASDAQ, NYSE, NYSE Arca, NYSE American,
TSX, major private liquidity pools
Rest Of World (“ROW”) Equities . . . . . . . . . .
17 %
Amsterdam, Aquis, ASX, BATS Europe, Bolsa de
Global Fixed Income, Currencies,
Commodities ("FICC"), Options and Other . .
Madrid, Borsa Italiana, Brussels, EUREX,
Euronext -Paris, ICE Futures Europe,
Johannesburg Stock Exchange, Lisbon, LSE, OSE,
SBI Japannext, SGX, SIX Swiss Exchange,
TOCOM, TSE
23 %
BOX, BrokerTec, CME, Currenex, EBS, eSpeed,
Hotspot, ICE, ICE Futures Europe, LMAX,
NASDAQ Energy Exchange, NYSE Arca Options,
PHLX, Reuters/Fxall, SGX, TOCOM
(1) For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to
trading income, net, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations”
Technology is at the core of our business. Our team of in-house software engineers develops our software and
applications, and we utilize optimized infrastructure to integrate directly with the exchanges and other trading venues on
which we provide liquidity. Our focus on technology and our ability to leverage our technology enables us to be one of
the lowest cost providers of liquidity to the global electronic trading marketplace.
Leveraging the scalability and low costs of our platform, we are able to test and rapidly deploy new liquidity
provisioning strategies, expand to new securities, asset classes and geographies and increase transaction volumes at little
incremental cost. These efficiencies are central to our ability to deliver consistently positive Adjusted Net Trading
Income as our profitability per trade and per instrument is not significant, particularly in U.S. equities.
Our transaction processing is automated over the full life cycle of a trade. Our market making platform
generates and disseminates continuous bid and offer quotes. At the moment when a trade is executed, our systems
capture and deliver this information back to the source, in most cases within a fraction of a second, and the trade record
is written into our clearing system, where it flows through a chain of control accounts that allow us to automatically and
efficiently reconcile trades, positions and payments until the final settlement occurs.
We have built and continuously refine our automated and integrated, real time systems for global trading, risk
management, clearing and cash management, among other purposes. We have also assembled a proprietary connectivity
network between us and exchanges around the world. Efficiency and speed in performing prescribed functions are
always crucial requirements for our systems, and generally we focus on opportunities in markets that are sufficiently
advanced to allow the seamless deployment of our automated strategies, risk management system and core technology.
Our systems are monitored 24 hours a day, five days a week by our core operations team and are substantially
identical across our offices, in New York, New York; Austin, Texas; Chicago, Illinois; Dublin, Ireland; London,
England; and Singapore. This redundancy covers our full technology platform, including our market data, order routing,
transaction processing, risk management and market surveillance technology modules.
6
Clients and Products
We offer direct-to-client market making services across multiple asset classes primarily to sell-side clients
including global, national and regional broker dealers and banks as well as buy-side clients comprising, among others,
mutual funds, pension plans, plan sponsors, hedge funds, trusts and endowments in North America, Europe and Asia.
We generally compete based on execution quality and immediacy, market coverage, price-improvement,
payment for order flow, fulfillment rates and client service. In direct-to-client electronic market making in U.S. equities,
execution quality is generally accepted as speed, spread and price improvement under SEC Rule 605. In other asset
classes, standards for execution quality are both mandatory by applicable regulation and in many cases, client defined.
We continually work to provide clients with high quality, low-cost trade executions that enable them to satisfy
their fiduciary obligation to seek the best execution on behalf of the end client. We continually refine our automated
order routing models so that we may remain competitive.
Americas Equities
Americas Equities trading accounted for approximately 50% and 29% of our Adjusted Net Trading Income for
the years ended December 31, 2017 and 2016, respectively. We trade over 25,000 listed Americas equity securities
including, among others, equity related futures and exchange traded products, on thirteen U.S. Securities and Exchange
Commission (“SEC”) registered exchanges as well as other ATSs, including the New York Stock Exchange (“NYSE”),
the NASDAQ, NYSE Arca, Cboe BATS, Chicago Stock Exchange, the TSX in Canada, Bovespa in Brazil and BMV in
Mexico, and we connect to more than 20 private liquidity pools.
As exchange traded products, or “ETPs,” and other similar products have proliferated both domestically and
internationally, demand has increased for trading the underlying assets or hedging such funds. Our technology has
enabled us to expand into providing liquidity to this growing area by making markets across these assets in a variety of
trading venues globally. We are authorized participants, and can create and/or redeem ETPs in the Americas. As of
December 31, 2017, we are the Lead Market Maker or Designated Liquidity Provider in over 600 ETPs listed in the
Americas.
Rest of World (“ROW”) Equities
ROW equities trading accounted for approximately 17% and 22% of our Adjusted Net Trading Income for the
years ended December 31, 2017 and 2016, respectively. Similar to our strategy in the Americas, we utilize direct
connections to all of the registered exchanges in a particular jurisdiction including the London Stock Exchange, Cboe
BATS Europe, NYSE Euronext, Six Swiss Exchange, Australian Securities Exchange, Tokyo Stock Exchange and
Singapore Exchange, as well as other trading venues and additional pools of liquidity to which we can gain access either
directly or through a broker.
We are also well positioned in European ETPs, as an authorized participant in many European ETPs. We are
authorized participants in over 2,000 ETPs and can create and/or redeem ETPs listed outside the Americas. As of
December 31, 2017, we are the registered Market Maker in over 500 ETPs listed abroad.
We increased our presence in APAC equities in 2016 by completing the acquisition of a minority stake in SBI
Japannext Co., Ltd. (“SBI”), a leading Proprietary Trading System in Japan.
Global FICC, Options, and Other
Trading in Global FICC, Options, and Other accounted for approximately 23% and 46% of our Adjusted Net
Trading Income for the years ended December 31, 2017 and 2016, respectively.
Our Fixed Income market making includes our activity in U.S. Treasury securities and other sovereign debt,
corporate bonds, and other debt instruments. We trade these products on a variety of specialized exchanges, direct to
counterparties, and other trading venues, including BrokerTec, eSpeed, DealerWeb, and BGS’s Fenics UTS.
7
Our Currencies market making, including spot, futures and forwards, comprises our activity in over 80
currencies, including deliverable, non-deliverable, fiat, and digital currencies, across dozens of venues and direct to
counterparties. During the years ended December 31, 2017 and 2016, we were a leading participant in the major foreign
exchange venues, including Reuters, Currenex, Cboe FX and NEX.
Our Commodities market making on both the CME, ICE, and Nasdaq Futures in crude oil, natural gas, heating
oil, gasoline futures. We trade approximately 100 energy products and futures on the ICE, CME, and TOCOM. We also
actively trade precious metals, including gold, silver, platinum and palladium, as well as base metals such as aluminum
and copper.
Our Options and Other market making includes our activity on all of the U.S. options exchanges of which we
are a member (i.e., Cboe, ISE and NYSE Arca) and through the U.S. futures exchanges.
Execution Services
Virtu offers agency execution services in global equities, ETFs, futures and fixed income to institutions, banks
and broker dealers. We generally earn commissions as an agent when executing orders on behalf of clients. Agency
based, execution-only trading is done primarily through: (a) algorithmic trading and order routing; (b) institutional sales
traders who offer portfolio trading and single stock sales trading which provides execution expertise for program, block
and riskless principal trades in global equities and ETFs; and (c) matching of client orders in Virtu MatchIt (our
registered ATS for U.S. equities) and in Virtu BondPoint (our fixed income ECN, which we sold in January 2018 as
described in Note 4 “Business Held for Sale” of the Company’s Consolidated Financial Statements included in Part II
Item 8 herein). Additionally we do act as principal on occasions, either when we manually work an order for a client, or
more often, via electronic trading algorithms, executing against our firm’s liquidity. We also earn technology services
revenues by providing our proprietary technology and infrastructure to select third parties for a service fee.
Clients and Products
We offer agency execution services across multiple asset classes to buy-side clients including mutual funds,
pension plans, plan sponsors, hedge funds, trusts and endowments and sell-side clients including global, national and
regional broker dealers and banks in North America, Europe and Asia. In 2017, our Execution Services segment did not
have any client that accounted for more than 10% of our commissions earned.
In this segment, we generally compete on trading technology, execution performance, costs, client service,
market coverage, liquidity, platform capabilities and anonymity. We draw on in-house developed trading technologies to
meet client criteria for best execution and for managing trading costs. As a result, we are able to attract a diverse array of
clients in terms of strategy, size and style. We also provide algorithmic trading and order routing that combine
technology, access to our differentiated liquidity and support from experienced professionals to help clients execute
trades.
We offer electronic execution services in global equities, options, futures and commodities via algorithmic
trading, order routing and an execution management system (“EMS”) as well as internal crossing through our registered
ATS. Our ATS provides clients with an anonymous source of non-displayed liquidity.
We offer clients a broad range of products and services and voice access to global markets including sales and
trading for equities, ETFs and options. Additionally, we provide buy-side clients with deep liquidity, actionable market
insights, anonymity and trade executions with minimal market impact and offer comprehensive trade execution services
covering the depth and breadth of the market. We handle large complex trades, accessing liquidity from our order flow
and other sources. We also provide soft dollar and commission recapture programs.
Corporate
Our Corporate segment contains investments principally in strategic financial services-oriented opportunities
and maintains corporate overhead expenses and all other income and expenses that are not attributable to our other
segments.
8
Risk Management
We are intensely focused on risk management and it is at the core of our trading infrastructure. Our real time
risk controls monitor all of our market making positions, incorporating market data and evaluating our risk exposure to
continuously update our outstanding bid and offer quotes, often many times per second. Although the majority of our
market making is automated, the trading process and our risk exposure are monitored by a team of individuals, including
members of our senior management team, who oversee our risk management processes in real-time. Our risk
management system is intrinsic to our trading infrastructure that is utilized in each of our trading centers.
Our on exchange market making strategies are designed to put minimal capital at risk at any given time by
limiting the notional size of our positions. Our strategies are also designed to lock in returns through precise hedging in
the primary instrument or in one or more economically equivalent instruments, as we seek to eliminate the price risk in
any positions held. Our real-time risk management system is built into our trading platform and is an integral part of our
order life-cycle, analyzing real-time pricing data and ensuring that our order activity is conducted within strict
pre-determined trading and position limits. If our risk management system detects that a trading strategy is generating
revenues or losses in excess of our preset limits, it will lockdown that strategy and alert management.
The market making activities, where we interact with customers, involve the taking on of position risks. The
risks at any point in time are limited by the notional size of positions as well as other factors. The overall portfolio risks
are quantified using internal risk models and monitored by the Chief Risk Officer (“CRO”), the independent risk group
and senior management.
In addition, our risk management system continuously reconciles our internal transaction records against the
records of the exchanges and other liquidity centers with which we interact.
Our risk management policies and risk limits are set by our Risk Advisory Committee, and overseen by our
CRO, who also reports independently into the Board Risk Committee.
We utilize the following approach to managing risk:
• On Exchange Market Making Strategy Lockdowns. Messages that leave our trading environment must first
pass through a series of preset risk controls, or “lockdowns,” which are intended to minimize the likelihood of
unintended activities by our market making algorithms, and which cannot be modified by our traders. Not only
do we implement preset risk controls to limit downside risk, but we also do the same to limit upside risk — if
our risk management system detects that a trading strategy is generating revenues or losses in excess of our
preset limits, a lockdown will be triggered. When a lockdown is triggered, our risk management system alerts us
and automatically freezes the applicable trading strategy, cancels all applicable open orders and prevents the
placement of additional related orders. Following a lockdown, a trader must manually reset the applicable
trading strategy. While this risk prevention layer adds a degree of latency to our trading infrastructure and can
prevent us from earning outsized returns in times of extreme market volatility, we believe that this trade off is
necessary to properly limit our downside risk.
• Customer Market Making Model Restrictions. All models have limits in place which restrict individual position
sizes, sector exposures and imbalanced portfolios with significant directional risks. Strategies are designed to
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automatically reduce exposures when limits are reached. The models are monitored by the trading team and the
risk managers constantly.
• Aggregate Exposure Monitoring. Pursuant to our risk management policies, our automated management
information systems monitor in real-time and generate report on daily and periodic bases. Exposures monitored
include:
o Risk Profiles
o Statistical Risk Measures including Value at Risk (“VaR”), and Equity Betas
o Stress and Scenario analysis
o Concentration measures
o Profit and Loss analysis
o Trading performance reports
• Our assets and liabilities are marked-to-market daily for financial reporting purposes by reference to official
exchange prices, and they are re-valued continuously throughout the trading day for risk management and
asset/liability management purposes.
• Operational Controls. We have a series of fully automated controls over of our business. Key automated
controls include:
o Our technical operations system continuously monitors our network and the proper functioning of each
of our trading centers around the world;
o Our market making system continuously evaluates the listed securities in which we provide bid and
offer quotes and changes its bids and offers in such a way as to minimize exposure to directional price
movements. The speed of communicating with exchanges and market centers is maximized through
continuous software and network engineering innovation, allowing us to achieve real-time controls
over market exposure. We connect to exchanges and other electronic venues through a network of
co-location facilities around the world that are monitored 24 hours a day, five days a week, by our staff
of experienced network professionals;
o Our clearing system captures trades in real-time and performs automated reconciliations of trades and
positions, corporate action processing, options exercises, securities lending and inventory management,
allowing us to effectively manage operational risk;
o Software developed to support our market making systems performs daily profit and loss and position
reconciliations; and
o After event reviews where operational issues are evaluated and risk mitigations are identified and
subsequently implemented
• Credit Controls. Trading notional limits are applied to customers and counterparts. These are monitored
throughout the day by trading support and risk.
• Liquidity Controls. We seek to minimize liquidity risk by focusing the majority of trading in highly active and
liquid instruments. Less liquid securities are identified and restrictions are in place as to the size of positions we
hold in such instruments.
We rely heavily on technology and automation to perform many functions within Virtu, which exposes us to
various forms of cyberattacks, including data loss or destruction, unauthorized access, unavailability of service or the
introduction of malicious code. We have taken significant steps to mitigate the various cyber threats, and we devote
significant resources to maintain and regularly upgrade our systems and networks and review the ever changing threat
landscape. We have created a Risk Advisory Committee, which includes key personnel from each of our locations
globally and is comprised of our CRO and our Chief Compliance Officer, members of our senior management team,
senior technologists and traders, and certain senior officers. We will continue to periodically review policies and
procedures to ensure they are effective in mitigating current cyber and other information security threats. In addition to
the policy reviews, we continue to look to implement technology solutions that enhance preventive and detection
capabilities. We also maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects
of cyber risks. However, such insurance may be insufficient to cover all losses.
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Our board of directors, through the Board Risk Committee, is regularly apprised of risk events, risk profiles,
trends and the activities of our Risk Advisory Committee, including our risk management policies, procedures and
controls.
Competition
Historically, our competition has been registered market making firms ranging from sole proprietors with very
limited resources to large, integrated broker-dealers. Today, a range of market participants may compete with us for
revenues generated by market making activities across one or more asset classes and geographies, including market
participants, such as Citadel Securities, Susquehanna International Group LLP, Two Sigma, Jane Street, DRW Holdings,
IMC, and Optiver. Some of our competitors in market making are larger than we are and have more captive order flow in
certain assets. We believe that the high cost of developing a competitive technological framework is a significant barrier
to entry by new market participants.
Technology and software innovation is a primary focus for us, rather than relying solely on the speed of our
network. We believe that our scalable technology allows us to access new markets and increase volumes with limited
incremental costs.
Intellectual Property and Other Proprietary Rights
We rely on federal and state laws that govern trade secrets, trademarks, domain names, copyright and contract
law to protect our intellectual property and proprietary technology. We enter into confidentiality, intellectual property
invention assignment and/or non-competition and non-solicitation agreements or restrictions with our employees,
independent contractors and business partners, and we control access to, and distribution of, our intellectual property.
Employees
As of March 5, 2018, we had approximately 560 employees, all of whom were employed on a full-time basis.
None of our employees are covered by collective bargaining agreements. We believe that our employee relations are
good.
Regulation
We conduct our U.S. equities and options market making and provide execution services through our three
SEC-registered broker-dealers, Virtu Financial BD LLC, Virtu Financial Capital Markets LLC, and Virtu Americas
LLC. Virtu Financial BD LLC is a self-clearing broker-dealer, is regulated by the SEC and its designated examining
authority is the Chicago Stock Exchange. Both Virtu Americas LLC and Virtu Financial Capital Markets LLC are
dual-clearing broker-dealers (which means each self-clears certain proprietary and customer transactions and clears and
settles the majority of customer transactions through fully disclosed clearing arrangements), are regulated by the SEC
and their designated examining authority is the Financial Industry Regulatory Authority, Inc. (“FINRA”).
Our activities in U.S. equities are primarily self-cleared. We are a full clearing member of the National
Securities Clearing Corporation (NSCC), and the DTCC. Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as our
clearing broker and carries and clears, on a fully disclosed basis, accounts for our institutional customers and acts as a
prime broker for certain of our market making accounts. In other asset classes, we use the services of prime brokers who
provide us direct market access to markets and often cross-margining and margin financing in return for an execution
and clearing fee. We continually monitor the credit quality of our prime brokers and rely on large multinational banks for
most of our execution and clearing needs globally.
Our energy, commodities and currency market making and trading activities are primarily conducted through
Virtu Financial Global Markets LLC.
We conduct our European, Middle Eastern and African (“EMEA”) market making and trading activities from
Dublin and through our Irish subsidiary, Virtu Financial Ireland Limited, which is authorized as an “Investment Firm”
with the Central Bank of Ireland. Execution Services and market making are also conducted through KCG Europe
Limited. In order to reduce the complexity of compliance with the requirements of the Markets in Financial Instruments
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Directive (“MiFID”) and Markets in Financial Instruments Directive II (“MiFID II”), the operations of KCG Europe
Limited, including all of its clients, are being transitioned to Virtu Financial Ireland Limited. Virtu Financial Ireland
Limited has received authorization from the Central Bank of Ireland to provide agency execution services to customers
and to operate a branch office in London. Once the transition is complete, KCG Europe Limited will cease operations
and withdraw its authorization with the FCA.
We conduct our Asia-Pacific (“APAC”) market making and trading activities from Singapore and through our
Singapore subsidiary, Virtu Financial Singapore Pte. Ltd. Virtu Financial Singapore Pte. Ltd. is registered with the
Monetary Authority of Singapore for an investment incentive arrangement.
Most aspects of our business are subject to extensive regulation under federal, state and foreign laws and
regulations, as well as the rules of the various self-regulatory organization (“SROs”) of which our subsidiaries are
members. The SEC, the U.S. Commodity Futures Trading Commission (“CFTC”), state securities regulators, FCA, the
Securities and Futures Commission (“SFC”), FINRA, National Futures Association (“NFA”), other SROs and other U.S.
and foreign governmental regulatory bodies promulgate numerous rules and regulations that may impact our business.
As a matter of public policy, regulatory bodies are charged with safeguarding the integrity of the securities and other
financial markets and with protecting the interests of investors in those markets. Regulated entities are subject to
regulations concerning all aspects of their business, including but not limited to trading practices, order handling, best
execution practices, anti-money laundering and financial crimes, handling of material non-public information,
safeguarding data, compliance with exchange and clearinghouse rules, capital adequacy, reporting, record retention,
market access and the conduct of officers, employees and other associated persons. Virtu Americas LLC carries certain
customer accounts and is therefore subject to applicable SEC requirements relating to the protection of customer
securities and the maintenance of a cash reserve account for the benefit of customers.
Rulemaking by these and other regulators (foreign and domestic), including resulting market structure changes,
has had an impact on our regulated subsidiaries by directly affecting our method of operation and, at times, our
profitability. Legislation can impose, and has imposed, significant obligations on broker-dealers, including our regulated
subsidiaries. These increased obligations require the implementation and maintenance of internal practices, procedures
and controls which have increased our costs and may subject us to government and regulatory inquiries, claims or
penalties.
Failure to comply with any laws, rules or regulations could result in administrative or court proceedings,
censures, fines, penalties, judgments, disgorgement, restitution and censures, suspension or expulsion from a certain
jurisdiction, SRO or market, the revocation or limitation of licenses, the issuance of cease-and-desist orders or
injunctions or the suspension or disqualification of the entity and/or its officers, employees or other associated persons.
These administrative or court proceedings, whether or not resulting in adverse findings, can require substantial
expenditures of time and money and can have an adverse impact on a firm’s reputation, customer relationship and
profitability. We and other broker dealers and trading firms have been the subject of requests for information and
documents from the SEC, FINRA and other regulators. We have cooperated and complied with the requests for
information and documents.
The regulatory environment in which we operate is subject to constant change. Our business, financial condition
and operating results may be adversely affected as a result of new or revised legislation or regulations imposed by the
U.S. Congress, foreign legislative bodies, state securities regulators, U.S. and foreign governmental regulatory bodies
and SROs. Additional regulations, changes in existing laws and rules, or changes in interpretations or enforcement of
existing laws and rules often directly affect the method of operation and profitability of regulated broker-dealers. We
cannot predict what effect, if any, the above-noted legislation, regulation or changes might have. However, there have
been in the past, and could be in the future, significant technological, operational and compliance costs associated with
the obligations which derive from compliance with such regulations.
On July 21, 2010, the Dodd-Frank Act was enacted in the U.S. Implementation of the Dodd-Frank Act is being
accomplished through extensive rulemaking by the SEC, the CFTC and other governmental agencies. The Dodd-Frank
Act includes the “Volcker Rule,” which significantly limits the ability of banks and their affiliates to engage in
proprietary trading, and Title VII, which provides a framework for the regulation of the swap markets. The CFTC has
largely finalized its rules with respect to those swaps markets and participants it regulates, while the SEC has not yet
12
completed all of its rules relating to security-based swaps. One of our subsidiaries is registered with the CFTC as a floor
trader, and is exempt from registration as a swap dealer based on its current activity. Registration as a swap dealer would
subject our subsidiary to various requirements, including those related to capital, conduct, and reporting.
The SEC and other regulatory bodies have enacted and are actively considering rules that may affect our
operations and profitability. In particular, on November 15, 2016, the SEC approved an NMS Plan to create a single,
comprehensive database known as the Consolidated Audit Trail (“CAT”) to enable regulators to track all data relating to
US equity and options market activity. The current compliance date for large reporting broker-dealers is November 15,
2018. Among other things, the NMS Plan will impose substantial new reporting obligations and costs on broker-dealers.
Regulators may propose other market structure changes particularly considering the continued regulatory scrutiny of
high frequency trading, alternative trading systems, market fragmentation, colocation, access to market data feeds, and
remuneration arrangements such as payment for order flow and exchange fee structures.
We have foreign subsidiaries and plan to continue to expand our international presence. The market making
industry in many foreign countries is heavily regulated, much like in the U.S. The varying compliance requirements of
these different regulatory jurisdictions and other factors may limit our ability to conduct business or expand
internationally. MiFID, which was implemented in November 2007, has been replaced by a more prescriptive MiFIR
Regulation and MiFID II. MiFID II represents the most significant change to take place in the operation of European
capital markets to date and became effective on January 3, 2018. MiFID II introduces requirements for increased pre and
post trade transparency, technological and organizational requirements for firms deploying algorithmic trading
techniques, restrictions on dark trading, and the roll out of a new bi-lateral OTC equity trading regime called the
Systematic Internalizer regime. MiFID II will require European firms to conduct all trading on European Trading Venues
including Regulated Markets, Multilateral Trading Facilities, Systematic Internalisers or equivalent third country venues,
require market makers like us to post firm quotes at competitive prices and will supplement current requirements with
regard to investment firms’ pre-trade risk controls related to the safe operation of electronic systems. MiFID II also
imposes additional requirements on trading platforms, such as additional technological requirements, clock
synchronization, microsecond processing granularity, pre-trade risk controls, transaction reporting requirements and
limits on the ratio of unexecuted orders to trades. Each of these requirements imposes additional technological,
operational and compliance costs on us. New laws, rules or regulations as well as any regulatory or legal actions or
proceedings, changes in legislation or regulation and changes in market customs and practices could have a material
adverse effect on our business, financial condition, results of operations, and cash flows.
Certain of our subsidiaries are subject to regulatory capital rules of the SEC, FINRA, other SROs and foreign
regulators. These rules, which specify minimum capital requirements for our regulated subsidiaries, are designed to
measure the general financial integrity and liquidity of a broker-dealer and require that at least a minimum part of its
assets be kept in relatively liquid form. Failure to maintain required minimum capital may subject a regulated subsidiary
to a fine, requirement to cease conducting business, suspension, revocation of registration or expulsion by applicable
regulatory authorities, and ultimately could require the relevant entity’s liquidation. See “Item 1A. Risk Factors — Risks
Related to Our Business — Failure to comply with applicable regulatory capital requirements could subject us to
sanctions imposed by the SEC, FINRA and other SROs or regulatory bodies.”
Corporate History
We and our predecessors have been in the electronic trading and market making business for more than 15
years. We conduct our business through Virtu Financial LLC (“Virtu Financial”) and its subsidiaries. We completed our
initial public offering (“IPO”) in April 2015, after which shares of our Class A common stock began trading on
NASDAQ under the ticker symbol “VIRT.”
Prior to our initial public offering, we completed a series of reorganization transactions (the “Reorganization
Transactions”) pursuant to which we became the sole managing member of Virtu Financial, all of the existing equity
interests in Virtu Financial were reclassified into non-voting common interest units (“Virtu Financial Units”), our
certificate of incorporation was amended and restated to authorize the issuance of four classes of common stock: Class
A, Class B, Class C and Class D, and the holders of Virtu Financial Units other than us subscribed for shares of Class C
common stock or Class D common stock (in the case of the Founder Post-IPO Member, as defined below) in an amount
equal to the number of Virtu Financial Units held by such member.
13
The Class A common stock and Class C common stock each provide holders with one vote on all matters
submitted to a vote of stockholders, and the Class B common stock and Class D common stock each provide holders
with 10 votes on all matters submitted to a vote of stockholders. The holders of Class C common stock and Class D
common stock do not have any of the economic rights (including rights to dividends and distributions upon liquidation)
provided to holders of Class A common stock and Class B common stock. Shares of our common stock generally vote
together as a single class on all matters submitted to a vote of our stockholders.
On July 20, 2017, the Company completed the all-cash acquisition of KCG Holdings, Inc. In connection with
the Acquisition, the Company issued 8,012,821 shares of the Company’s Class A stock to Aranda Investments Pte. Ltd.
(together with Havelock Fund Investments Pte. Ltd., the “Temasek Stockholders”), an affiliate of Temasek Holdings
(Private) Limited (“Temasek”) for an aggregate purchase price of approximately $125.0 million and 40,064,103 shares
of the Company’s Class A stock to an affiliate of North Island Holdings (the “North Island Stockholder”) for an
aggregate purchase price of approximately $618.7 million, in each case in accordance with terms of an investment
agreement in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (collectively, the “July 2017 Private Placement”).
As a result of the completion of the IPO, the Reorganization Transactions, the July 2017 Private Placement, and
certain other secondary offerings and permitted exchanges by current and former employees of Virtu Financial common
units for shares of the Company’s Class A common stock, the Company holds an approximately 48.3% interest in Virtu
Financial at December 31, 2017. The remaining issued and outstanding Virtu Finanical Units are held by an affiliate of
Mr. Viola (the “Founder Post-IPO Member”), two entities whose equityholders include certain members of the
management of Virtu Financial and certain other current and former members of management of Virtu Financial
(collectively, the “Virtu Post-IPO Members”). The Founder Post-IPO Member controls approximately 88.1% of the
combined voting power of our outstanding common stock as of December 31, 2017. As a result, the Founder Post-IPO
Member controls any actions requiring the general approval of our stockholders, including the election of our board of
directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or
sale of substantially all of our assets. The Founder Post-IPO Member is controlled by family members of Mr. Viola, our
Founder and Chairman Emeritus.
Available Information
Our website address is www.virtu.com. The information on our website is not, and shall not be deemed to be, a
part of this Annual Report on Form 10-K or incorporated into any other filings we make with the Securities and
Exchange Commission (the “SEC”). Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge on our website as soon as possible
after we electronically file them with, or furnish them to, the SEC. You can also read, access and copy any document that
we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference
Room. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements,
and other information regarding issuers, including Virtu, that are electronically filed with the SEC.
Our Investor Relations Department can be contacted at Virtu Financial, Inc., 300 Vesey Street, New York, NY,
10282, Attn: Investor Relations, e-mail: investor_relations@virtu.com.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
Because our revenues and profitability depend on trading volume and volatility in the markets in which we operate,
they are subject to factors beyond our control, are prone to significant fluctuations and are difficult to predict.
Our revenues and profitability depend in part on the level of trading activity of securities, derivatives and other
financial products on exchanges and in other trading venues in the U.S. and abroad, which are directly affected by factors
beyond our control, including economic and political conditions, broad trends in business and finance and changes in the
markets in which such transactions occur. Weaknesses in the markets in which we operate, including economic
14
slowdowns in recent years, have historically resulted in reduced trading volumes for us. Declines in trading volumes
generally result in lower revenues from market making and transaction execution activities. Lower levels of volatility
generally have the same directional impact. Declines in market values of securities or other financial instruments can
also result in illiquid markets, which can also result in lower revenues and profitability from market making and
transaction execution activities. Lower price levels of securities and other financial instruments, as well as compressed
bid/ask spreads, which often follow lower pricing, can further result in reduced revenues and profitability. These factors
can also increase the potential for losses on securities or other financial instruments held in inventory and failures of
buyers and sellers to fulfill their obligations and settle their trades, as well as claims and litigation. Declines in the
trading activity of institutional or “buy-side” market participants may result in lower revenue and/or diminished
opportunities for us to earn commissions from execution activities. Any of the foregoing factors could have a material
adverse effect on our business, financial condition, results of operations and cash flows. In the past, our revenues and
operating results have varied significantly from period to period due primarily to movements and trends in the
underlying markets and to fluctuations in trading volumes and volatility levels. As a result, period to period comparisons
of our revenues and operating results may not be meaningful, and future revenues and profitability may be subject to
significant fluctuations or declines.
We are dependent upon our trading counterparties and clearing houses to perform their obligations to us.
Our business consists of providing consistent two-sided liquidity to market participants across numerous
geographies and asset classes. In the event of a systemic market event, resulting from large price movements or
otherwise, certain market participants may not be able to meet their obligations to their trading counterparties, who, in
turn, may not be able to meet their obligations to their other trading counterparties, which could lead to major defaults by
one or more market participants. Following the implementation of certain mandates under the Dodd-Frank Act in the
U.S. and similar legislation worldwide, many trades in the securities and futures markets, and an increasing number of
trades in the over-the-counter derivatives markets, are cleared through central counterparties. These central
counterparties assume, and specialize in managing, counterparty performance risk relating to such trades. However, even
when trades are cleared in this manner, there can be no assurance that a clearing house’s risk management methodology
will be adequate to manage one or more defaults. Given the concentration of counterparty performance risk that is
concentrated in central clearing parties, any failure by a clearing house to properly manage a default could lead to a
systemic market failure. If our trading counterparties do not meet their obligations to us, or if any central clearing parties
fail to properly manage defaults by market participants, we could suffer a material adverse effect on our business,
financial condition, results of operations and cash flows.
We may incur losses in our market making activities and our execution services businesses in the event of failures of
our customized trading platform.
The success of our market making business is substantially dependent on the accuracy and performance of our
customized trading platform, which evaluates and monitors the risks inherent in our market making strategies and
execution services business, assimilates market data and reevaluates our outstanding quotes and positions continuously
throughout the trading day. Our strategies are designed to automatically rebalance our positions throughout the trading
day to manage risk exposures on our positions. Flaws in our strategies, order management system, latencies or
inaccuracies in the market data that we use to generate our quotes, or human error in managing risk parameters or other
strategy inputs, may lead to unexpected and unprofitable trades, which may result in material trading losses and could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may incur material trading losses from our market making activities.
A significant portion of our revenues are derived from our trading as principal in our role as a formal or
registered market maker and liquidity provider on various exchanges and markets, as well as direct to customer market
making. We may incur trading losses relating to these activities since each primarily involves the purchase, sale or short
sale of securities, futures and other financial instruments for our own account. In any period, we may incur significant
trading losses for a variety of reasons, including price changes, performance, size and volatility of portfolios we may
hold in connection with our customer market making activities, lack of liquidity in instruments in which we have
positions and the required performance of our market making obligations. Furthermore, we may from time to time
develop large position concentrations in securities or other financial instruments of a single issuer or issuers engaged in a
15
specific industry, or alternatively a single future or other financial instrument, which would result in the risk of higher
trading losses than if our concentration were lower.
These risks may limit or restrict, for example, our ability to either resell securities we have purchased or to
repurchase securities we have sold. In addition, we may experience difficulty borrowing securities to make delivery to
purchasers to whom we have sold securities short or lenders from whom we have borrowed securities.
In our role as a market maker, we attempt to derive a profit from bid/ask spreads. However, competitive forces
often require us to match or improve upon the quotes that other market makers display, thereby narrowing bid/ask
spreads, and to hold long or short positions in securities, futures or other financial instruments. We cannot assure you
that we will be able to manage these risks successfully or that we will not experience significant losses from such
activities, which could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Our risk management activities related to our on exchange market making strategies utilize a four-pronged
approach, consisting of strategy lockdowns, centralized strategy monitoring, aggregate exposure monitoring and
operational controls. In particular, messages that leave our trading environment first must pass through a series of preset
risk controls or “lockdowns” that are intended to minimize the likelihood of unintended activities. In certain cases this
layer of risk management, which adds a layer of latency to our process, may limit our ability to profit from acute
volatility in the markets. This would be the case, for example, where a particular strategy being utilized by one of our
traders is temporarily locked down for generating revenue in excess of the preset risk limit. Even if we are able to
quickly and correctly identify the reasons for a lockdown and quickly resume the trading strategy, we may limit our
potential upside as a result of our risk management policies.
The valuation of the securities we hold at any particular time may result in large and occasionally anomalous swings
in the value of our positions and in our earnings in any period.
The market prices of our long and short positions are reflected on our books at closing prices, which are
typically the last trade prices before the official close of the primary exchange on which each such security trades. Given
that we manage a globally integrated portfolio, we may have large and substantially offsetting positions in securities that
trade on different exchanges that close at different times of the trading day and may be denominated in different
currencies. Further, there may be large and occasionally anomalous swings in the value of our positions on any particular
day and in our earnings in any period. Such swings may be especially pronounced on the last business day of each
calendar quarter, as the discrepancy in official closing prices resulting from the asynchronous closing times may cause us
to recognize a gain or loss in one quarter which would be substantially offset by a corresponding loss or gain in the
following quarter.
We are exposed to losses due to lack of perfect information.
As a market maker, we provide liquidity by consistently buying securities from sellers and selling securities to
buyers. We may at times trade with others who have information that is more accurate or complete than the information
we have, and as a result we may accumulate unfavorable positions preceding large price movements in a given
instrument. Should the frequency or magnitude of these events increase, our losses would likely increase
correspondingly, which could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
We face substantial competition which would harm our financial performance.
Revenues from our market making activities depend on our ability to offer to buy and sell financial instruments
at prices that are attractive and represent the best bid and/or offer in a given instrument at a given time. To attract order
flow, we compete with other firms not only on our ability to provide liquidity at competitive prices, but also on other
factors such as order execution speed and technology. Similarly, revenues from our technology services and agency
execution services depend on our ability to offer cutting edge technology and risk management solutions.
Our competitors include other registered market makers, as well as unregulated or lesser-regulated trading and
technology firms that also compete to provide liquidity and Execution Services. Our competitors range from sole
16
proprietors with very limited resources to highly sophisticated groups, hedge funds, well-capitalized broker-dealers and
proprietary trading firms or other market makers that have substantially greater financial and other resources than we do.
These larger and better capitalized competitors may be better able to respond to changes in the market making industry,
to compete for skilled professionals, to finance acquisitions, to fund internal growth, to manage costs and expenses and
to compete for market share generally. Trading firms that are not registered as broker-dealers or broker-dealers not
registered as market makers may in some instances have certain advantages over more regulated firms, including our
subsidiaries that may allow them to bypass regulatory restrictions and trade more cheaply than more regulated
participants on some markets or exchanges. In addition, we may in the future face enhanced competition from new
market participants that may also have substantially greater financial and other resources than we do, which may result in
compressed bid/ask spreads in the marketplace that may negatively impact our financial performance. Moreover, current
and potential competitors may establish cooperative relationships among themselves or with third parties or may
consolidate to enhance their services and products. The trend toward increased competition in our business is expected to
continue, and it is possible that our competitors may acquire increased market share. Increased competition or
consolidation in the marketplace could reduce the bid/ask spreads on which our business and profitability depend, and
may also reduce commissions paid by institutional clients for execution services, negatively impacting our financial
performance. As a result, there can be no assurance that we will be able to compete effectively with current or future
competitors, which could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
Our market making business is concentrated in U.S. equities; accordingly, our operating results may be negatively
impacted by changes that affect the U.S. equity markets.
Approximately 81% of our market making revenues for 2017 were derived from our market making in U.S.
equities. The level of activity in the U.S. equity markets is directly affected by factors beyond our control, including U.S.
economic and political conditions, broad trends in business and finance, legislative and regulatory changes and changes
in volume and price levels of U.S. equity transactions. As a result, to the extent these or other factors reduce trading
volume or volatility or result in a downturn in the U.S. equity markets, we may experience a material adverse effect on,
our business, financial condition and operating results.
We could lose significant sources of revenues if we lose any of our larger clients.
At times, a limited number of clients could account for a significant portion of our order flow, revenues and
profitability, and we expect a large portion of the future demand for, and profitability from, our trade execution services
to remain concentrated within a limited number of clients. The loss of one or more larger clients could have an adverse
effect on our revenues and profitability in the future. None of these clients is currently contractually obligated to utilize
us for trade execution services and, accordingly, these clients may direct their trade execution activities to other
execution providers or market centers at any time. Some of these clients have grown organically or acquired market
makers and specialist firms to internalize order flow or will have entered into strategic relationships with competitors.
There can be no assurance that we will be able to retain these significant clients or that such clients will maintain or
increase their demand for our trade execution services. Further, the continued integration of legacy systems and the
development of new systems could result in disruptions to our ongoing businesses and relationships or cause issues with
standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, or
to solicit new customers. The loss, or a significant reduction, of demand for our services from any of these clients could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to liquidity risk in our operations.
We require liquidity to fund various ongoing obligations, including operating expenses, capital expenditures,
debt service and dividend payments. Our main sources of liquidity are cash flow from the operations of our subsidiaries,
our broker-dealer revolving credit facility (described under “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources — Long-Term Borrowings”), margin financing
provided by our prime brokers and cash on hand. Our liquidity could be materially impaired by a number of factors,
including reduced business activity due to a market downturn, adverse regulatory action or a downgrade of our credit
rating. If our business activities decrease or we are unable to borrow additional funds in the future on terms that are
acceptable to us, or at all, we could suffer a material adverse effect on our business, financial condition, results of
operations and cash flows.
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Self-clearing and other elements of our trade processing operations expose us to significant operational, financial
and liquidity risks.
We currently self-clear substantially all of our domestic equity trades and may expand our self-clearing
operations internationally and across product offerings and asset classes in the future. Self-clearing exposes our business
to operational risks, including business disruption, operational inefficiencies, liquidity, financing risks, counterparty
performance risk and potentially increased expenses and lost revenue opportunities. While our clearing platform,
operational processes, risk methodologies, enhanced infrastructure and current and future financing arrangements have
been carefully designed, we may nevertheless encounter difficulties that may lead to operating inefficiencies, including
delays in implementation, disruption in the infrastructure that supports the business, inadequate liquidity and financial
loss. Any such delay, disruption or failure could negatively impact our ability to effect transactions and manage our
exposure to risk and could have a material adverse effect on our business, financial condition, results of operations cash
flows.
We have a substantial amount of indebtedness, which could negatively impact our business and financial condition,
and our debt agreements contain restrictions that will limit our flexibility in operating our business.
We are a highly leveraged company. As of December 31, 2017, we had an aggregate of $1,431 million
outstanding indebtedness under our long-term borrowings. If we cannot generate sufficient cash flow from operations to
service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do
not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory to us or at all.
Additionally, we are party to the $150.0 million uncommitted facility (the “Uncommitted Facility “) under
which we had $25.0 million of borrowings outstanding as of December 31, 2017. We are also are party to the $500.0
million revolving credit facility (the “Revolving Credit Facility”) under which we had $7.0 million of borrowing
outstanding as of December 31, 2017. Also, certain of our non-guarantor subsidiaries are party to various short-term
credit facilities with various prime brokers and other financial institutions in an aggregate amount of $543.0 million
under which we had $205.7 million in borrowings outstanding at December 31, 2017.
The Fourth Amended and Restated Credit Agreement and the indenture governing the Notes contain, and any
other existing or future indebtedness of ours may contain a number of covenants that impose significant operating and
financial restrictions on us, including restrictions on our and our restricted subsidiaries’ ability to, among other things:
•
•
•
incur additional debt, guarantee indebtedness or issue certain preferred equity interests;
pay dividends on or make distributions in respect of, or repurchase or redeem, our equity interests or make
other restricted payments;
prepay, redeem or repurchase certain debt;
• make loans or certain investments;
•
sell certain assets;
•
•
•
•
•
create liens on our assets;
consolidate, merge or sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates;
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
designate our subsidiaries as unrestricted subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be
unable to successfully execute our strategy, engage in favorable business activities or finance future operations or capital
needs. In addition, our Fourth Amended and Restated Credit Agreement requires us to maintain specified financial ratios
and tests, including interest coverage and total leverage ratios, which may require us to take action to reduce our debt or
to act in a manner contrary to our business objectives.
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We may be unable to remain in compliance with the financial maintenance and other covenants contained in the
Fourth Amended and Restated Credit Agreement, and our obligation to comply with these covenants may adversely
affect our ability to operate our business. A failure to comply with the covenants under the Fourth Amended and
Restated Credit Agreement, the Notes or any of our other future indebtedness could result in an event of default, which,
if not cured or waived, could have a material adverse effect on our business, financial condition, results of operations and
cash flows. If any such event of default has occurred and is continuing, the lenders under our Fourth Amended and
Restated Credit Agreement, among other things:
• will not be required to lend any additional amounts to us;
•
could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be
immediately due and payable and terminate all commitments to extend further credit; or
•
could effectively prevent us from making debt service payments on the Notes;
any of which could result in an event of default under the Notes or cause cross defaults under our other indebtedness. If
we default on our indebtedness, our business, financial condition and results of operation could suffer a material adverse
effect.
We pledge substantially all of our and our guarantor subsidiaries’ assets as collateral under the Fourth Amended
and Restated Credit Agreement and the Notes. If we were unable to repay such indebtedness, the lenders under the
Fourth Amended and Restated Credit Agreement and, subject to certain intercreditor arrangements, the holders of the
Notes, could proceed to exercise remedies against the collateral granted to them to secure that indebtedness. If any of our
outstanding indebtedness under the Fourth Amended and Restated Credit Agreement, the Notes or our other
indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such
indebtedness in full. We do not have sufficient working capital to satisfy our debt obligations in the event of an
acceleration of all or a significant part of our outstanding indebtedness.
Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could
intensify the risks associated with our substantial indebtedness.
Borrowings under the Fourth Amended and Restated Credit Agreement, the Uncommitted Facility and the
Revolving Credit Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our
debt service obligations on certain of our variable rate indebtedness will increase even though the amount borrowed
remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will
correspondingly decrease. We may enter into interest rate swaps that involve the exchange of floating for fixed rate
interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with
respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk,
may prove disadvantageous or may create additional risks. Rising interest rates could also limit our ability to refinance
existing debt when it matures or cause us to pay higher interest rates upon refinancing.
Regulatory and legal uncertainties could harm our business.
Securities and derivatives businesses are heavily regulated. Firms in the financial services industry have been
subject to an increasingly regulated environment over recent years, and penalties and fines sought by regulatory
authorities have increased considerably. In addition, following recent news media attention to electronic trading and
market structure, the regulatory and enforcement environment has created uncertainty with respect to various types of
transactions that historically had been entered into by financial services firms and that were generally believed to be
permissible and appropriate. “High frequency” and other forms of low latency or electronic trading strategies continue to
be the focus of extensive regulatory scrutiny by federal, state and foreign regulators and SROs, and such scrutiny is
likely to continue. Our market making and trading activities are characterized by substantial volumes, an emphasis on
technology and certain other characteristics that are also commonly associated with high frequency trading. Specifically,
both the SEC and the CFTC have issued general concept releases on market structure requesting comment from market
participants on topics including, among others, high frequency trading, co-location, dark liquidity, pre- and post-trade
risk controls and system safeguards. The SEC has adopted rules that, among other results, have significantly limited the
use of sponsored access by market participants to the U.S. equities exchanges, imposed large trader reporting
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requirements, restricted short sales in listed securities under certain conditions and required the planning and creation of
a new comprehensive consolidated audit trail. The SEC has also approved by order a pilot proposal by the FINRA and
the national securities exchanges establishing a “Limit Up-Limit Down” mechanism to address market volatility.
In addition, certain market participants, SROs, government officials and regulators have requested that the U.S.
Congress, the SEC, and the CFTC propose and adopt additional laws and rules, including rules relating to additional
registration requirements, restrictions on co-location, order-to-execution ratios, minimum quote life for orders,
incremental messaging fees to be imposed by exchanges for “excessive” order placements and/or cancellations, further
transaction taxes, tick sizes, changes to maker/taker rebates programs, and other market structure proposals. For
example, the SEC adopted Regulation SCI, which imposes compliance and other costs on market centers that may have
to pass such costs on to their users, including us, and could impact our future business plans of establishing a market
center to avoid or reduce market center costs for certain of our transactions. Similarly, CAT imposes new reporting
requirements and additional costs on U.S. broker-dealers. The Tick Pilot program, which is currently underway, includes
a “trade at” component, requiring that certain of these transactions occur only on an exchange. If the trade at feature is
adopted permanently for small capitalization securities without the trade at exemptions that currently exist, and it is not
accompanied by a reduction in the fees paid to access liquidity on exchanges, the trade at requirement may increase the
costs for certain of our transactions. Finally, the SEC has proposed amendments to regulations that would require our
registered broker-dealer that is not currently a FINRA member to become a member of FINRA, which, if adopted as
proposed, would subject the broker-dealer to FINRA’s rules and require payment of additional fees per trade that could
adversely affect our profits given that we seek to make small profits on individual trades. Additionally, the CFTC has
proposed the adoption of Regulation Automated Trading, which would, among other requirements, require registration
by direct market participants, mandate the use of certain types of risk controls, and require the maintenance of a source
code repository in accordance with certain specifications.
Any or all of these proposals or additional proposals may be adopted by the SEC, CFTC or other U.S. or foreign
legislative or regulatory bodies, and recent news media attention to electronic trading and market structure could increase
the likelihood of adoption. These potential market structure and regulatory changes could cause a change in the manner
in which we make markets, impose additional costs and expenses on our business or otherwise have a material adverse
effect on our business, financial condition, results of operations and cash flows.
In addition, the financial services industry is heavily regulated in many foreign countries, much like in the U.S.
The varying compliance requirements of these different regulatory jurisdictions and other factors may limit our ability to
conduct business or expand internationally. For example, MiFID, which was implemented in November 2007, has been
replaced by MiFID II/Markets in Financial Investments Regulation (“MiFIR”), which was adopted by the European
Parliament on April 15, 2014 and by the Council on May 13, 2014, entered into force on July 2, 2014, and became
effective on January 3, 2018. Many MiFID II changes are likely to affect our business. For example, MiFID II requires
certain types of firms, including us, to post firm quotes at competitive prices and will supplement current requirements
with regard to investment firms’ risk controls related to the safe operation of electronic systems. MiFID II will also
impose additional requirements on market structure, such as the introduction of a harmonized tick size regime, the
introduction of new trading venues known as Organized Trading Facilities, and the promulgation of a new bilateral
trading arrangement called the Systematic Internaliser regime, new open access provisions, market making requirements
and various other pre- and post-trade risk management requirements. Each of these and other proposals may impose
technological and compliance costs on us. Any of these laws, rules or regulations, as well as changes in legislation or
regulation and changes in market customs and practices could have a material adverse effect on our business, financial
condition, results of operations and cash flows. These risks may be enhanced by recent scrutiny of electronic trading and
market structure from regulators, lawmakers and the financial news media.
In addition, we maintain borrowing facilities with banks, prime brokers and Futures Commission Merchants
(“FCMs”), and we obtain uncommitted margin financing from our prime brokers and FCMs, which are in many cases
affiliated with banks. In response to the financial crisis, the Basel Committee on Banking Supervision issued a new,
more stringent capital and liquidity framework known as Basel III, which national banking regulators are in the process
of implementing in the various jurisdictions in which our lenders may be incorporated. As these rules are implemented
and impose more stringent capital and liquidity requirements, certain of our lenders may revise the terms of our
borrowing facilities or margin financing arrangements, reduce the amount of financing they provide, or cease providing
20
us financing, each of which could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Non-compliance with applicable laws or regulatory requirements could negatively impact our reputation, prospects,
revenues and earnings.
Our subsidiaries are subject to regulations in the U.S., and our foreign subsidiaries are subject to regulations
abroad, in each case covering all aspects of their business. Regulatory bodies that exercise or may exercise authority over
us include, without limitation, in the U.S., the SEC, FINRA, the Chicago Stock Exchange, the Chicago Mercantile
Exchange, the Intercontinental Exchange, the CFTC, the NFA and the various state securities regulators; in Ireland, the
Central Bank of Ireland; in Switzerland, the Swiss Financial Market Supervisory Authority; in France, the Autorité des
Marchés Financiers (“AMF”); in the United Kingdom, the FCA; in Hong Kong, the SFC; in Australia, the Australian
Securities and Investment Commission; in Canada, the Investment Industry Regulatory Organization of Canada and
various Canadian provincial securities commissions; in Singapore, the Monetary Authority of Singapore and the
Singapore Exchange; and in Japan, the Financial Services Agency and the Japan Securities Dealers Association. Our
mode of operation and profitability may be directly affected by additional legislation and changes in rules promulgated
by various domestic and foreign government agencies and SROs that oversee our businesses, as well as by changes in the
interpretation or enforcement of existing laws and rules, including the potential imposition of additional capital and
margin requirements and/or transaction taxes. While we endeavor to timely deliver required annual filings in all
jurisdictions, we cannot guarantee that we will meet every applicable filing deadline globally. Noncompliance with
applicable laws or regulations could result in sanctions being levied against us, including fines, penalties, judgments,
disgorgement, restitution and censures, suspension or expulsion from a certain jurisdiction, SRO or market or the
revocation or limitation of licenses. Noncompliance with applicable laws or regulations could also negatively impact our
reputation, prospects, revenues and earnings. In addition, changes in current laws or regulations or in governmental
policies could negatively impact our operations, revenues and earnings.
Domestic and foreign stock exchanges, other SROs and state and foreign securities commissions can censure,
fine, impose undertakings, issue cease-and-desist orders and suspend or expel a broker-dealer or other market participant
or any of its officers or employees. Our ability to comply with all applicable laws and rules is largely dependent on our
internal systems to ensure compliance, as well as our ability to attract and retain qualified compliance personnel. We
could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows. We have been, are currently, and
may in the future be, the subject of one or more regulatory or SRO enforcement actions, including but not limited to
targeted and routine regulatory inquiries and investigations involving Regulation NMS, Regulation SHO, market access
rules, capital requirements and other domestic and foreign securities rules and regulations. We and other broker-dealers
and trading firms have also been the subject of requests for information and documents from the SEC and other
regulators. We have cooperated and complied with these requests for information and documents. Our business or
reputation could be negatively impacted if it were determined that disciplinary or other enforcement actions were
required. Additionally, in December 2015, the enforcement committee of the AMF fined our European subsidiary in the
amount of €5.0 million (approximately $5.4 million) based on its conclusion that the subsidiary engaged in price
manipulation and violations of the AMF General Regulation and Euronext Market Rules. In May 2017, the fine was
reduced to €3.0 million (approximately $3.5 million), subject to an incremental charge of €0.3 (approximately $0.4 million).
The relevant trading activities were conducted on or around 2009, prior to our acquisition of that subsidiary from
Madison Tyler Holdings, which acquisition was consummated in 2011. To continue to operate and to expand our
services internationally, we will have to comply with the regulatory controls of each country in which we conduct or
intend to conduct business, the requirements of which may not be clearly defined. The varying compliance requirements
of these different regulatory jurisdictions, which are often unclear, may limit our ability to continue existing international
operations and further expand internationally.
Failure to comply with applicable regulatory capital requirements could subject us to sanctions imposed by the SEC,
FINRA and other SROs or regulatory bodies.
Certain of our subsidiaries are subject to regulatory capital rules of the SEC, FINRA, other SROs and foreign
regulators. These rules, which specify minimum capital requirements for our regulated subsidiaries, are designed to
measure the general financial integrity and liquidity of a broker-dealer and require that at least a minimum part of its
assets be kept in relatively liquid form. In general, net capital is defined as net worth (assets minus liabilities), plus
21
qualifying subordinated borrowings, less certain mandatory deductions that result from, among other things, excluding
assets that are not readily convertible into cash and from valuing conservatively certain other assets. Among these
deductions are adjustments, commonly called haircuts, which reflect the possibility of a decline in the market value of an
asset before disposition, and non-allowable assets.
Failure to maintain the required minimum capital may subject our regulated subsidiaries to a fine, requirement
to cease conducting business, suspension, revocation of registration or expulsion by the applicable regulatory authorities,
reputational harm and ultimately could require the relevant entity’s liquidation. Events relating to capital adequacy could
give rise to regulatory actions that could limit business expansion or require business reduction. SEC and SRO net
capital rules prohibit payments of dividends, redemptions of stock, prepayments of subordinated indebtedness and the
making of any unsecured advances or loans to a stockholder, employee or affiliate, in certain circumstances, including if
such payment would reduce the firm’s net capital below required levels. Similar issues and risks arise in connection with
the capital adequacy requirements of foreign regulators.
A change in the net capital rules, the imposition of new rules or any unusually large charges against net capital
could limit our operations that require the intensive use of capital and also could restrict our ability to withdraw capital
from our broker-dealer subsidiaries. A significant operating loss or any unusually large charge against net capital could
negatively impact our ability to expand or even maintain our present levels of business. Similar issues and risks arise in
connection with the capital adequacy requirements of foreign regulators. Any of these results could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to risks relating to litigation and potential securities law liability.
We are exposed to substantial risks of liability under federal and state securities laws and other federal and state
laws and court decisions, as well as rules and regulations promulgated by the SEC, the CFTC, state securities regulators,
SROs and foreign regulatory agencies. These risks may be enhanced by recent scrutiny of electronic trading and market
structure from regulators, lawmakers and the financial news media. We are also subject to the risk of litigation and
claims that may be without merit. At present and from time to time, we, our past and present officers, directors and
employees are and may be named in legal actions, regulatory investigations and proceedings, arbitrations and
administrative claims and may be subject to claims alleging the violations of laws, rules and regulations, some of which
may ultimately result in the payment of fines, awards, judgments and settlements. We could incur significant legal
expenses in defending ourselves against and resolving lawsuits or claims even if we believe them to be meritless. An
adverse resolution of any current or future lawsuits or claims against us could result in a negative perception of our
Company and cause the market price of our common stock to decline or otherwise have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Proposed legislation in the European Union, the U.S. and other jurisdictions that would impose taxes on certain
financial transactions could have a material adverse effect on our business and financial results.
On September 28, 2011, the former president of the European Commission officially presented a plan to create
a new financial transactions tax which in February 2013 was formally presented for consideration by the European
Commission under an enhanced cooperation procedure among 11 European Union Member States (Belgium, Germany,
Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia) for the purposes of a financial
transaction tax among those Member States (the “EU Financial Transaction Tax”). The EU Financial Transaction Tax
was initially intended to be implemented within those 11 European Union Member States in January 2014. As of
December 31, 2017 such tax has not yet been implemented within the European Union and no final political or
legislative proposal has been presented for consideration. In 2016, Estonia, of the original members withdrew its support
for the proposal. Similarly, in 2013, U.S. Representative Peter DeFazio and former Senator Thomas Harkin introduced
proposed legislation, a bill entitled the “Wall Street Trading and Speculators Tax Act,” which would have, subject to
certain exceptions, imposed an excise tax on the purchase of a security, including equities, bonds, debentures, other debt
and interests in derivative financial instruments, if the purchase occurred or was cleared on a trading facility in the U.S.
and the purchaser or seller is a U.S. person. More recently, U.S. Representative Chris Van Hollen presented an “action
plan” that included a financial transaction fee. These proposed transaction taxes would apply to certain aspects of our
business and transactions in which we are involved. Any such tax would increase our cost of doing business to the extent
that (i) the tax is regularly applicable to transactions in the markets in which we operate, (ii) the tax does not include
exceptions for market makers or market making activities that is broad enough to cover our activities or (iii) we are
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unable to widen our bid/ask spreads in the markets in which such a tax would be applicable to compensate for its
imposition. Furthermore, the proposed taxes may reduce or negatively impact trading volume and transactions on which
we are dependent for revenues. While it is difficult to assess the impact the proposed taxes could have on us, if either
transaction tax is implemented or any similar tax is implemented in any other jurisdiction in which we operate, our
business, financial condition, results of operations and cash flows could suffer a material adverse effect, and could be
impacted to a greater degree than other market participants.
We depend on our technology, and our future results may be negatively impacted if we cannot remain technologically
competitive.
We believe that our success in the past has largely been attributable to our technology, which has taken many
years to develop. If technology equivalent to ours becomes more widely available for any reason, our operating results
may be negatively impacted. Additionally, adoption or development of similar or more advanced technologies by our
competitors may require that we devote substantial resources to the development of more advanced technology to remain
competitive. Regulators and exchanges may also introduce risk control and other technological requirements on our
business that could result in increased costs of compliance and divert our technological resources away from their
primary strategy development and maintenance duties. The markets in which we compete are characterized by rapidly
changing technology, evolving industry standards and changing trading systems, practices and techniques. The
widespread adoption of new internet, networking or telecommunications technologies or other technological changes
could require us to incur substantial expenditures to modify or adapt our services or infrastructure. We may not be able
to anticipate or respond adequately or in a cost-efficient and competitive manner to technological advancements
(including advancements related to low-latency technologies, execution and messaging speeds) or changing industry
standards. If any of these risks materialize, it could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Our reliance on our computer systems and software could expose us to material financial and reputational harm if
any of our computer systems or software were subject to any material disruption or corruption.
We rely significantly on our computer systems and software to receive and properly process internal and
external data and utilize such data to generate orders and other messages. A disruption or corruption of the proper
functioning of our computer systems or software could cause us to make erroneous trades, which could result in material
losses or reputational harm. We cannot guarantee that our efforts to maintain competitive computer systems and software
will be successful. Our computer systems and software may fail or be subject to bugs or other errors, resulting in service
interruptions or other unintended consequences. If any of these risks materialize, they could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
We could be the target of a significant cyber-attack, threat or incident that impairs internal systems, results in adverse
consequences to information our system process, store or transmit or causes reputation damages as a consequence.
Our business relies on technology and automation to perform significant functions within our firm. Because of
our reliance on technology, we may be susceptible to various forms of cyber-attacks by third parties or insiders. Though
we take steps to mitigate the various cyber threats and devote significant resources to maintain and update our systems
and networks, we may be unable to anticipate attacks or to implement adequate preventative measures. Our cybersecurity
measures may not detect or prevent all attempts to compromise our systems, including denial-of-service attacks, viruses,
malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar
disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise
maintain. Although we maintain insurance coverage that may, subject to policy terms and conditions, cover certain
aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. Breaches of our cybersecurity
measures could result in any of the following: unauthorized access to our systems; unauthorized access to and
misappropriation of information or data, including confidential or proprietary information about ourselves, third parties
with whom we do business or our proprietary systems; viruses, worms, spyware or other malware being placed in our
systems and intellectual property; deletion or modification of client information; or a denial-of-service or other
interruptions to our business operations. While we have not suffered a material breach of our cybersecurity, any actual or
perceived breach of our cybersecurity could damage our reputation, expose us to a risk of loss or litigation and possible
liability, require us to expend significant capital and other resources to alleviate problems caused by such breaches and
otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.
23
Capacity constraints, systems failures, malfunctions and delays could harm our business.
Our business activities are heavily dependent on the integrity and performance of the computer and
communications systems supporting them. Our systems and operations are vulnerable to damage or interruption from
human error, software bugs and errors, electronic and physical security breaches, natural disasters, power loss, utility or
internet outages, computer viruses, intentional acts of vandalism, terrorism and other similar events. Extraordinary
trading volumes or other events could cause our computer systems to operate in ways that we did not intend, at an
unacceptably low speed or even fail. While we have invested significant amounts of capital to upgrade the capacity,
reliability and scalability of our systems, there can be no assurance that our systems will always operate properly or be
sufficient to handle such extraordinary trading volumes. Any disruption for any reason in the proper functioning or any
corruption of our software or erroneous or corrupted data may cause us to make erroneous trades or suspend our services
and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Although our systems and infrastructure are generally designed to accommodate additional growth without
redesign or replacement, we may need to make significant investments in additional hardware and software to
accommodate growth. Failure to make necessary expansions and upgrades to our systems and infrastructure could not
only limit our growth and business prospects but could also cause substantial losses and have a material adverse effect on
our business, financial condition, results of operations and cash flows.
Since the timing and impact of disasters and disruptions are unpredictable, we may not be able to respond to
actual events as they occur. Business disruptions can vary in their scope and significance and can affect one or more of
our facilities. Further, the severity of the disruption can also vary from minimal to severe. Although we have employed
efforts to develop, implement and maintain reasonable disaster recovery and business continuity plans, we cannot
guarantee that our systems will fully recover after a significant business disruption in a timely fashion or at all. If we are
prevented from using any of our current trading operations, or if our business continuity operations do not work
effectively, we may not have complete business continuity, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Failure or poor performance of third-party software, infrastructure or systems on which we rely could adversely
affect our business.
We depend on third parties to provide and maintain certain infrastructure that is critical to our business. For
example, we rely on third parties to provide software, data center services and dedicated fiber optic, microwave, wireline
and wireless communication infrastructure. This infrastructure may malfunction or fail due to events outside of our
control, which could disrupt our operations and have a material adverse effect on our business, financial condition,
results of operations and cash flows. Any failure to maintain and renew our relationships with these third parties on
commercially favorable terms, or to enter into similar relationships in the future, could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
We also rely on certain third-party software, third-party computer systems and third-party service providers,
including clearing systems, exchange systems, alternate trading systems, order routing systems, internet service
providers, communications facilities and other facilities. Any interruption in these third-party services or software,
deterioration in their performance, or other improper operation could interfere with our trading activities, cause losses
due to erroneous or delayed responses, or otherwise be disruptive to our business. If our arrangements with any third
party are terminated, we may not be able to find an alternative source of software or systems support on a timely basis or
on commercially reasonable terms. This could also have a material adverse effect on our business, financial condition,
results of operations and cash flows.
The use of open source software may expose us to additional risks.
We use software development tools covered by open source licenses and may incorporate such open source
software into our proprietary software from time to time. “Open source software” refers to any code, shareware or other
software that is made generally available to the public without requiring payment of fees or royalties and/or that may
require disclosure or licensing of any software that incorporates such source code, shareware or other software. Given
the nature of open source software, third parties might assert contractual or copyright and other intellectual
property-related claims against us based on our use of such tools and software programs or might seek to compel the
24
disclosure of the source code of our software or other proprietary information. If any such claims materialize, we could
be required to (i) seek licenses from third parties in order to continue to use such tools and software or to continue to
operate certain elements of our technology, (ii) release certain proprietary software code comprising our modifications to
such open source software, (iii) make our software available under the terms of an open source license, (iv) re-engineer
all, or a portion of, that software, any of which could materially and adversely affect our business, financial condition,
results of operations and cash flows or (v) be required to pay significant damages as a result of substantiated
unauthorized use. While we monitor the use of all open source software in our solutions, processes and technology and
try to ensure that no open source software is used (i) in such a way as to require us to disclose the source code to the
related solution when we do not wish to do so nor (ii) in connection with critical or fundamental elements of our
software or technology, such use may have inadvertently occurred in deploying our proprietary solutions. If a third-party
software provider has incorporated certain types of open source software into software we license from such third party
for our products and solutions, we could, under certain circumstances, be required to disclose the source code to our
solutions. In addition to risks related to license requirements, usage of open software can lead to greater risks than use of
third-party commercial software because open source licensors generally do not provide warranties or controls on the
origin of the software. Many of the risks associated with usage of open source software cannot be eliminated and could
potentially have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property
necessary for our business.
We rely on federal and state law, trade secrets, trademarks, domain names, copyrights and contract law to
protect our intellectual property and proprietary technology. It is possible that third parties may copy or otherwise obtain
and use our intellectual property or proprietary technology without authorization or otherwise infringe on our rights. For
example, while we have a policy of entering into confidentiality, intellectual property invention assignment and/or
non-competition and non-solicitation agreements or restrictions with our employees, independent contractors and
business partners, such agreements may not provide adequate protection or may be breached, or our proprietary
technology may otherwise become available to or be independently developed by our competitors. The promulgation of
laws or rules which require the maintenance of source code or other intellectual property in a repository subject to certain
requirements and/or which enhance or facilitate access to such source code by regulatory authorities could inhibit our
ability to protect against unauthorized dissemination or use of our intellectual property. Third parties have alleged and
may in the future allege that we are infringing, misappropriating or otherwise violating their intellectual property rights.
Third parties may initiate litigation against us without warning, or may send us letters or other communications that
make allegations without initiating litigation. We may elect not to respond to these letters or other communications if we
believe they are without merit, or we may attempt to resolve these disputes out of court by negotiating a license, but in
either case it is possible that such disputes will ultimately result in litigation. Any such claims could interfere with our
ability to use technology or intellectual property that is material to the operation of our business. Such claims may be
made by competitors seeking to obtain a competitive advantage or by other parties, such as entities that purchase
intellectual property assets for the purpose of bringing infringement claims. We also periodically employ individuals
who were previously employed by our competitors or potential competitors, and we may therefore be subject to claims
that such employees have used or disclosed the alleged trade secrets or other proprietary information of their former
employers.
At times we rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the
validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such
litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the
attention of management. If unsuccessful, such litigation could result in the loss of important intellectual property rights,
require us to pay substantial damages, subject us to injunctions that prevent us from using certain intellectual property,
require us to make admissions that affect our reputation in the marketplace and require us to enter into license
agreements that may not be available on favorable terms or at all. Finally, even if we prevail in any litigation, the remedy
may not be commercially meaningful or fully compensate us for the harm we suffer or the costs we incur. Any of the
foregoing could have a material adverse effect on our business, financial condition, results of operations and cash flows.
25
We are exposed to risks associated with our international operations and expansion and failure to comply with laws
and regulations applicable to our international operations may increase costs, reduce profits, limit growth or subject
us to broader liability.
We are exposed to risks and uncertainties inherent in doing business in international markets, particularly in the
heavily regulated broker-dealer industry. Such risks and uncertainties include political, economic and financial
instability, unexpected changes in regulatory requirements, tariffs and other trade barriers, exchange rate fluctuations,
applicable currency controls, the imposition of restrictions on currency conversion or the transfer of funds, limitations on
our ability to repatriate non-U.S. earnings in a tax efficient manner and difficulties in staffing and managing foreign
operations, including reliance on local experts. Such restrictions generally include those by imposed by the Foreign
Corrupt Practices Act (the “FCPA”) and trade sanctions administered by the Office of Foreign Assets Control
(“OFAC”). The FCPA is intended to prohibit bribery of foreign officials and requires companies whose securities are
listed in the U.S. to keep books and records that accurately and fairly reflect those companies’ transactions and to devise
and maintain an adequate system of internal accounting controls. OFAC administers and enforces economic and trade
sanctions based on U.S. foreign policy and national security goals against designated foreign states, organizations and
individuals. Though we have policies in place designed to comply with applicable OFAC sanctions, rules and regulations
as well as the FCPA and equivalent laws and rules of other jurisdictions, if we fail to comply with these laws and
regulations, we could be exposed to claims for damages, financial penalties, reputational harm, incarceration of
employees and restrictions on our operations and cash flows.
In addition, the varying compliance requirements of these different regulatory jurisdictions and other factors
may limit our ability to successfully conduct or expand our business internationally and may increase our costs of
investment. Expansion into international locations involves substantial operational and execution risk. We may not be
able to manage these costs or risks effectively.
The results of the United Kingdom’s referendum on withdrawal from the European Union may negatively impact the
global economy, financial markets and our business.
In June 2016, the United Kingdom voted in an advisory referendum to leave the European Union (commonly
referred to as “Brexit”). The outcome of the negotiations between the U.K. and the European Union in connection with
the referendum and withdrawal is highly uncertain and may significantly affect the fiscal, monetary and regulatory
landscape in the U.K., and could have a material impact on its economy and the future growth of its various industries,
including the financial services industry, as well as global economic conditions and financial markets. We presently
access the E.U. markets primarily through our Irish regulated subsidiary and we do not expect any impact on our access
to E.U. markets as a result of Brexit. However, it is not possible at this point in time to predict fully the effects of an exit
of the U.K. from the E.U., especially with respect to our activities in the U.K. or the potential impact of interacting with
U.K. based market participants, and it could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Fluctuations in currency exchange rates could negatively impact our earnings.
A significant portion of our international business is conducted in currencies other than the U.S. dollar, and
changes in foreign exchange rates relative to the U.S. dollar can therefore affect the value of our non-U.S. dollar net
assets, revenues and expenses. Although we closely monitor potential exposures as a result of these fluctuations in
currencies, and where cost-justified we adopt strategies that are designed to reduce the impact of these fluctuations on
our financial performance, including the financing of non-U.S. dollar assets with borrowings in the same currency and
the use of various hedging transactions related to net assets, revenues, expenses or cash flows, there can be no assurance
that we will be successful in managing our foreign exchange risk. Our exposure to currency exchange rate fluctuations
will grow if the relative contribution of our operations outside the U.S. increases. Any material fluctuations in currencies
could have a material effect on our financial condition, results of operations and cash flows.
We may experience risks associated with future growth or expansion of our operations or acquisitions, strategic
investments or dispositions of businesses, and we may never realize the anticipated benefits of such activities.
As a part of our business strategy, we may make acquisitions or significant investments in and/or disposals of
businesses. Any such future acquisitions, investments and/or dispositions would be accompanied by risks such as
assessment of values for acquired businesses, intangible assets and technologies, difficulties in assimilating the
26
operations and personnel of acquired companies or businesses, diversion of our management’s attention from ongoing
business concerns, our potential inability to maximize our financial and strategic position through the successful
incorporation or disposition of operations, maintenance of uniform standards, controls, procedures and policies and the
impairment of existing relationships with employees, contractors, suppliers and customers as a result of the integration of
new management personnel and cost-saving initiatives. We cannot guarantee that we will be able to successfully
integrate any company or business that we might acquire in the future, and our failure to do so could harm our current
business.
In addition, we may not realize the anticipated benefits of any such transactions, and there may be other
unanticipated or unidentified effects. While we would seek protection, for example, through warranties and indemnities
in the case of acquisitions, significant liabilities may not be identified in due diligence or come to light after the expiration
of warranty or indemnity periods. Additionally, while we would seek to limit our ongoing exposure, for example, through
liability caps and period limits on warranties and indemnities in the case of disposals, some warranties and indemnities may
give rise to unexpected and significant liabilities. If we fail to realize any such anticipated benefits, or if we experience any
such unanticipated or unidentified effects in connection with any future acquisitions, investments or dispositions, we
could suffer a material adverse effect on our business, financial condition, results of operations and cash flows. Finally,
strategic investments may involve additional risks associated with holding a minority or non-controlling position in an
illiquid business or asset.
Our future efforts to sell shares of our common stock or raise additional capital may be delayed or prohibited by
regulations.
As certain of our subsidiaries are members of FINRA and other SROs, we are subject to certain regulations
regarding changes in ownership or control and material changes in operations. For example, FINRA’s NASD Rule 1017
generally provides that FINRA approval must be obtained in connection with certain change of ownership or control
transactions, such as a transaction that results in a single entity or person owning 25% or more our equity. Similarly,
Virtu Financial Ireland Limited, one of our Irish subsidiaries, is subject to change in control regulations promulgated by
the Central Bank of Ireland, and other registered or regulated foreign subsidiaries may be subject to similar regulations in
applicable jurisdictions. As a result of these regulations, our future efforts to sell shares of our common stock or raise
additional capital may be delayed or prohibited. We may be subject to similar restrictions in other jurisdictions in which
we operate.
We are dependent on the continued service of certain key executives, the loss or diminished performance of whom
could have a material adverse effect on our business.
Our performance is substantially dependent on the performance of our senior management, Mr. Cifu, our Chief
Executive Officer and Mr. Molluso, our Chief Financial Officer. In connection with and subsequent to the IPO, we have
entered into employment and other related agreements with certain members of our senior management team that restrict
their ability to compete with us should they decide to leave our Company. Even though we have entered into these
agreements, we cannot be sure that any member of our senior management will remain with us or that they will not
compete with us in the future. The loss of any member of our senior management team could impair our ability to
execute our business plan and growth strategy and have a negative impact on our revenues, in addition to potentially
causing employee morale problems and/or the loss of key employees. In particular, Mr. Cifu invests in other businesses
and spends time on such matters, which could divert their attention from us. Our employment agreement with Mr. Cifu
specifically permits his participation in and attention to certain other business activities, including but not necessarily
limited to his role as the Vice Chairman and Alternate Governor of the Florida Panthers, a National Hockey League
franchise, and his role as a director of the Independent Bank Group, Inc., a regional bank holding company. We cannot
guarantee that these or other permitted outside activities will not impact his performance as Chief Executive Officer.
Our success depends, in part, on our ability to identify, recruit and retain skilled management and technical
personnel. If we fail to recruit and retain suitable candidates or if our relationship with our employees changes or
deteriorates, it could have a material adverse effect on our business.
Our future success depends, in part, upon our continued ability to identify, attract, hire and retain highly
qualified personnel, including skilled technical, management, product and technology, trading, sales and marketing
personnel, all of whom are in high demand and are often subject to competing offers. Competition for qualified
27
personnel in the financial services industry is intense and we cannot assure you that we will be able to hire or retain a
sufficient number of qualified personnel to meet our requirements, or that we will be able to do so at salary, benefit and
other compensation costs that are acceptable to us or that would allow us to achieve operating results consistent with our
historical results. A loss of qualified employees, or an inability to attract, retain and motivate additional highly skilled
employees in the future, could have a material adverse effect on our business.
We could lose significant sources of revenues if we were to lose access to an important exchange or other trading
venue.
Changes in applicable laws, regulations or rules promulgated by exchanges could conceivably prevent us from
providing liquidity to an exchange or other trading venue where we provide liquidity today. Though our revenues are
diversified across exchanges and other trading venues, asset classes and geographies, the loss of access to one or more
significant exchanges and other trading venues for any reason could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Risks Related to the Acquisition of KCG
Significant costs and significant indebtedness were incurred in connection with the consummation of the Acquisition
of KCG, and the integration of KCG into our business, including legal, accounting, financial advisory and other
costs.
We expect to incur significant costs in connection with integrating the operations, products and personnel of
KCG into our business. These costs may include:
•
•
•
•
employee retention, redeployment, relocation or severance;
integration of information systems;
combination of corporate and administrative functions; and
potential or pending litigation or other proceedings related to the Acquisition of KCG.
The costs related to the Acquisition of KCG could be higher than currently estimated, depending on how
difficult it will be to integrate our business with that of KCG, and the expected cost reductions and synergies may not be
achieved.
In addition, we expect to incur a number of non-recurring costs associated with combining the operations of
KCG with ours, which cannot be estimated accurately at this time. While we expected to and incurred a significant
amount of transaction fees and other costs related to the consummation of the Acquisition of KCG, additional
unanticipated costs may yet be incurred. Any expected elimination of duplicative costs, as well as the expected
realization of other cost reductions, efficiencies and synergies related to the integration of our operations with those of
KCG, that may offset incremental transaction and transaction-related costs over time, may not be achieved as projected,
or at all.
In addition, we incurred $1,650.0 million of new indebtedness in connection with the Acquisition of KCG, $526
million of which we have prepaid as of March 13, 2018. The debt we have incurred in connection with the Acquisition
of KCG may limit our financial and operating flexibility, and we may incur additional debt, which could increase the
risks associated with our substantial indebtedness. Our substantial indebtedness may have material consequences for our
business, prospects, results of operations, financial condition and/or cash flows.
Integrating KCG’s business into our business may divert management’s attention away from operations, and we may
also encounter significant difficulties in integrating the two businesses.
The Acquisition of KCG involves the integration of two companies that have previously operated
independently. The success of the Acquisition of KCG and their anticipated financial and operational benefits, including
increased revenues, synergies and cost reductions, will depend in part on our ability to successfully combine and
integrate KCG’s business into ours, and there can be no assurance regarding when or the extent to which we will be able
28
to realize these increased revenues, synergies, cost reductions or other benefits. These benefits may not be achieved
within the anticipated time frame, or at all.
Successful integration of KCG’s operations, products and personnel may place a significant burden on
management and other internal resources. The diversion of management’s attention, and any difficulties encountered in
the transition and integration process, could harm our business, prospects, results of operations, financial condition
and/or cash flows.
In addition, the overall integration of the businesses may result in material unanticipated problems, expenses,
liabilities, and competitive responses. The difficulties of combining the operations of the companies include, among
others:
•
•
•
•
•
•
•
•
difficulties in achieving anticipated cost reductions, synergies, business opportunities and growth prospects
from the combination;
difficulties in the integration of operations and systems;
conforming standards, controls, procedures and accounting and other policies, business cultures and
compensation structures between the two companies;
difficulties in the assimilation of employees and the integration of the companies’ different organizational
structures;
difficulties in managing the expanded operations of a larger and more complex company with increased
international operations;
challenges in integrating the business culture of each company;
challenges in attracting and retaining key personnel; and
difficulties in replacing numerous systems, including those involving management information, purchasing,
accounting and finance, sales, billing, employee benefits, payroll, data privacy and security and regulatory
compliance, many of which may be dissimilar.
These factors could result in increased costs, decreases in the amount of expected revenues and diversion of
management’s time and energy, which could materially impact our business, prospects, results of operations, financial
condition and/or cash flows.
We may not realize the anticipated synergies, net cost reductions and growth opportunities from the Acquisition of
KCG.
The benefits that we expect to achieve as a result of the Acquisition of KCG will depend, in part, on the ability
of the combined company to realize anticipated growth opportunities, net cost reductions and synergies. Our success in
realizing these growth opportunities, net cost reductions and synergies, and the timing of this realization, depends on the
successful integration of our historical business and operations and the historical business and operations of KCG. Even
if we are able to integrate the businesses and operations of the Company and KCG successfully, this integration may not
result in the realization of the full benefits of the growth opportunities, net cost reductions and synergies that we
currently expect from this integration within the anticipated time frame or at all. For example, we may be unable to
eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with the integration of our
business and KCG’s business. While we anticipate that certain expenses will be incurred, such expenses are difficult to
estimate accurately and may exceed current estimates. Accordingly, the benefits from the Acquisition of KCG may be
offset by costs or delays incurred in integrating the businesses. We projected net cost reductions and synergies are based
on a number of assumptions relating to our business and KCG’s business. Those assumptions may be inaccurate, and, as
a result, our projected net cost reductions and synergies may be inaccurate, and our business, prospects, results of
operations, financial condition and/or cash flows could be materially and adversely affected.
29
The Company will be subject to business uncertainties that could materially and adversely affect our business.
Uncertainty about the effect of the Acquisition of KCG on employees, customers and suppliers may have both a
material and adverse effect on the Company. These uncertainties may impair the Companies’ ability to attract, retain and
motivate key personnel, and could cause customers, suppliers and others who deal with the Company to seek to end,
suspend or change existing business relationships. If key employees depart because of issues related to the uncertainty
and difficulty of integration or a desire not to remain with us, or if customers, suppliers or others seek to end, suspend or
change their dealings with us as a result of the Acquisition of KCG, our business could be materially and adversely
impacted.
In connection with the Acquisition of KCG, we have assumed potential liabilities relating to KCG’s business.
In connection with the Acquisition of KCG, we have assumed potential regulatory, litigation and other
liabilities relating to KCG’s business. For example, KCG is currently the subject of various regulatory reviews and
investigations by federal, state and foreign regulators and SROs, including the SEC, FINRA and the FCA. In some
instances, these matters may rise to a disciplinary action and/or a civil or administrative action, penalties, fines,
judgments, censures and settlements. To the extent we have not identified such liabilities or miscalculated their potential
financial impact, these liabilities could have a material adverse effect on our business, prospects, results of operations,
financial condition and/or cash flows.
Risks Related to Our Organization and Structure
We are a holding company and our principal asset is our 48.3% of equity interest in Virtu Financial, and we are
accordingly dependent upon distributions from Virtu Financial to pay dividends, if any, taxes and other expenses.
We are a holding company and our principal asset is our direct and indirect ownership of 48.3% of the Virtu
Financial Units as of December 31, 2017. We have no independent means of generating revenue. As the sole managing
member of Virtu Financial, we cause Virtu Financial to make distributions to its equityholders, including the Founder
Post-IPO Member, Virtu Employee Holdco, certain current and former members of management of the Company and
their affiliates (the “Management Members”) and us, in amounts sufficient to fund dividends to our stockholders in
accordance with our dividend policy and, as further described below, to cover all applicable taxes payable by us and any
payments we are obligated to make under the tax receivable agreements we entered into as part of the Reorganization
Transactions, but we are limited in our ability to cause Virtu Financial to make these and other distributions to us
(including for purposes of paying corporate and other overhead expenses and dividends) under our Fourth Amended and
Restated Credit Agreement governing our term loan facility (the “Term Loan Facility”), and the indenture pursuant to
which we have issued senior secured second lien notes (the “Notes”). In addition, certain laws and regulations may result
in restrictions on Virtu Financial’s ability to make distributions to its equityholders (including us), or the ability of its
subsidiaries to make distributions to it. These include:
•
the SEC Net Capital Rule (Rule 15c3-1), which requires each of Virtu Financial’s registered broker-dealer
subsidiaries to maintain specified levels of net capital;
• FINRA Rule 4110, which imposes a requirement of prior FINRA approval for any distribution by Virtu
Financial’s FINRA member registered broker-dealer subsidiary in excess of 10% of its excess net capital;
and
•
the requirement for prior approval from the Central Bank of Ireland before Virtu Financial’s regulated Irish
subsidiary completes any distribution or dividend.
To the extent that we need funds and Virtu Financial is restricted from making such distributions to us, under
applicable law or regulation, as a result of covenants in our Fourth Amended and Restated Credit Agreement, the
indenture governing our Notes or otherwise, we may not be able to obtain such funds on terms acceptable to us or at all
and as a result could suffer a material adverse effect on our liquidity and financial condition.
Under the Third Amended and Restated Limited Liability Company Agreement of Virtu Financial (as amended,
the “Amended and Restated Virtu Financial LLC Agreement”), Virtu Financial from time to time makes pro rata
distributions in cash to its equityholders, including the Founder Post-IPO Member, the trust that holds equity interests in
Virtu Financial on behalf of certain employees of ours based outside the United States, which we refer to as the
30
“Employee Trust”, Virtu Employee Holdco and us, in amounts sufficient to cover the taxes on their allocable share of the
taxable income of Virtu Financial. As a result of (i) potential differences in the amount of net taxable income allocable to
us and to Virtu Financial’s other equityholders, (ii) the lower tax rate applicable to corporations than individuals and
(iii) the favorable tax benefits that we anticipate from (a) the exchange of Virtu Financial Units and corresponding shares
of Class C common stock or Class D common stock, (b) payments under the tax receivable agreements and (c) future
deductions attributable to the prior acquisition of interests in Virtu Financial by certain affiliates of Silver Lake Partners
and Temasek, we expect that these tax distributions will be in amounts that exceed our tax liabilities. Our board of
directors will determine the appropriate uses for any excess cash so accumulated, which may include, among other uses,
the payment of obligations under the tax receivable agreements, the payment of other expenses or the repurchase of
shares of common stock or Virtu Financial Units. We will have no obligation to distribute such cash (or other available
cash) to our shareholders. No adjustments to the exchange ratio for Virtu Financial Units and corresponding shares of
common stock will be made as a result of any cash distribution by us or any retention of cash by us, and in any event the
ratio will remain one-to-one.
We are controlled by the Founder Post-IPO Member, whose interests in our business may be different than yours,
and certain statutory provisions afforded to stockholders are not applicable to us.
The Founder Post-IPO Member controls approximately 88% of the combined voting power of our common
stock as a result of its ownership of our Class D common stock, each share of which is entitled to 10 votes on all matters
submitted to a vote of our stockholders.
The Founder Post-IPO Member has the ability to substantially control our Company, including the ability to
control any action requiring the general approval of our stockholders, including the election of our board of directors, the
adoption of amendments to our certificate of incorporation and by-laws and the approval of any merger or sale of
substantially all of our assets. This concentration of ownership and voting power may also delay, defer or even prevent
an acquisition by a third party or other change of control of our Company and may make some transactions more
difficult or impossible without the support of the Founder Post-IPO Member, even if such events are in the best interests
of minority stockholders. This concentration of voting power with the Founder Post-IPO Member may have a negative
impact on the price of our Class A common stock. In addition, because shares of our Class B common stock and Class D
common stock each have 10 votes per share on matters submitted to a vote of our stockholders, the Founder Post-IPO
Member is able to control our Company as long as it owns at least 25% of our issued and outstanding common stock.
The Founder Post-IPO Member’s interests may not be fully aligned with yours, which could lead to actions that
are not in your best interest. Because the Founder Post-IPO Member holds part of its economic interest in our business
through Virtu Financial, rather than through the public company, it may have conflicting interests with holders of shares
of our Class A common stock. For example, the Founder Post-IPO Member may have a different tax position from us,
which could influence its decisions regarding whether and when we should dispose of assets or incur new or refinance
existing indebtedness, especially in light of the existence of the tax receivable agreements that we entered into in
connection with the IPO, and whether and when we should undergo certain changes of control within the meaning of the
tax receivable agreements or terminate the tax receivable agreements. In addition, the structuring of future transactions
may take into consideration these tax or other considerations even where no similar benefit would accrue to us. See
“Item 1A. Risk Factors — Risks Related to Our Organizational Structure — We are required to pay the Virtu Post IPO
Members and the Investor Post IPO Stockholders for certain tax benefits we may claim, and the amounts we may pay
could be significant.” In addition, pursuant to an exchange agreement, the holders of Virtu Financial Units and shares of
our Class C common stock or Class D common stock are not required to participate in a proposed sale of our Company
that is tax-free for our stockholders unless the transaction is also tax-free for such holders of Virtu Financial Units and
shares of our Class C common stock or Class D common stock. This requirement could limit structural alternatives
available to us in any such proposed transaction and could have the effect of discouraging transactions that might benefit
you as a holder of shares of our Class A common stock. In addition, the Founder Post-IPO Member’s significant
ownership in us and resulting ability to effectively control us may discourage someone from making a significant equity
investment in us, or could discourage transactions involving a change in control, including transactions in which you as a
holder of shares of our Class A common stock might otherwise receive a premium for your shares over the then-current
market price.
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We have opted out of Section 203 of the General Corporation Law of the State of Delaware (the “Delaware
General Corporation Law”), which prohibits a publicly held Delaware corporation from engaging in a business
combination transaction with an interested stockholder for a period of three years after the interested stockholder became
such unless the transaction fits within an applicable exemption, such as board approval of the business combination or
the transaction which resulted in such stockholder becoming an interested stockholder. Therefore, the Founder Post-IPO
Member is able to transfer control of us to a third party by transferring its shares of our common stock (subject to certain
restrictions and limitations), which would not require the approval of our board of directors or our other stockholders.
Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, the
doctrine of “corporate opportunity” does not apply against the Founder Post-IPO Member, Mr. Viola, Temasek, any of
our non-employee directors or any of their respective affiliates in a manner that would prohibit them from investing in
competing businesses or doing business with our clients or customers. In addition, subject to the restrictions on
competitive activities described below, Mr. Cifu is permitted to become engaged in, or provide services to, any other
business or activity in which Mr. Viola is currently engaged or permitted to become engaged, to the extent that
Mr. Cifu’s level of participation in such businesses or activities is consistent with his current participation in such
businesses and activities. The Amended and Restated Virtu Financial LLC Agreement provides that Mr. Viola, in
addition to our other executive officers and our employees that are Virtu Post-IPO Members, including Mr. Cifu, may
not directly or indirectly engage in certain competitive activities until the third anniversary of the date on which such
person ceases to be an officer, director or employee of ours. Temasek and our non-employee directors are not subject to
any such restriction. To the extent that the Founder Post-IPO Member, Mr. Viola, Temasek, our non-employee directors
or any of their respective affiliates invests in other businesses, they may have differing interests than our other
stockholders. Messrs. Viola and Cifu also have business relationships outside of our business.
We may be unable to remain in compliance with the financial maintenance and other covenants contained in our
Fourth Amended and Restated Credit Agreement and the indenture governing our Notes and our obligation to
comply with these covenants may adversely affect our ability to operate our business.
The covenants in our Fourth Amended and Restated Credit Agreement and indenture governing our Notes may
negatively impact our ability to finance future operations or capital needs or to engage in other business activities. Our
Fourth Amended and Restated Credit Agreement and the indenture governing our Notes requires us to maintain specified
financial ratios and tests, including interest coverage and total leverage ratios, which may require us to take action to
reduce our debt or to act in a manner contrary to our business objectives. Our Fourth Amended and Restated Credit
Agreement and the indenture governing our Notes also restrict our ability to, among other things, incur additional
indebtedness, dispose of assets, guarantee debt obligations, repay other indebtedness, pay dividends, pledge assets, make
investments, including in certain of our operating subsidiaries, make acquisitions or consummate mergers or
consolidations and engage in certain transactions with subsidiaries and affiliates.
A failure to comply with the restrictions contained in our Fourth Amended and Restated Credit Agreement and
indenture governing our Notes could lead to an event of default, which could result in an acceleration of our
indebtedness. Our future operating results may not be sufficient to enable compliance with the covenants in our Fourth
Amended and Restated Credit Agreement or indenture governing our Notes or to remedy such a default. In addition, in
the event of an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or to
make any accelerated payments. Even if we were able to obtain new financing, we would not be able to guarantee that
the new financing would be on commercially reasonable terms. If we default on our indebtedness, our business, financial
condition and results of operation could suffer a material adverse effect.
Our reported financial results depend on management’s selection of accounting methods and certain assumptions
and estimates.
Our accounting policies and assumptions are fundamental to our reported financial condition, and results of
operations and cash flows. Our management must exercise judgment in selecting and applying many of these accounting
policies and methods to comply with generally accepted accounting principles and reflect management’s judgment of the
most appropriate manner to report our financial condition, results of operations and cash flows. In some cases,
management must select the accounting policy or method to apply from multiple alternatives, any of which may be
reasonable under the circumstances, yet each may result in the reporting of materially different results than would have
been reported under a different alternative.
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Certain accounting policies are critical to presenting our reported financial condition and results. They require
management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different
amounts could be reported under different conditions or using different assumptions or estimates. If such estimates or
assumptions underlying our financial statements are incorrect, we may experience material losses.
Additionally, from time to time, the Financial Accounting Standards Board and the SEC change the financial
accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial
statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report
our financial condition, results of operations and cash flows. Changes in these standards are continuously occurring, and
given the current economic environment, more drastic changes may occur. The implementation of such changes could
have a material adverse effect on our business, financial condition and results of operation.
We are exempt from certain corporate governance requirements since we are a “controlled company” within the
meaning of the NASDAQ rules, and as a result our stockholders do not have the protections afforded by these
corporate governance requirements.
The Founder Post-IPO Member controls more than 50% of our combined voting power. As a result, we are
considered a “controlled company” for purposes of the NASDAQ rules and corporate governance standards, and
therefore we are permitted and have elected not to, comply with certain NASDAQ corporate governance requirements,
including those that would otherwise require our board of directors to have a majority of independent directors and
require that we either establish a Compensation and Nominating and Corporate Governance Committees, each comprised
entirely of independent directors, or otherwise ensure that the compensation of our executive officers and nominees for
directors are determined or recommended to the board of directors by the independent members of the board of directors.
Accordingly, holders of our Class A common stock do not have the same protections afforded to stockholders of
companies that are subject to all of the NASDAQ rules and corporate governance standards, and the ability of our
independent directors to influence our business policies and affairs may be reduced.
We are required to pay the Virtu Post-IPO Members and the Investor Post-IPO Stockholders for certain tax benefits
we may claim, and the amounts we may pay could be significant.
In connection with the Reorganization Transactions, we acquired equity interests in Virtu Financial from an
affiliate of Silver Lake Partners (which, following a secondary offering completed in November 2015 (the “November
2015 Secondary Offering”), no longer holds any equity interest in us) and the an affiliate of the Temasek Pre-IPO
Member in the Mergers. In addition, we used a portion of the net proceeds from our IPO and our Secondary Offerings
(as defined below) to purchase Virtu Financial Units and corresponding shares of Class C common stock from certain
Virtu Post-IPO Members, including affiliates of the Silver Lake Partners (the “Silver Lake Post-IPO Members”), and
certain employees. These acquisitions of interests in Virtu Financial, along with certain subsequent exchanges of
interests in Virtu Financial by current and former employees, resulted in tax basis adjustments to the assets of Virtu
Financial that were allocated to us and our subsidiaries. Future acquisitions of interests in Virtu Financial are expected to
produce favorable tax attributes. In addition, future exchanges by the Virtu Post-IPO Members of Virtu Financial Units
and corresponding shares of Class C common stock or Class D common stock, as the case may be, for shares of our
Class A common stock or Class B common stock, respectively, are expected to produce favorable tax attributes. These
tax attributes would not be available to us in the absence of such transactions. Both the existing and anticipated tax basis
adjustments are expected to reduce the amount of tax that we would otherwise be required to pay in the future.
We entered into three tax receivable agreements with the Virtu Post-IPO Members and the Investor Post-IPO
Stockholders (one with the Founder Post-IPO Member, the Employee Trust, Virtu Employee Holdco and other post IPO
investors, other than affiliates of Silver Lake Partners and affiliates of Temasek, another with the Investor Post-IPO
Stockholders and the other with the Silver Lake Post-IPO Members) that provide for the payment by us to the Virtu Post-
IPO Members and the Investor Post-IPO Stockholders (or their transferees of Virtu Financial Units or other assignees) of
85% of the amount of actual cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we
actually realize as a result of (i) any increase in tax basis in Virtu Financial’s assets resulting from (a) the acquisition of
equity interests in Virtu Financial from an affiliates of Silver Lake Partners and Temasek, and the Temasek Pre-IPO
Member in the Reorganization Transactions (which represents the unamortized portion of the increase in tax basis in
Virtu Financial’s assets resulting from a prior acquisition of interests in Virtu Financial by an affiliates of Silver Lake
Partners and Temasek, and the Temasek Pre-IPO Member), (b) the purchases of Virtu Financial Units (along with the
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corresponding shares of our Class C common stock or Class D common stock, as applicable) from certain of the Virtu
Post-IPO Members using a portion of the net proceeds from the IPO or in any future offering, (c) exchanges by the Virtu
Post-IPO Members of Virtu Financial Units (along with the corresponding shares of our Class C common stock or Class
D common stock, as applicable) for shares of our Class A common stock or Class B common stock, as applicable, or
(d) payments under the tax receivable agreements, (ii) any net operating losses available to us as a result of the Mergers
and (iii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable
agreements.
The actual increase in tax basis, as well as the amount and timing of any payments under these tax receivable
agreements, will vary depending upon a number of factors, including the timing of exchanges by the Virtu Post-IPO
Members, the price of our Class A common stock at the time of the exchange, the extent to which such exchanges are
taxable, the amount and timing of the taxable income we generate in the future and the tax rate then applicable and the
portion of our payments under the tax receivable agreements constituting imputed interest.
The payments we are required to make under the tax receivable agreements, which represent 85% of the amount
of actual cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize, could
be substantial. We expect that, as a result of the amount of the increases in the tax basis of the tangible and intangible
assets of Virtu Financial, assuming no material changes in the relevant tax law and that we earn sufficient taxable income
to realize in full the potential tax benefits described above, future payments to the Virtu Post-IPO Members and the
Investor Post-IPO Stockholders in respect of the purchases, the exchanges and the Mergers in connection with the IPO,
and the purchases and exchanges completed in connection with our subsequent public offering will aggregate to
approximately $147.0 million and range from approximately $0.3 million to $12.8 million per year over the next
15 years. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition
to these amounts. The payments under the tax receivable agreements are not conditioned upon the Virtu Post-IPO
Members’ or the Investor Post-IPO Stockholders’ continued ownership of us.
In addition, although we are not aware of any issue that would cause the Internal Revenue Service (the “IRS”)
to challenge the tax basis increases or other benefits arising under the tax receivable agreements, the Virtu Post-IPO
Members and the Investor Post-IPO Stockholders (or their transferees or other assignees) will not reimburse us for any
payments previously made if such tax basis increases or other tax benefits are subsequently disallowed, except that any
excess payments made to the Virtu Post-IPO Members and the Investor Post-IPO Stockholders will be netted against
future payments otherwise to be made under the tax receivable agreements, if any, after our determination of such
excess. As a result, in such circumstances we could make payments to the Virtu Post-IPO Members and the Investor
Post-IPO Stockholders under the tax receivable agreements that are greater than our actual cash tax savings and may not
be able to recoup those payments, which could negatively impact our liquidity.
In addition, the tax receivable agreements provide that, upon certain mergers, asset sales or other forms of
business combination, or certain other changes of control, our or our successor’s obligations with respect to tax benefits
would be based on certain assumptions, including that we or our successor would have sufficient taxable income to fully
utilize the increased tax deductions and tax basis and other benefits covered by the tax receivable agreements. As a
result, upon a change of control, we could be required to make payments under a tax receivable agreement that are
greater than the specified percentage of our actual cash tax savings, which could negatively impact our liquidity.
In addition, the tax receivable agreements provide that in the case of a change in control of the Company, the
Virtu Post-IPO Members and the Investor Post-IPO Stockholders have the option to terminate the applicable tax
receivable agreement, and we are required to make a payment to such electing party in an amount equal to the present
value of future payments (calculated using a discount rate equal to the lesser of 6.5% or LIBOR plus 100 basis points,
which may differ from our, or a potential acquirer’s, then-current cost of capital) under the tax receivable agreement,
which payment would be based on certain assumptions, including those relating to our future taxable income. In these
situations, our obligations under the tax receivable agreements could have a substantial negative impact on our, or a
potential acquirer’s, liquidity and could have the effect of delaying, deferring, modifying or preventing certain mergers,
asset sales, other forms of business combinations or other changes of control. These provisions of the tax receivable
agreements may result in situations where the Virtu Post-IPO Members and the Investor Post-IPO Stockholders have
interests that differ from or are in addition to those of our other shareholders. In addition, we could be required to make
34
payments under the tax receivable agreements that are substantial and in excess of our, or a potential acquirer’s, actual
cash savings in income tax.
Finally, because we are a holding company with no operations of our own, our ability to make payments under
the tax receivable agreements are dependent on the ability of our subsidiaries to make distributions to us. Our Fourth
Amended and Restated Credit Agreement restricts the ability of our subsidiaries to make distributions to us, which could
affect our ability to make payments under the tax receivable agreements. To the extent that we are unable to make
payments under the tax receivable agreements for any reason, such payments will be deferred and will accrue interest
until paid, which could negatively impact our results of operations and cash flows and could also affect our liquidity in
periods in which such payments are made.
Risks Related to Our Class A Common Stock
Substantial future sales of shares of our Class A common stock in the public market could cause our stock price to
fall.
As of December 31, 2017, we had 89,798,609 shares of Class A common stock outstanding, excluding
14,540,911 shares of Class A common stock issuable pursuant to the 2015 Management Incentive Plan and 97,490,729
shares of Class A common stock issuable upon potential exchanges and/or conversions. Of these shares, the 29,404,003
shares sold in the IPO and the Secondary Offerings are freely tradable without further restriction under the Securities
Act. The remaining 158,738,382 shares of Class A common stock outstanding as of December 31, 2017 (including
shares issuable upon exchange and/or conversion) are “restricted securities,” as that term is defined under Rule 144 of
the Securities Act. The holders of these remaining 158,738,382 shares of our Class A common stock, including shares
issuable upon exchange or conversion as described above, are entitled to dispose of their shares pursuant to (i) the
applicable holding period, volume and other restrictions of Rule 144 or (ii) another exemption from registration under
the Securities Act. Additional sales of a substantial number of our shares of Class A common stock in the public market,
or the perception that sales could occur, could have a material adverse effect on the price of our Class A common stock.
We have filed a registration statement under the Securities Act registering 16,000,000 shares of our Class A
common stock reserved for issuance under our 2015 Amended and Restated Management Incentive Plan, 14,540,911 of
which are issuable, and we entered into the Registration Rights Agreement pursuant to which we granted demand and
piggyback registration rights to the Founder Post-IPO Member, Temasek, the North Island Stockholder and piggyback
registration rights to certain of the other Virtu Post-IPO Members.
Failure to establish and maintain effective internal control over financial reporting could have a material adverse
effect on our business, financial condition, results of operations and cash flows, and stock price.
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial
reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls over
financial reporting, our business and operating results could be harmed. We have begun to develop and implement a plan
to test our internal controls over financial reporting to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002 (“Sarbanes-Oxley”) and the related rules of the SEC, which require, among other things, our management to
assess annually the effectiveness of our internal control over financial reporting and, if we are no longer an emerging
growth company under the Jumpstart Our Business Startups Act (the “JOBS Act”), our independent registered public
accounting firm to issue a report on the effectiveness of internal control over financial reporting with our Annual Report
on Form 10-K. The internal control assessment required by Section 404 of Sarbanes-Oxley may divert internal resources
and we may experience higher operating expenses, higher independent auditor and consulting fees during the
implementation of these changes. During the course of this documentation and testing, we may identify deficiencies that
we are unable to remediate before the reporting date. Any material weaknesses or any failure to implement required new
or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting
obligations or result in material misstatements in our consolidated financial statements. If our management or our
independent registered public accounting firm were to conclude in their reports that our internal control over financial
reporting was not effective, investors could lose confidence in our reported financial information, and the trading price of
our Class A common stock could drop significantly. Failure to comply with Section 404 of Sarbanes-Oxley could
potentially subject us to sanctions or investigations by the SEC, FINRA or other regulatory authorities, as well as
increasing the risk of liability arising from litigation based on securities law.
35
We intend to pay regular dividends to our stockholders, but our ability to do so may be limited by our holding
company structure, contractual restrictions and regulatory requirements.
We intend to pay cash dividends on a quarterly basis. See Item 5, “Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities.” However, we are a holding company, with our
principal asset being our direct and indirect equity interests in Virtu Financial, and we will have no independent means of
generating revenue. Accordingly, as the sole managing member of Virtu Financial, we intend to cause, and will rely on,
Virtu Financial to make distributions to its equityholders, including the Founder Post-IPO Member, the Employee Trust,
Virtu Employee Holdco and us, to fund our dividends. When Virtu Financial makes such distributions, the other
equityholders of Virtu Financial will be entitled to receive equivalent distributions pro rata based on their economic
interests in Virtu Financial. In order for Virtu Financial to make distributions, it may need to receive distributions from
its subsidiaries. Certain of these subsidiaries are or may in the future be subject to regulatory capital requirements that
limit the size or frequency of distributions. See “Item 1A. Risk Factors — Risks Related to Our Business — Failure to
comply with applicable regulatory capital requirements could subject us to sanctions imposed by the SEC, FINRA and
other SROs or regulatory bodies.” If Virtu Financial is unable to cause these subsidiaries to make distributions, we may
not receive adequate distributions from Virtu Financial in order to fund our dividends.
Our board of directors will periodically review the cash generated from our business and the capital
expenditures required to finance our global growth plans and determine whether to modify the amount of regular
dividends and/or declare periodic special dividends to our stockholders. Our board of directors will take into account
general economic and business conditions, including our financial condition, results of operations and cash flows, capital
requirements, contractual restrictions, including restrictions contained in our Fourth Amended and Restated Credit
Agreement, business prospects and other factors that our board of directors considers relevant. There can be no assurance
that our board of directors will not reduce the amount of regular cash dividends or cause us to cease paying dividends
altogether. In addition, our Fourth Amended and Restated Credit Agreement and the indenture governing our Notes
limits the amount of distributions our subsidiaries, including Virtu Financial, can make to us and the purposes for which
distributions could be made. Accordingly, we may not be able to pay dividends even if our board of directors would
otherwise deem it appropriate. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Liquidity and Capital Resources.”
Provisions in our charter documents and certain rules imposed by regulatory authorities may delay or prevent our
acquisition by a third party.
Our amended and restated certificate of incorporation and by-laws contain several provisions that may make it
more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These
provisions, which may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that
stockholders may consider favorable, include the following, some of which may only become effective when the
Founder Post-IPO Member or any of its affiliates or permitted transferees no longer beneficially own shares representing
25% of our issued and outstanding common stock (the “Triggering Event”):
•
•
•
•
•
•
•
the 10 vote per share feature of our Class B common stock and Class D common stock;
the division of our board of directors into three classes and the election of each class for three-year terms;
the sole ability of the board of directors to fill a vacancy created by the expansion of the board of directors;
advance notice requirements for stockholder proposals and director nominations;
after the Triggering Event, provisions limiting stockholders ability to call special meetings of stockholders,
to require special meetings of stockholders to be called and to take action by written consent;
after the Triggering Event, in certain cases, the approval of holders of at least 75% of the shares entitled to
vote generally on the making, alteration, amendment or repeal of our certificate of incorporation or by-laws
will be required to adopt, amend or repeal our by-laws, or amend or repeal certain provisions of our
certificate of incorporation;
after the Triggering Event, the required approval of holders of at least 75% of the shares entitled to vote at
an election of the directors to remove directors, which removal may only be for cause; and
36
•
the ability of our board of directors to designate the terms of and issue new series of preferred stock without
stockholder approval, which could be used, among other things, to institute a rights plan that would have
the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing
acquisitions that have not been approved by our board of directors.
These provisions of our amended and restated certificate of incorporation and by-laws could discourage
potential takeover attempts and reduce the price that investors might be willing to pay for shares of our Class A common
stock in the future, which could reduce the market price of our Class A common stock.
In addition, a third party attempting to acquire us or a substantial position in our Class A common stock may be
delayed or ultimately prevented from doing so by change in ownership or control regulations to which certain of our
regulated subsidiaries are subject. FINRA’s NASD Rule 1017 generally provides that FINRA approval must be obtained
in connection with any transaction resulting in a single person or entity owning, directly or indirectly, 25% or more of a
member firm’s equity and would include a change in control of a parent company. Similarly, Virtu Financial Ireland
Limited is subject to change in control regulations promulgated by the Central Bank of Ireland. We may also be subject
to similar restrictions in other jurisdictions in which we operate. These regulations could discourage potential takeover
attempts and reduce the price that investors might be willing to pay for shares of our Class A common stock in the
future, which could reduce the market price of our Class A common stock.
Our stock price may be volatile.
The market price of our Class A common stock is subject to significant fluctuations in response to, among other
factors, variations in our operating results and market conditions specific to our business. Furthermore, in recent years
the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact
on the market price of securities issued by many companies, including companies in our industry. The changes frequently
appear to occur without regard to the operating performance of the affected companies. As such, the price of our Class A
common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could
materially reduce the price of our Class A common stock and materially affect the value of your investment.
We will incur increased costs as a result of being a public company.
We completed the IPO in April 2015, and therefore we have a limited history operating as a public company.
As a public company, we incur significant levels of legal, accounting and other expenses that we did not incur as a
privately-owned company. Sarbanes-Oxley and related rules of the SEC, together with the listing requirements of
NASDAQ, impose significant requirements relating to disclosure controls and procedures and internal control over
financial reporting. We have incurred increased costs as a result of compliance with these public company requirements,
which require additional resources and make some activities more time consuming than they have been in the past when
we were privately owned. We may experience higher than anticipated operating expenses as well as higher independent
auditor and consulting fees during the implementation of these changes and thereafter and we may need to hire additional
qualified personnel in order to continue to satisfy these public company requirements. We are required to expend
considerable time and resources complying with public company regulations. In addition, these laws and regulations may
make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability
insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. In addition, these laws and regulations could make it more difficult for us to attract
and retain qualified persons to serve on our board of directors or as executive officers and may divert management’s
attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting
of our Class A common stock, fines, sanctions and other regulatory action.
Our reliance on exemptions from certain disclosure requirements under the JOBS Act may deter trading in our
Class A common stock.
We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and have
relied and intend to continue to rely, on exemptions from certain disclosure requirements. For so long as we are an
emerging growth company, we will not be required to:
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•
•
•
provide an auditor attestation and report with respect to management’s assessment of the effectiveness of
our internal controls over financial reporting pursuant to section 404(b) of the Sarbanes-Oxley Act;
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board
regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional
information about the audit and the financial statements (i.e., an auditor discussion and analysis); and
submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and
“say-on-frequency,” and disclose certain executive compensation related items such as the correlation
between executive compensation and performance and comparisons of the Chief Executive Officer's
compensation to median employee compensation.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised
accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We have elected not to take advantage of
the benefits of this extended transition period.
We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the
first fiscal year in which our total annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large
accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as
of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued
more than $1.07 billion in non-convertible debt during the preceding three-year period.
Until such time, however, we cannot predict if investors will find our Class A common stock less attractive
because we may rely on these exemptions. If some investors find our Class A common stock less attractive, there may be
a less active trading market for our Class A common stock and our stock price may be more volatile.
If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about us or
our business, or publish projections for our business that exceed our actual results, our stock price and trading
volume could decline.
The trading market for our Class A common stock may be affected by the research and reports that securities or
industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our Class A
common stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. In
addition, the analysts’ projections may have little or no relationship to the results we actually achieve and could cause
our stock price to decline if we fail to meet their projections. If one or more of these analysts ceases coverage of us or
fails to publish reports on us regularly, our stock price or trading volume could decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our headquarters are located in leased office space at 300 Vesey Street, New York, NY 10282. We also lease
space for our offices in U.S., Europe, and Asia. We consider the current arrangements to be adequate for our present
needs.
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ITEM 3. LEGAL PROCEEDINGS
The information required by this item is set forth in the “Litigation” section in Note 13 “Commitments,
Contingencies and Guarantees” to the Company’s Consolidated Financial Statements included in Part II Item 8 herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Market Prices
The following table shows the high and low sale price and dividends paid per share for the periods indicated for
the Company’s common stock, as reported by NASDAQ.
Year Ended December 31, 2016
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
23.90 $
22.16 $
18.00 $
16.20 $
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
19.07 $
18.30 $
18.15 $
18.50 $
Sale Price
High
Low
Dividend per Share
of common stock
0.24
Year Ended December 31, 2017
Sale Price
High
Low
Dividend per Share
of common stock
0.24
19.76 $
17.19 $
14.97 $
12.55 $
15.78 $
14.60 $
14.60 $
13.10 $
0.24
0.24
0.24
0.24
0.24
0.24
Holders
Based on information made available to us by the transfer agent, as of March 13, 2018, there are fifty-five
stockholders of record of our Class A common stock, one of which was Cede & Co., a nominee for The Depository Trust
Company. All of our Class A common stock held by brokerage firms, banks and other financial institutions as nominees
for beneficial owners is considered to be held of record by Cede & Co., who is considered to be one stockholder of
record. A substantially greater number of holders of our Class A common stock are “street name” or beneficial holders,
whose shares of Class A common stock are held of record by banks, brokers and other financial institutions. Because
such shares of Class A common stock are held on behalf of stockholders, and not by the stockholders directly, and
because a stockholder can have multiple positions with different brokerage firms, banks and other financial institutions,
we are unable to determine the total number of stockholders we have.
Dividend and Capital Return Policy
Our board of directors has adopted a policy of returning excess cash to our stockholders. Subject to the sole
discretion of our board of directors and the considerations discussed below, we intend to pay dividends that will annually
equal, in the aggregate, at least 70% of our net income.
The Company paid cash dividends during the years ended December 31, 2017 and 2016 as represented in the
previous table. The Company intends to continue paying regular quarterly dividends to our Class A and Class B
common stockholders and to holders of Restricted Stock Units, however, the payment of dividends will be subject to
general economic and business conditions, including the Company’s financial condition, results of operations and cash
flows, capital requirements, contractual restrictions, including restrictions contained in our Fourth Amended and
Restated Credit Agreement, regulatory restrictions, business prospects and other factors that the Company’s board of
directors considers relevant. The terms of the Fourth Amended and Restated Credit Agreement and the indenture
governing our Notes contain a number of covenants, including a restriction on our and our restricted subsidiaries’ ability
to pay dividends on, or make distributions in respect of, our equity interests. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources – Long-Term Borrowings”.
40
Stock Performance
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed”
with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future
filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent we specifically
incorporate it by reference into such filing. Our stock price performance shown in the graph below is not indicative of
future stock price performance.
The stock performance graph below compares the performance of an investment in our Class A common stock,
from April 16, 2015, the date of the IPO, through December 31, 2017, with the S&P 500 Index and the NYSE ARCA
Securities Broker/Dealer Index. The graph assumes $100 was invested in our Class A common stock, the S&P 500 Index
and the NYSE ARCA Securities Broker/Dealer Index. It assumes that dividends were reinvested on the date of payment
without payment of any commissions or consideration of income taxes.
150
140
130
120
110
100
90
80
70
60
50
Index
Virtu Financial, Inc.
S&P 500 Index
NYSE ARCA Securities Broker/Dealer Index
Virtu Financial Inc. . . . . . . . . . . . . . . . . . . .
S&P 500. . . . . . . . . . . . . . . . . . . . . . . . . . . .
NYSE ARCA Securities Broker/Dealer . . . .
Period Ending
4/16/2015 6/30/2015 12/31/2015 6/30/2016 12/31/2016 6/30/2017 12/31/2017
107.65
105.88
134.38
102.30
139.00
78.82
103.82
120.60
118.12
93.82
110.30
107.58
123.58
98.37
103.10
100.00
100.00
100.00
121.75
98.52
93.33
Unregistered Sale of Securities
On July 20, 2017, the Company completed the all-cash acquisition of KCG Holdings, Inc. In connection with
the Acquisition, the Company issued 8,012,821 shares of the Company’s Class A stock to an affiliate of Temasek for an
aggregate purchase price of approximately $125.0 million, and 40,064,103 shares of the Company’s Class A stock to
NIH for an aggregate purchase price of approximately $618.7 million, in each case in accordance with terms of an
investment agreement in a private placement exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (collectively, the “July 2017 Private
Placement”). As a result of the completion of the IPO, the Reorganization Transactions, the Secondary Offerings, the
July 2017 Private Placement, and certain other permitted exchanges by current and former employees of Virtu Financial
41
common units for shares of the Company’s Class A common stock, the Company holds an approximately 48.3% interest
in Virtu Financial at December 31, 2017.
Pursuant to the exchange agreement (the “Exchange Agreement”) entered into on April 15, 2015 by and among
the Company, Virtu Financial and holders of non-voting common interest units in Virtu Financial (the “Virtu Financial
Units”), Virtu Financial Units (along with the corresponding shares of our Class C common stock or Class D common
stock, as applicable) may be exchanged at any time for shares of our Class A common stock or Class B common stock,
as applicable, on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends
and reclassifications. Pursuant to the Exchange Agreement, on November 13, 2017, certain current and former
employees elected to exchange 209,448 Virtu Financial Units (along with the corresponding shares of our Class C
common stock) held on their behalf on a one-for-one basis for shares of our Class A common stock. The shares of our
Class A common stock were issued in reliance on the registration exemption contained in Section 4(a)(2) of the
Securities Act, on the basis that the transaction did not involve a public offering. No underwriters were involved in the
transaction.
Equity Compensation Plan Information
The following table provides information about shares of common stock available for future awards under all of
the Company’s equity compensation plans as of December 31, 2017:
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants
and rights
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
Equity compensation plans approved
Plan Category
by security holders . . . . . . . . . . . . 2015 Management Incentive Plan
8,591,047 $
18.89
5,949,864
Equity compensation plans not
approved by security holders . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
None
—
8,591,047 $
—
18.89
—
5,949,864
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data for the periods beginning on and
after January 1, 2013. We were formed on October 16, 2013 and, prior to the consummation of the Reorganization
Transactions and the IPO, did not conduct any activities other than those incident to our formation and the IPO. Our
consolidated financial statements reflect, for all the periods prior to April 16, 2015 (the period prior to completion of the
Reorganization Transactions), the operations of Virtu Financial and its consolidated subsidiaries, and for all periods on
or after April 16, 2015, the operations of the Company and its consolidated subsidiaries (including Virtu Financial). On
July 20, 2017 we acquired KCG, which is accounted for under the acquisition method of accounting. Under the
acquisition method of accounting, the assets and liabilities of KCG, as of July 20, 2017, were recorded at their respective
fair values and added to the carrying value of our existing assets and liabilities. Our reported financial condition, results
of operations and cash flows for the periods following the Acquisition reflect KCG's and our balances and reflect the
impact of purchase accounting adjustments. As we are the accounting acquirer, the financial results for 2017 comprise
our results for the entire applicable period and the results of KCG from the Closing Date through December 31, 2017.
All periods prior to the Closing Date comprise solely our results. The consolidated statements of comprehensive income
data for the years ended December 31, 2017, 2016 and 2015 and the consolidated statements of financial condition data
as of December 31, 2017 and 2016 have been derived from our consolidated financial statements included elsewhere in
this Form 10-K.
42
The following selected historical financial and other data should be read in conjunction with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our respective
consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.
(In thousands, except share and per share data)
Consolidated Statements of Comprehensive Income Data:
Revenues:
2017
2016
2015
2014
2013
Years Ended December 31,
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest and dividends income . . . . . . . . . . . . . . . . . . . . . . .
Commissions, net and technology services(1) . . . . . . . . . . .
Other, net(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
766,027 $
50,407
116,503
95,045
1,027,982
665,465 $
26,419
10,352
36
702,272
757,455 $ 685,150 $ 623,733
31,090
27,923
9,682
9,980
—
—
664,505
723,053
28,136
10,622
—
796,213
Operating Expenses:
Brokerage, exchange and clearance fees, net . . . . . . . . . . . .
Communication and data processing . . . . . . . . . . . . . . . . . .
Employee compensation and payroll taxes . . . . . . . . . . . . .
Payments for order flow(3) . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends expense . . . . . . . . . . . . . . . . . . . . . .
Operations and administrative . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangibles and acquired
capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition related retention bonus . . . . . . . . . . . . . . . . . . .
Debt issue cost related to debt refinancing(4) . . . . . . . . . . . .
Initial public offering fees and expenses(5) . . . . . . . . . . . . .
Transaction advisory fees and expenses(6) . . . . . . . . . . . . .
Reserve for legal matters(7) . . . . . . . . . . . . . . . . . . . . . . . .
Charges related to share based compensation at IPO(8) . . . .
Financing interest expense on long-term borrowings . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
256,926
131,506
177,489
27,727
91,993
65,137
47,327
15,447
—
10,460
—
25,270
657
772
64,107
914,818
113,164
221,214
71,001
85,295
—
56,557
23,039
29,703
211
—
5,579
—
—
—
1,755
28,327
522,681
179,591
232,469
68,647
88,026
—
52,423
25,991
33,629
211
—
—
—
—
5,440
44,194
29,254
580,284
215,929
230,965
68,847
84,531
—
47,083
21,923
30,441
211
2,639
—
8,961
3,000
—
—
30,894
529,495
193,558
195,146
64,689
78,353
—
45,196
27,215
23,922
1,011
6,705
10,022
—
—
—
—
24,646
476,905
187,600
Provision for income taxes(9) . . . . . . . . . . . . . . . . . . . . . . .
94,266
21,251
18,439
3,501
5,397
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income available for common stockholders . . . . . . . . . . . $
18,898 $
(15,959)
2,939 $
158,340
(125,360)
32,980
197,490 $ 190,057 $ 182,203
(176,603)
20,887
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.03 $
0.03 $
0.83 $
0.83 $
0.60
0.59
Weighted average common shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,579,147
62,579,147
38,539,091
38,539,091
34,964,312
35,339,585
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income
Foreign exchange translation adjustment . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income attributable to common
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
18,898 $
158,340 $
197,490 $ 190,057 $ 182,203
9,117
28,015
(1,165)
157,175
(4,255)
1,382
(5,032)
193,235 $ 185,025 $ 183,585
(21,833)
(124,546)
(172,249)
6,182 $
32,629
20,986
43
2017
2016
As of December 31,
2015
2014
2013
Consolidated Statements of Financial
Condition Data:
Cash and cash equivalents . . . . . . . . . . . . . $ 532,887 $ 181,415 $ 163,235 $
75,864 $
Total assets . . . . . . . . . . . . . . . . . . . . . . .
7,320,006
3,692,390
3,391,930
3,319,458
Senior secured credit facility . . . . . . . . . . .
1,388,548
564,957
493,589
495,724
Total liabilities . . . . . . . . . . . . . . . . . . . . .
6,168,428
3,157,978
2,834,060
2,812,760
Class A-1 redeemable interest(10) . . . . . . .
Total Virtu Financial Inc. stockholders'
equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
294,433
830,569
145,673
130,708
212,265
Noncontrolling interest . . . . . . . . . . . . . . .
321,009
388,739
427,162
—
Total equity . . . . . . . . . . . . . . . . . . . . . . .
1,151,578
534,412
557,870
506,698
66,010
3,963,570
500,827
3,510,282
250,000
203,288
—
453,288
(1) In connection with the Acquisition of KCG, we recognized significant revenue increase in commissions, net and
technology services for the year ended December 31, 2017. Commissions and fees are primarily affected by changes
in our equity, fixed income and futures transaction volumes with institutional clients, client relationships; changes in
commission rates; client experience on the various platforms; level of volume based fees from providing liquidity to
other trading venues; and the level of soft dollar and commission recapture activity.
(2) As a result of the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”), we recognized a gain of $86.6 million on the
reduction of tax receivable agreement obligation during the year ended December 31, 2017. See Note 5, “Tax
Receivable Agreements” in Part II Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.
(3) Payments for order flow are a result of the Acquisition of KGC, and primarily represent payments to broker dealer
clients, in the normal course of business, for directing their order flow to us.
(4) Virtu Financial entered into a $320.0 million senior secured credit facility in 2011, and it went through multiple
rounds of refinancing during the years ended December 31, 2013 and 2016. In 2017, in connection with the
Acquisition of KCG, the existing senior secured credit facility was terminated, and Virtu Financial entered into the
Fourth Amended and Restated Credit Agreement of $1,150.0 million, and issued senior secured second lien notes of
$500.0 million. During the refinancing and termination of the existing credit facility, a portion of certain financing
costs that were scheduled to be amortized over the term of the loan, including original issue discount and
underwriting and legal fees, were accelerated and recognized at the closing of the transactions.
(5) Initial public offering fees and expenses reflect costs directly attributable to our initial public offering process, which
was postponed in April 2014. We accounted for such costs in accordance with ASC 340-10, Other Assets and
Deferred Costs. ASC 340 states that costs directly attributable to a successfully completed offering of equity
securities may be deferred and charged against the gross proceeds of the offering as a reduction of additional paid-in
capital, but for an offering postponed for a period greater than 90 days, the offering costs must be charged as an
expense in the period the offering process was postponed.
(6) Transaction advisory fees reflect professional fees incurred by us in connection with the Temasek Transaction and
Acquisition of KCG, which were consummated on December 31, 2014 and July 20, 2017, respectively.
(7) In December 2015, the enforcement committee of the AMF fined the Company’s European subsidiary in the amount
of €5.0 million (approximately $5.4 million) based on its allegations that the subsidiary of Madison Tyler Holdings,
LLC engaged in price manipulation and violations of the AMF General Regulation and Euronext Market Rules. In
accordance with the foregoing, we accrued an estimated loss in relation to the fine imposed by the AMF. In May
2017, the fine was reduced to €3.0 million (approximately $3.5 million), subject to an incremental charge of €0.3
million (approximately $0.4 million).
(8) Represents non-cash compensation expenses in respect of the outstanding time vested Class B interests of Virtu
Financial and East MIP Class B interests recognized at the consummation of the IPO and through the year ended
December 31, 2015, net of $9.2 million and $8.5 million in capitalization and amortization, respectively, of the costs
attributable to employees incurred in development of software for internal use. We continued to capitalize and
amortize the costs related to development on the software for internal use for the years ended December 31, 2017
and 2016.
44
(9) As a result of the 2017 Tax Act, the U.S. statutory corporate tax rate has been lowered from 35% to 21% and certain
deductions have been eliminated. We have reasonably estimated the effect of the 2017 Tax Act, and recorded a
provisional deferred tax expense for the impact of the 2017 Tax Act of approximately $90.6 million. See Note 13,
“Income Taxes” in Part II Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.
(10) The Class A-1 interests of Virtu Financial were convertible by the holders at any time into an equivalent number of
Class A-2 capital interests of Virtu Financial and, in a sale or other specified capital transaction, holders were
entitled to receive distributions up to specified preference amounts before holders of Class A-2 capital interests of
Virtu Financial were entitled to receive distributions. In connection with the Reorganization Transactions, all of the
existing equity interests in Virtu Financial were reclassified into Virtu Financial Units. See Note 15, “Capital
Structure” within our consolidated financial statements.
45
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management’s discussion and analysis the years ended December 31, 2017, 2016, and 2015 and should be
read in conjunction with the audited consolidated financial statements for the years ended December 31, 2017, 2016 and
2015. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those discussed below. Unless otherwise stated, all amounts are presented in thousands of dollars.
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements. You should not place undue reliance on
forward-looking statements because they are subject to numerous uncertainties and factors relating to our operations and
business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking
statements include information concerning our possible or assumed future results of operations, including descriptions of
our business strategy. These forward-looking statements can be identified by the use of forward-looking terminology,
including the terms “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project” or,
in each case, their negative, or other variations or comparable terminology and expressions. These statements are based
on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical
trends, current conditions, expected future developments and other factors we believe are appropriate under the
circumstances. As you read and consider this annual report on Form 10-K, you should understand that these statements
are not guarantees of performance or results and that our actual results of operations, financial condition and liquidity,
and the development of the industry in which we operate, may differ materially from those made in or suggested by the
forward-looking statements contained in this annual report on Form 10-K. By their nature, forward-looking statements
involve known and unknown risks and uncertainties, including those described under the heading “Risk Factors” in this
Annual Report, because they relate to events and depend on circumstances that may or may not occur in the future.
Although we believe that the forward-looking statements contained in this annual report on Form 10-K are based on
reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk
Factors” in this annual report on Form 10-K, could affect our actual financial results or results of operations and cash
flows, and could cause actual results to differ materially from those in such forward-looking statements, including but
not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
reduced levels of overall trading activity;
dependence upon trading counterparties and clearing houses performing their obligations to
us;
failures of our customized trading platform;
risks inherent to the electronic market making business and trading generally;
increased competition in market making activities and execution services;
dependence on continued access to sources of liquidity;
risks associated with self-clearing and other operational elements of our business;
compliance with laws and regulations, including those specific to our industry;
obligation to comply with applicable regulatory capital requirements;
litigation or other legal and regulatory-based liabilities;
proposed legislation that would impose taxes on certain financial transactions in the European
Union, the U.S. and other jurisdictions;
obligation to comply with laws and regulations applicable to our international operations;
enhanced media and regulatory scrutiny and its impact upon public perception of us or of
companies in our industry;
need to maintain and continue developing proprietary technologies;
46
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
failure to maintain system security or otherwise maintain confidential and proprietary
information;
the effect of the Acquisition of KCG on existing business relationships, operating results, and
ongoing business operations generally;
the significant costs and significant indebtedness that we incurred in connection with the
Acquisition of KCG, and the integration of KCG into our business;
the risk that we may encounter significant difficulties or delays in integrating the two
businesses and the anticipated benefits, costs savings and synergies or capital release may not
be achieved;
the assumption of potential liabilities relating to KCG’s business;
capacity constraints, system failures, and delays;
dependence on third party infrastructure or systems;
use of open source software;
failure to protect or enforce our intellectual property rights in our proprietary technology;
risks associated with international operations and expansion, including failed acquisitions or
dispositions;
the effects of and changes in economic conditions (such as volatility in the financial markets,
inflation, monetary conditions and foreign currency and exchange rate fluctuations, foreign
currency controls and/or government mandated pricing controls, as well as in trade, monetary,
fiscal and tax policies in international markets) and political conditions (such as military
actions and terrorist activities);
risks associated with potential growth and associated corporate actions;
inability to, or delay, in accessing the capital markets to sell shares or raise additional capital;
loss of key executives and failure to recruit and retain qualified personnel; and
risks associated with losing access to a significant exchange or other trading venue.
Our forward-looking statements made herein are made only as of the date of this report. We expressly disclaim
any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any
change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such
statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by the cautionary statements contained in this annual report on
Form 10-K.
Basis of Preparation
Our audited consolidated financial statements for the year ended December 31, 2017 reflect our operations and
those of our consolidated subsidiaries. As discussed in Note 1 “Organization and Basis of Presentation” and in Note 3
“Acquisition of KCG Holdings Inc.” of Part II Item 8 “Financial Statements and Supplementary Data” of this Form 10-
K, we are accounting for the Acquisition of KCG under the acquisition method of accounting. Under the acquisition
method of accounting, the assets and liabilities of KCG, as of the Closing Date, were recorded at their respective fair
values and added to the carrying value of our existing assets and liabilities. Our reported financial condition, results of
operations and cash flows for the periods following the Acquisition reflect KCG's and our balances and reflect the
impact of purchase accounting adjustments, including revised amortization and depreciation expense for acquired assets.
As we are the accounting acquirer, the financial results for the year ended December 31, 2017 comprise our results for
the entire applicable period and the results of KCG from the Closing Date through December 31, 2017. All periods prior
to the Closing Date comprise solely our results.
47
Overview
We are a leading financial services firm that leverages cutting edge technology to deliver liquidity to the global
markets and innovative, transparent trading solutions to our clients. We believe that our broad diversification, in
combination with our proprietary technology platform and low-cost structure, enables us to facilitate risk transfer
between global capital markets participants by supplying competitive liquidity and execution services while at the same
time earning attractive margins and returns.
Technology and operational efficiency are at the core of our business, and our focus on market making
technology is a key element of our success. We have developed a proprietary, multi-asset, multi-currency technology
platform that is highly reliable, scalable and modular, and we integrate directly with exchanges and other liquidity
centers. Our market data, order routing, transaction processing, risk management and market surveillance technology
modules manage our market making activities in an efficient manner and enable us to scale our market making activities
globally and across additional securities and other financial instruments and asset classes without significant incremental
costs or third party licensing or processing fees.
We believe that technology-enabled market makers like Virtu serve an important role in maintaining and
improving the overall health and efficiency of the global capital markets by continuously posting bids and offers for
financial instruments and thereby providing market participants a transparent and efficient means to transfer risk. All
market participants benefit from the increased liquidity, lower overall trading costs and execution certainty that Virtu
provides.
As described in “Acquisition of KCG” below, on the Closing Date, we completed our acquisition of KCG.
KCG was a leading independent securities firm offering clients a range of services designed to address trading needs
across asset classes, product types and geographies. KCG combined advanced technology with specialized client service
across market making, agency execution and trading venues and also engaged in principal trading via exchange-based
electronic market making. KCG offered multiple access points to trade global equities, options, futures, fixed income,
currencies and commodities available via voice or electronically.
Prior to the Acquisition of KCG, Virtu operated as a single reportable business segment. As a result of the
Acquisition of KCG, beginning in the third quarter of 2017, Virtu has three operating segments: Market Making,
Execution Services, and Corporate. Our management allocates resources, assesses performance and manages our
business according to these segments:
• Market Making,
• Execution Services, and
• Corporate
We believe that the most relevant asset class distinctions and venues for the markets we serve include the
following:
Asset Classes
Americas Equities . . . . . . . . .
Rest of World Equities . . . . .
Global FICC, Options, and
Other . . . . . . . . . . . . . . . . . . . .
Selected Venues in Which We Make Markets
BATS, BM&F Bovespa, CHX, CME, MexDer, NASDAQ,
NYSE, NYSE Arca, NYSE American, TSX, major private
liquidity pools
Amsterdam, Aquis, ASX, BATS Europe, Bolsa de Madrid,
Borsa Italiana, Brussels, EUREX, Euronext -Paris, ICE Futures
Europe, Johannesburg Stock Exchange, Lisbon, LSE, OSE, SBI
Japannext, SGX, SIX Swiss Exchange, TOCOM, TSE
BOX, BrokerTec, CME, Currenex, EBS, eSpeed, Hotspot, ICE,
ICE Futures Europe, LMAX, NASDAQ Energy Exchange,
NYSE Arca Options, PHLX, Reuters/Fxall, SGX, TOCOM
48
Market Making
We provide competitive and deep liquidity that helps to create more efficient markets around the world. We
stand ready, at any time, to buy or sell a broad range of securities, and we generate revenue by buying and selling large
volumes of securities and other financial instruments and earning small bid/ask spreads. Our market structure expertise,
broad diversification, and execution technology enables us to provide competitive bids and offers in over 25,000
securities, at over 235 venues, in 36 countries worldwide.
We believe the overall level of volumes and realized volatility in the various markets we serve have the greatest
impact on our businesses. Increases in market volatility can cause bid/ask spreads to widen as market participants are
more willing to pay market makers like us to transact immediately and as a result market makers capture rate per
notional amount transacted will increase.
Execution Services
We offer agency execution services and trading venues that provide transparent trading in global equities, ETFs,
futures and fixed income to institutions, banks and broker dealers. We generally earn commissions as an agent between
principals for transactions. Agency based, execution-only trading in the segment is done primarily through a variety of
access points including: (a) algorithmic trading and order routing; (b) institutional sales traders who offer portfolio
trading and single stock sales trading which provides execution expertise for program, block and riskless principal trades
in global equities and ETFs; and (c) matching of client orders in Virtu BondPoint (our fixed income ECN) and in Virtu
MatchIt (our ATS for U.S. equities), We also earn technology services revenues by providing our proprietary
technology and infrastructure to select third parties for a service fee.
Corporate
Our Corporate segment contains investments principally in strategic financial services-oriented opportunities
and maintains corporate overhead expenses and all other income and expenses that are not attributable to our other
segments.
Acquisition of KCG
On the Closing Date, pursuant to the terms of the Agreement and Plan of Merger, dated as of April 20, 2017
(the “Merger Agreement”), by and among the Company, Orchestra Merger Sub, Inc., a Delaware corporation and an
indirect wholly-owned subsidiary of the Company (“Merger Sub”), and KCG, Merger Sub merged with and into KCG
(the “Merger”), with KCG surviving the Merger as a wholly owned subsidiary of the Company.
In connection with the financing of the Acquisition, on the Closing Date, the Company issued to (i) Aranda
Investments Pte. Ltd. (“Aranda”), an affiliate of Temasek, 6,346,155 shares of the Company’s Class A Common Stock
for an aggregate purchase price of approximately $99.0 million and (ii) North Island Holdings I, LP (“NIH”) 39,725,979
shares of the Company Class A Common Stock for an aggregate purchase price of approximately $613.5 million. On
August 10, 2017, the Company issued additional 1,666,666 shares and 338,124 shares of the Company Class A Common
Stock to Aranda and NIH respectively, for an aggregate additional purchase price of approximately $26.0 million and
$5.2 million, respectively.
Also in connection with the financing of the Acquisition, on June 16, 2017, Orchestra Borrower LLC, a wholly
owned subsidiary of Virtu Financial (the “Escrow Issuer”) and Orchestra Co-Issuer, Inc. (the “Co-Issuer”) completed the
offering of $500 million aggregate principal amount of 6.750% Senior Secured Second Lien Notes due 2022 (the
“Notes”). On July 20, 2017, VFH assumed all of the obligations of the Escrow Issuer under the indenture and the Notes.
On June 30, 2017, Virtu Financial and VFH Parent LLC (“VFH”) entered into a fourth amended and restated
credit agreement (the “Fourth Amended and Restated Credit Agreement”) for $1.15 billion first lien secured term loans
with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, sole lead arranger and
bookrunner, which amended and restated in its entirety VFH’s existing Credit Agreement.
49
On July 21, 2017, the outstanding 6.875% Senior Secured Notes due 2020 issued by KCG were redeemed at a
redemption price equal to 103.438% of the principal amount, plus accrued and unpaid interest, pursuant to the indenture,
dated as of March 13, 2015 (as amended, restated, supplemented or otherwise modified), by and among KCG, the
subsidiary guarantors party thereto and The Bank of New York Mellon, as trustee and collateral agent.
Amended and Restated 2015 Management Incentive Plan
The Company’s board of directors and stockholders adopted the 2015 Management Incentive Plan, which
became effective upon consummation of the IPO. The 2015 Management Incentive Plan was amended and restated in
2017 (the “Amended and Restated 2015 Management Incentive Plan”), provides for the grant of stock options, restricted
stock units, and other awards based on an aggregate of 16,000,000 shares of Class A common stock, subject to additional
sublimits, including limits on the total option grant to any one participant in a single year and the total performance
award to any one participant in a single year.
In connection with the IPO, non-qualified stock options to purchase 9,228,000 shares were granted at the IPO
per share price, each of which vests in equal annual installments over a period of four years from grant date and expires
not later than 10 years from the date of grant. Subsequent to the IPO and during the year ended December 31, 2017,
options to purchase 994,000 shares in the aggregate were forfeited. The fair value of the stock option grants were
determined through the application of the Black-Scholes-Merton model and will be recognized on a straight line basis
over the vesting period. In connection with and subsequent to the IPO, 1,076,681 shares of immediately vested Class A
common stock and 1,579,438 restricted stock units were granted, which vest over a period of up to 4 years and are settled
in shares of Class A common stock. The fair value of the Class A common stock and restricted stock units was
determined based on the volume weighted average price for the three days preceding the grant, and with respect to the
restricted stock units, a projected annual forfeiture rate, and will be recognized on a straight line basis over the vesting
period.
Components of Our Results of Operations
The following table sets forth: (i) Total revenue, (ii) Total operating expenses and (iii) Income before income
taxes and noncontrolling interest of our segments and on a consolidated basis (in thousands):
(in thousands)
Market Making
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes and noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Execution Services
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes and noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes and noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2016
2015
2017
836,707 $
762,074
691,884 $
515,739
785,591
574,148
74,633
176,145
211,443
99,135
111,654
(12,519)
92,140
41,090
51,050
10,352
5,949
4,403
36
993
(957)
10,622
6,136
4,486
—
—
—
Consolidated
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes and noncontrolling
1,027,982
914,818
702,272
522,681
796,213
580,284
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
113,164 $
179,591
$
215,929
50
(in thousands, except share and per share data)
Revenues:
Years Ended December 31,
2016
2017
2015
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
766,027
50,407
116,503
95,045
1,027,982
$
665,465
26,419
10,352
36
702,272
$
757,455
28,136
10,622
—
796,213
Operating Expenses:
Brokerage, exchange and clearance fees, net . . . . . . . . . . . . . . . .
Communication and data processing . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and payroll taxes . . . . . . . . . . . . . . . . . .
Payments for order flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Operations and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangibles and acquired capitalized
software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issue cost related to debt refinancing . . . . . . . . . . . . . . . . . .
Transaction advisory fees and expenses . . . . . . . . . . . . . . . . . . . .
Reserve for legal matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges related to share based compensation at IPO . . . . . . . . . .
Financing interest expense on long-term borrowings . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
256,926
131,506
177,489
27,727
91,993
65,137
47,327
15,447
10,460
25,270
657
772
64,107
914,818
221,214
71,001
85,295
—
56,557
23,039
29,703
211
5,579
—
—
1,755
28,327
522,681
232,469
68,647
88,026
—
52,423
25,991
33,629
211
—
—
5,440
44,194
29,254
580,284
Income before income taxes and noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113,164
94,266
18,898
$
179,591
21,251
158,340
$
215,929
18,439
197,490
$
Total Revenues
The majority of our revenue is generated through market making activities and is recorded as trading income,
net. In addition, we generate revenues from interest and dividends income as well as the technology services revenue
generated by using our proprietary technology to provide technology infrastructure and agency execution services to
select third parties. Following the Acquisition of KCG, we also earn commissions and commission equivalents from
executing trades on behalf of institutional clients.
Trading Income, Net. Trading income, net, represents revenue earned from bid/ask spreads. Trading income is
generated in the normal course of our market making activities and is typically proportional to the level of trading
activity, or volumes, in the asset classes we serve. Our trading income is highly diversified by asset class and geography
and is comprised of small amounts earned on millions of trades on various exchanges, primarily in the following three
categories: Americas Equities, Rest of World Equities, and Global FICC, options and other. Our trading income, net,
results from gains and losses associated with economically neutral trading strategies, which are designed to capture small
bid ask spreads and often involve making markets in a derivative versus a correlated instrument that is not a derivative.
These transactions often result in a gain or loss on the derivative and a corresponding loss or gain on the non-derivative.
Trading income, net, accounted for 75%, 95% and 95% of our total revenues for the years ended December 31, 2017,
2016, and 2015, respectively.
Interest and Dividends Income. Our market making activities require us to hold securities on a regular basis,
and we generate revenues in the form of interest and dividends income from these securities. Interest is earned on
securities borrowed from other market participants pursuant to collateralized financing arrangements and on cash held by
brokers. Dividends income arises from holding market making positions over dates on which dividends are paid to
shareholders of record.
Commissions, Net and Technology Services. Technology services revenues include technology licensing fees
and agency commission fees. Technology licensing fees are charged for the licensing of our proprietary technology and
the provision of related services, including hosting, management and support. These fees include an up-front component
and a recurring fee for the relevant terms, which may include both fixed and variable components. Revenue is recognized
ratably for these services over the contractual term of the agreement. We began providing technology licensing services
51
to a third party in 2013 pursuant to a three-year arrangement, which was renewed for one year on the same terms except
for the up-front component in January 2016. In July 2016, we entered into a separate three-year arrangement with
another third party to provide technology services.
Agency commission fees are charged for agency trades executed by us on behalf of third party broker-dealers,
institutions and other financial institutions. We began providing agency execution services in April 2016, and revenue is
recognized on a trade date basis based on the trade volume executed. Revenues on transactions for which we charge
explicit commissions or commission equivalents, which include the majority of our institutional client orders, are
included within commissions, net and technology services. Commissions and fees are primarily affected by changes in
our equity, fixed income and futures transaction volumes with institutional clients; client relationships; changes in
commission rates; client experience on the various platforms; level of volume based fees from providing liquidity to
other trading venues; and the level of our soft dollar and commission recapture activity.
Other, Net. In July 2016, we made a minority investment in SBI Japannext Co., Ltd. (“SBI”), a proprietary
trading system based in Tokyo, for $38.8 million which was substantially paid in Japanese Yen. In connection with the
investment, we issued bonds to certain affiliates of SBI and used the proceeds of ¥3.5 billion to partially finance the
transaction. Revenues or losses are recognized due to the changes in fair value of the investment or fluctuations in
Japanese Yen conversion rates within other, net.
As discussed in Note 6 “Tax Receivable Agreements” of Part II Item 8 “Financial Statements and
Supplementary Data” of this Form 10-K, as a result of the decrease in the U.S. corporate income tax rate to 21% (see
“Provision for Income Taxes” below), we recognized $86.6 million gain on the reduction of our tax receivable
agreement obligation. As discussed in Note 2. “Summary of Significant Accounting Policies” of Part II Item 8
“Financial Statements and Supplementary Data” of this Form 10-K.
We also have interests in two telecommunications joint ventures (“JV”). We record our pro-rata share of each
JV’s earnings or losses within other, net while fees related to the use of communication services provided by the JVs are
recorded within communications and data processing.
Operating Expenses
Brokerage, Exchange and Clearance Fees, Net. Brokerage, exchange and clearance fees are our most
significant expenses, which include the direct expenses of executing and clearing transactions that we consummate in the
course of our market making activities. Brokerage, exchange and clearance fees primarily consist of fees charged by the
third parties for executing, processing and settling trades. These fees generally increase and decrease in direct correlation
with the level of trading activity, or volumes, in the markets we serve. Execution fees are paid primarily to exchanges
and venues where we trade. Clearance fees are paid to clearing houses and clearing agents. Rebates based on volume
discounts, credits or payments received from exchanges or other market places are netted against brokerage, exchange
and clearance fees.
Payments for Order Flow. Payments for order flow are a result of the Acquisition of KCG, and they primarily
represent payments to broker dealer clients, in the normal course of business, for directing their order flow to us
primarily in U.S. equities. Payments for order flow will fluctuate as we modify our rates and as our percentage of clients
whose policy is not to accept payments for order flow varies. Payments for order flow also fluctuate based on U.S. equity
share and option volumes, our profitability and the mix of market orders, limit orders, and customer mix.
Communication and Data Processing. Communication and data processing represent primarily fixed expenses
for leased equipment, equipment co-location, network lines and connectivity for our trading centers and co-location
facilities. More specifically, communications expense consists primarily of the cost of voice and data telecommunication
lines supporting our business, including connectivity to data centers and exchanges, markets and liquidity pools around
the world, and data processing expense consists primarily of market data fees that we pay to third parties to receive price
quotes and related information.
Employee Compensation and Payroll Taxes. Employee compensation and payroll taxes include employee
salaries, cash and non-cash incentive compensation, employee benefits, payroll taxes, severance and other employee
52
related costs. Non-cash compensation includes, prior to the Reorganization Transactions, the share based-incentive
compensation paid to employees in the form of Class A-2 profits interests in Employee Holdco, which formerly held
corresponding Class A-2 profits interests in Virtu Financial. Additionally, after the Reorganization Transactions, it
includes non-cash compensation expenses with respect to the stock options and restricted stock units granted in
connection with and subsequent to the IPO pursuant to the 2015 Management Incentive Plan. We have capitalized and
therefore excluded employee compensation and benefits related to software development of $15.7 million, $11.1 million,
and $10.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Interest and Dividends Expense. We incur interest expense from loaning certain equity securities in the general
course of our market making activities pursuant to collateralized lending transactions. Typically, dividend expense is
incurred when a dividend is paid on securities sold short.
Operations and Administrative. Operations and administrative expense represents occupancy, recruiting, travel
and related expense, professional fees and other expenses.
Depreciation and Amortization. Depreciation and amortization expense results from the depreciation of fixed
assets, such as computing and communications hardware, as well as amortization of leasehold improvements and
capitalized in-house software development. We depreciate our computer hardware and related software, office hardware
and furniture and fixtures on a straight line basis over a period of 3 to 7 years based on the estimated useful life of the
underlying asset, and we amortize our capitalized software development costs on a straight line basis over a period of 1.5
to 2.5 years, which represents the estimated useful lives of the underlying software. We amortize leasehold
improvements on a straight line basis over the lesser of the life of the improvement or the term of the lease.
Amortization of Purchased Intangibles and Acquired Capitalized Software. Amortization of purchased
intangibles and acquired capitalized software represents the amortization of $1.9 million, $2.0 million and $175.0 million
of assets acquired in connection with the acquisitions of certain assets from Nyenburgh Holding B.V., Teza and KCG,
respectively. These assets are amortized over their useful lives, ranging from 1 to 17 years, except for certain assets
which where categorized as indefinite useful life.
Debt Issue Costs Related to Debt Refinancing. As a result of the refinancing or early termination of our debt,
we accelerate the capitalized debt issue costs and the discount on debt that would otherwise to be amortized or accreted
over the life of the loan.
Transaction Advisory Fees and Expenses. Transaction advisory fees and expenses primarily reflect
professional fees incurred by us in connection with the Acquisition of KCG.
Reserve for Legal Matters. Reserve for legal matters represents the potential legal settlements arriving from on-
going legal matters that might be material for our results of operations and cash flows for any particular reporting period.
Charges Related to Share Based Compensation at IPO. At the consummation of the IPO and through the year
ended December 31, 2017, we recognized non-cash compensation expenses in respect of the outstanding time vested
Class B and East MIP Class B interests, net of capitalization and amortization of costs attributable to employees incurred
in development of software for internal use, as discussed in Note 16 (“Share-based compensation”) of Part II Item 8
“Financial Statements and Supplementary Data” of this Form 10-K.
Financing Interest Expense on Long-Term Borrowings. Financing interest expense reflects interest accrued
on outstanding indebtedness, under our long-term borrowing arrangements.
Provision for Income Taxes
Prior to the consummation of the Reorganization Transactions and the IPO, our business was historically
operated through a limited liability company that is treated as a partnership for U.S. federal income tax purposes, and as
such most of our income was not subject to U.S. federal and certain state income taxes. Our income tax expense for
historical periods reflects taxes payable by certain of our non-U.S. subsidiaries. Subsequent to consummation of the
53
Reorganization Transactions and the IPO, we are subject to U.S. federal, state and local income tax at the rate applicable
to corporations less the rate attributable to the noncontrolling interest in Virtu Financial.
Our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax
and taxable income and loss and the mix of jurisdictions to which they relate, changes in how we do business,
acquisitions (including the acquisition of KCG) and investments, audit-related developments, tax law developments
(including changes in statutes, regulations, case law, and administrative practices), and relative changes of expenses or
losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on
the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our
effective tax rate is greater when our pre-tax income is lower.
Public Law No. 115-97, commonly referred to as the The Tax Cuts and Jobs Act (“2017 Tax Act”) was signed
into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other
things, lowering the statutory corporate tax rate from 35% to 21%, and eliminating certain deductions. We have not
completed our determination of the accounting implications of the 2017 Tax Act on our tax accruals. However, we have
reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of
December 31, 2017. We recorded a provisional deferred tax expense for the impact of the 2017 Tax Act of
approximately $91.0 million, which is primarily composed of the remeasurement of federal net deferred tax assets as a
result of the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. As we complete our analysis
of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S.
Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts.
Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are
made.
We regularly assess whether it is more likely than not that we will realize our deferred tax assets in each taxing
jurisdiction in which we operate. In performing this assessment with respect to each jurisdiction, we review all available
evidence, including actual and expected future earnings, capital gains, and investment in such jurisdiction, the carry-
forward periods available to us for tax reporting purposes, and other relevant factors.
See Note 13 “Income Taxes” of Part II Item 8 “Financial Statements and Supplementary Data” of this Form 10-K
for additional information.
Non-GAAP Financial Measures and Other Items
To supplement our consolidated financial statements presented in accordance with generally accepted
accounting principles (“GAAP”), we use the following non-GAAP financial measures of financial performance:
•
•
“Adjusted Net Trading Income”, which is the amount of revenue we generate from our market making
activities, or trading income, net, plus commissions, net and technology services, plus interest and dividends
income and expense, net, less direct costs associated with those revenues, including brokerage, exchange and
clearance fees, net, and payments for order flow. Management believes that this measurement is useful for
comparing general operating performance from period to period. Although we use Adjusted Net Trading
Income as a financial measure to assess the performance of our business, the use of Adjusted Net Trading
Income is limited because it does not include certain material costs that are necessary to operate our business.
Our presentation of Adjusted Net Trading Income should not be construed as an indication that our future
results will be unaffected by revenues or expenses that are not directly associated with our market making
activities.
“EBITDA”, which measures our operating performance by adjusting net income to exclude financing interest
expense on long-term borrowings, debt issue cost related to debt refinancing, depreciation and amortization,
amortization of purchased intangibles and acquired capitalized software, and income tax expense, and
“Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude
severance, reserve for legal matters, transaction advisory fees and expenses, termination of office leases,
acquisition related retention bonus, trading related settlement income, other, net, share based compensation,
charges related to share based compensation at IPO, 2015 Management Incentive Plan, and charges related to
share based compensation at IPO.
54
•
“Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized
provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to
exclude certain items including IPO-related adjustments and other non-cash items, assuming that all vested and
unvested Virtu Financial Units have been exchanged for Class A common stock, and applying a corporate tax
rate of 35.5% to 37%.
Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized
Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPS are
non-GAAP financial measures used by management in evaluating operating performance and in making strategic
decisions. Additional information provided regarding the breakdown of Total ANTI by category is also a non-GAAP
financial measure but is not used by the Company in evaluating operating performance and in making strategic decisions.
In addition, these non-GAAP financial measures or similar non-GAAP financial measures are used by research analysts,
investment bankers and lenders to assess our operating performance. Management believes that the presentation of
Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted
Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPS provide useful
information to investors regarding our results of operations and cash flows because they assist both investors and
management in analyzing and benchmarking the performance and value of our business. Adjusted Net Trading Income,
EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes,
Normalized provision for income taxes and Normalized Adjusted EPS provide indicators of general economic
performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that
these measurements are useful for comparing general operating performance from period to period. Furthermore, our
Fourth Amended and Restated Credit Agreement contains covenants and other tests based on metrics similar to Adjusted
EBITDA. Other companies may define Adjusted Net Trading Income, Adjusted EBITDA, Normalized Adjusted Net
Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized
Adjusted EPS differently, and as a result our measures of Adjusted Net Trading Income, Adjusted EBITDA, Normalized
Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes
and Normalized Adjusted EPS may not be directly comparable to those of other companies. Although we use these non-
GAAP measures as financial measures to assess the performance of our business, such use is limited because they do not
include certain material costs necessary to operate our business.
Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized
Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized Adjusted EPS should
be considered in addition to, and not as a substitute for, Net Income in accordance with U.S. GAAP as a measure of
performance. Our presentation of Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net
Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized
Adjusted EPS should not be construed as an indication that our future results will be unaffected by unusual or
nonrecurring items. Adjusted Net Trading Income, Normalized Adjusted Net Income, Normalized Adjusted Net Income
before income taxes, Normalized provision for income taxes and Normalized Adjusted EPS and our EBITDA-based
measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis
of our results as reported under U.S. GAAP. Some of these limitations are:
•
•
•
•
•
they do not reflect every cash expenditure, future requirements for capital expenditures or contractual
commitments;
our EBITDA-based measures do not reflect the significant interest expense or the cash requirements
necessary to service interest or principal payment on our debt;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized
will often have to be replaced or require improvements in the future, and our EBITDA-based measures do
not reflect any cash requirement for such replacements or improvements;
they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash
flows;
they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative
of our ongoing operations; and
55
•
they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us.
Because of these limitations, Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized
Adjusted Net Income are not intended as alternatives to Net Income as indicators of our operating performance and
should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as
measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using
Adjusted Net Trading Income, EBITDA, Adjusted EBITDA and Normalized Adjusted Net Income along with other
comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. These
U.S. GAAP measurements include operating Net Income, cash flows from operations and cash flow data. See below a
reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure.
The following tables reconcile Consolidated Statements of Comprehensive Income to arrive at EBITDA,
Adjusted EBITDA, Adjusted Net Trading Income, and selected Operating Margins.
For the Year Ended
December 31,
2016
2017
Reconciliation of Trading income, net to Adjusted Net Trading Income
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest and dividends income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage, exchange and clearance fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for order flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Trading Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
766,027
50,407
116,503
(256,926)
(27,727)
(91,993)
556,291
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Financing interest expense on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issue cost related to debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangibles and acquired capitalized software . . . . . . . . . . . . . . .
Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for legal matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction advisory fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of office leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition related retention bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading related settlement income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment write-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges related to share based compensation at IPO, 2015 Management Incentive Plan . . . . .
Charges related to share based compensation awards at IPO . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
18,898
64,107
10,460
47,327
15,447
94,266
250,505
14,911
657
25,270
3,671
23,050
(628)
(95,045)
1,216
21,825
5,225
740
251,397
$
$
$
$
$
665,465
26,419
10,352
(221,214)
—
(56,557)
424,465
158,340
28,327
5,579
29,703
211
21,251
243,411
1,252
—
994
(319)
—
(2,975)
(36)
428
18,222
5,606
1,755
268,338
$
$
$
$
$
2015
757,455
28,136
10,622
(232,469)
—
(52,423)
511,321
197,490
29,254
—
33,629
211
18,439
279,023
1,065
5,440
—
2,729
—
—
—
—
15,202
4,710
44,194
352,363
Selected Operating Margins
Net Income Margin (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA Margin (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA Margin (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.4 %
45.0 %
45.2 %
37.3 %
57.3 %
63.2 %
38.6 %
54.6 %
68.9 %
(1) Calculated by dividing net income by Adjusted Net Trading Income.
(2) Calculated by dividing EBITDA by Adjusted Net Trading Income.
(3) Calculated by dividing Adjusted EBITDA by Adjusted Net Trading Income.
56
The following tables reconcile Net Income to arrive at Normalized Adjusted Net Income before income taxes,
Normalized provision for income taxes, Normalized Adjusted Net Income and Normalized Adjusted EPS.
(in thousands, except share and per share data)
Reconciliation of Net Income to Normalized Adjusted Net Income
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangibles and acquired capitalized software . . . . . . . . . . . . . . . . . .
Financing interest expense related to KCG transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issue cost related to debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for legal matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction advisory fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of office leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment write-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition related retention bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading related settlement income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges related to share based compensation at IPO, 2015 Management Incentive Plan . . . . . . .
Charges related to share based compensation awards at IPO . . . . . . . . . . . . . . . . . . . . . . . . . . .
Normalized Adjusted Net Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Normalized provision for income taxes (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
18,898 $
94,266
113,164
15,447
4,626
10,460
14,911
657
25,270
3,671
2,849
23,050
(628)
(95,045)
21,825
5,225
740
146,222
54,102
158,340 $
21,251
179,591
211
—
5,579
1,252
—
994
(319)
428
—
(2,975)
(36)
18,222
5,606
1,755
210,308
74,659
197,490
18,439
215,929
211
—
—
1,064
5,440
—
2,729
1,719
—
—
—
15,202
4,710
44,194
291,198
103,375
Normalized Adjusted Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
92,120 $
135,649 $
187,823
Weighted Average Adjusted shares outstanding (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161,464,923
139,685,124
138,772,354
Normalized Adjusted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.57 $
0.97 $
1.35
(1) Reflects U.S. federal, state, and local income tax rate applicable to corporations of approximately 35.5% to 37%.
(2) Assumes that (1) holders of all vested and unvested Virtu Financial Units (together with corresponding shares of Class C
common stock), have exercised their right to exchange such Virtu Financial Units for shares of Class A common stock on a one-
for-one basis, (2) holders of all Virtu Financial Units (together with corresponding shares of Class D common stock), have
exercised their right to exchange such Virtu Financial Units for shares of Class B common stock on a one-for-one basis, and
subsequently exercised their right to convert the shares of Class B common stock into shares of Class A common stock on a one-
for-one basis. Includes additional shares from dilutive impact of options and restricted stock units outstanding under the 2015
Management Incentive Plan during the years ended December 31, 2017, 2016 and 2015.
The following table shows our Trading Income, Net, average daily Trading Income, Net, Adjusted Net Trading
Income, average daily Adjusted Net Trading Income and percentage of Adjusted Net Trading Income by asset class for
the years ended December 31, 2017, 2016, and 2015.
(in thousands, except percentages)
Adjusted Net Trading Income by Category:
Market Making:
2017
2016
2015
Total
Average Daily %
Total
Average Daily %
Total
Average Daily %
Americas Equities . . . . . . . . . . . . . . . . . . . $ 275,714 $
ROW Equities . . . . . . . . . . . . . . . . . . . . .
92,232
Global FICC, Options and Other . . . . . . . . . 127,749
(6,243)
Unallocated (1) . . . . . . . . . . . . . . . . . . . .
Total market making . . . . . . . . . . . . . . . . . . $ 489,452 $
1,098
367
509
(25)
1,949
49.6 % $ 124,246 $
16.6 %
94,436
23.0 % 195,036
(1.2) %
395
88
$ 414,113 $
493
375
775
2
1,645
29.2 % $ 135,662 $
22.2 % 103,478
46.0 % 255,129
6,430
0.2 %
$ 500,699 $
97.6
538
410
1,013
26
1,987
26.5
20.2
49.9
0.9
97.5
Execution Services . . . . . . . . . . . . . . . . . . .
67,345
268
12.1 %
10,352
41
2.4 %
10,622
42.15
2.5
Corporate . . . . . . . . . . . . . . . . . . . . . . . . .
(506)
(2)
(0.1) %
—
— —
—
— —
Adjusted Net Trading Income . . . . . . . . . . . $ 556,291 $
2,215
100.0 % $ 424,465 $
1,686
100.0 % $ 511,321 $
2,029 100.0
(1) Under our methodology for recording “trading income, net” in our consolidated statements of comprehensive income from Part II
Item 8 “Financial Statements and Supplementary Data” of this Form 10-K, we recognize revenues based on the exit price of
assets and liabilities in accordance with applicable U.S. GAAP rules, and when we calculate Adjusted Net Trading Income for
corresponding reporting periods, we start with trading income, net, so calculated. By contrast, when we calculate Adjusted Net
57
Trading Income by category, we do so on a daily basis, and as a result prices used in recognizing revenues may differ. Because
we provide liquidity on a global basis, across asset classes and time zones, the timing of any particular Adjusted Net Trading
Income calculation may defer or accelerate the amount in a particular category from one day to another, and, at the end of a
reporting period, from one reporting period to another. The purpose of the Unallocated category is to ensure that Adjusted Net
Trading Income by category sums to total Adjusted Net Trading Income, which can be reconciled to Trading Income, Net,
calculated in accordance with GAAP. We do not allocate any resulting differences based on the timing of revenue recognition.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Total Revenues
Our total revenues increased $325.7 million, or 46.4%, to $1,028.0 million for the year ended
December 31, 2017, compared to $702.3 million for the year ended December 31, 2016. This increase was primarily
attributable to an increase in trading income, net, of $100.5 million, $101.1 million increase in commissions, net and
technology services, $24.0 million increase in interest and dividend income, and $95.0 million increase in other, net.
These increases were primarily attributable to the Acquisition of KCG, as well as the gain on the reduction of our tax
receivable agreement obligation as a result of the 2017 Tax Act during the year ended December 31, 2017.
The following table shows the total revenues by operating segment for the years ended December 31, 2017 and
2016.
(in thousands, except for percentage)
Market Making
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from Market Making . . . . . . . . . . . .
Execution Services
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from Execution Services . . . . . . . . . .
Corporate
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from Corporate . . . . . . . . . . . . . . . . .
Consolidated
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
2017
2016
% Change
769,556
51,822
13,689
1,640
836,707
(5,394)
619
102,814
1,096
99,135
1,865
(2,034)
-
92,309
92,140
766,027
50,407
116,503
95,045
1,027,982
$
$
$
$
$
$
$
$
665,465
26,419
—
—
691,884
—
—
10,352
—
10,352
—
—
—
36
36
15.6%
96.2%
NM
NM
20.9%
NM
NM
893.2%
NM
857.6%
NM
NM
NM
NM
NM
665,465
26,419
10,352
36
702,272
15.1%
90.8%
1025.4%
NM
46.4%
Trading Income, Net. Trading income, net is primarily earned by our Market Making segment. Trading
income, net increased $100.5 million, or 15.1%, to $766.0 million for the year ended December 31, 2017, compared to
$665.5 million for the year ended December 31, 2016. The increase was primarily attributable to the Acquisition of
KCG. Rather than analyzing trading income, net, in isolation, we generally evaluate it in the broader context of our
Adjusted Net Trading Income, together with interest and dividends income, interest and dividends expense and
brokerage, exchange and clearance fees, net, each of which are described below.
Interest and Dividends Income. Interest and dividends income is primarily earned by our Market Making
segment. Interest and dividends income increased $24.0 million, or 90.9%, to $50.4 million for the year ended
December 31, 2017, compared to $26.4 million for the year ended December 31, 2016. This increase was primarily
58
attributable to the Acquisition of KCG. As indicated above, rather than analyzing interest and dividends income in
isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income.
Commissions, Net and Technology Services. Commissions, net and technology services revenues are primarily
earned by our Execution Services segment. Technology services revenue increased $106.1 million, or 1,020.2%, to
$116.5 million for the year ended December 31, 2017, compared to $10.4 million for the year ended December 31, 2016.
The increase was primarily due to the Acquisition of KCG, as well as agency fee revenues arising from new customers
we on-boarded.
Other, Net. Other, net revenues are primarily earned by our Corporate segment. Other, net increased $95.0
million for the year ended December 31, 2017, compared to $36 thousand for the year ended December 31, 2016. The
increase was primarily due to the gain on reduction of our tax receivable agreement obligation as a result of the 2017 Tax
Act.
As discussed in Note 6. “Tax Receivable Agreements” of Part II Item 8 “Financial Statements and
Supplementary Data” of this Form 10-K, and Provision for Income Taxes above we recognized a $86.6 million gain on
the reduction of our tax receivable agreement obligation which is recorded in Other, net for the year ended December 31,
2017.
The increase in other, net was also attributable to the $3.3 million gain recognized from fair value adjustment in
our minority interest in SBI Japannext for the year ended December 31, 2017.
Adjusted Net Trading Income
Adjusted Net Trading Income increased $131.8 million, or 31.0%, to $556.3 million for the year ended
December 31, 2017, compared to $424.5 million for the year ended December 31, 2016. This increase was primarily
attributable to the Acquisition of KCG, which resulted in a significant increase in Americas Equities of $151.5 million,
or 122%, from the Market Making segment, and a significant increase of $56.9 million, or 569%, from Execution
Services for the year ended December 31, 2017. The overall increase was partially offset by a decrease of $2.2 million,
or 2%, to $92.2 million in ROW equities and a decrease of $67.3 million, or 35%, to $127.7 million in Global FICC,
Options and Other categories in the Market Making segment. The number of trading days for the year ended
December 31, 2017 and 2016 were both 252.
Operating Expenses
Our operating expenses increased $392.1 million, or75.0%, to $914.8 million for the year ended
December 31, 2017, compared to $522.7 million for the year ended December 31, 2016. The increase in operating
expenses was primarily attributable to the Acquisition of KCG, which caused increases in all expense areas except for
charges related to share based compensation at IPO. There was an increase in brokerage, exchange, and clearance fees,
net of $30.7 million, communication of data processing of $60.5 million, employee compensation and payroll taxes of
$92.2 million, interest and dividends expense of $35.4 million, operations and administrative expense of $42.1 million,
depreciation and amortization expense of $17.6 million, amortization of purchased intangible and acquired capital
software of $15.2 million, debt issue cost related to debt refinancing of $4.9 million, transaction advisory fees and
expenses of $25.3 million, reserve for legal matters of $0.7 million, and in financing interest expense on our long-term
borrowings of $35.8 million. Additionally we incurred $27.7 million in payments for order flow, which was a new
expense for the year ended December 31, 2017.
Brokerage, Exchange and Clearance Fees, Net. Brokerage exchange and clearance fees, net, increased $35.7
million, or16.1%, to $256.9 million for the year ended December 31, 2017, compared to $221.2 million for the year
ended December 31, 2016. This increase was primarily attributable to the increases in market volume traded in Americas
Equities instruments in which we make markets as a result of the Acquisition of KCG. As indicated above, rather than
analyzing brokerage, exchange and clearance fees, net, in isolation, we generally evaluate it in the broader context of our
Adjusted Net Trading Income.
Communication and Data Processing. Communication and data processing expense increased $60.5 million,
or 85.2%, to $131.5 million for the year ended December 31, 2017, compared to $71.0 million for the year ended
59
December 31, 2016. This increase was primarily due to the Acquisition of KCG, which brought on additional
connections, co-location connectivity, market data and other subscriptions to us. The increase was partially offset by the
reductions in connectivity connections as a result of an on-going effort to consolidate various communication and data
processing subscriptions.
Employee Compensation and Payroll Taxes. Employee compensation and payroll taxes increased $92.2
million, or 108.1%, to $177.5 million for the year ended December 31, 2017, compared to $85.3 million for the year
ended December 31, 2016. The increase in compensation levels was primarily attributable to the $23.0 million in
Acquisition related retention bonus and the increase in headcount as a result of the Acquisition of KCG. Incentive
compensation is recorded at management’s discretion and is generally accrued in connection with the overall level of
profitability.
Payments for order flow. Payments for order flow were $27.7 million for the year ended December 31, 2017,
and were attributable to the Acquisition of KCG. Payments for order flow primarily represent payments to broker-dealer
clients, in the normal course of business, for directing to us their order flow primarily in U.S. equities. Payments for
order flow also fluctuate based on U.S. equity share and option volumes, our profitability and the mix of market orders,
limit orders, and customer mix.
Interest and Dividends Expense. Interest and dividends expense increased $35.4 million, or 62.5%, to $92.0
million for the year ended December 31, 2017, compared to $56.6 million for the year ended December 31, 2016. This
increase was primarily attributable to higher interest expense incurred on cash collateral received as part of securities
lending transactions resulting from the Acquisition of KCG. As indicated above, rather than analyzing interest and
dividends expense in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income.
Operations and Administrative. Operations and administrative expense increased $42.1 million, or 183.0%, to
$65.1 million for the year ended December 31, 2017, compared to $23.0 million for the year ended December 31, 2016.
This increase was primarily attributable to the increases in legal and other professional fees resulting from the
Acquisition of KCG. The increase was partially offset by the cancellation of various legal and professional expenses as a
result of an on-going effort to consolidate professional services.
Depreciation and Amortization. Depreciation and amortization increased $17.6 million, or 59.3%, to $47.3
million for the year ended December 31, 2017, compared to $29.7 million for the year ended December 31, 2016. This
increase was primarily attributable to depreciation and amortization of additional assets resulting from the Acquisition of
KCG and an increase in capital expenditures on telecommunication, networking and other assets.
Amortization of Purchased Intangibles and Acquired Capitalized Software. Amortization of purchased
intangibles and acquired capitalized software increased $15.2 million, to $15.4 million for the year ended
December 31, 2017, compared to $0.2 million for the year ended December 31, 2016. The increase was primarily due to
additional intangible assets recognized as part of purchase price accounting for the Teza acquisition and the Acquisition
of KCG for $2.0 million and $175.0 million, respectively, as of December 31, 2017. We recognized an aggregated of
$15.2 million in amortization expenses related to the Teza acquisition and the Acquisition of KCG for the year ended
December 31, 2017.
Debt issue cost related to Debt refinancing. Debt issue costs related to debt refinancing increased $4.9 million,
or 87.5%, to $10.5 million for the year ended December 31, 2017, compared to $5.6 million for the year ended
December 31, 2016. The increase was primarily attributable to the recognition of an approximately $5.5 million in
acceleration of the debt issue costs associated with the $250 million voluntary prepayment made towards our senior
secured first lien term loan, as discussed in Note 10 “Borrowings” of Part II Item 8 “Financial Statements and
Supplementary Data” of this Form 10-K.
Transaction Advisory Fees and Expenses. Transaction advisory fees and expense was $25.3 million for the
year ended December 31, 2017. We had no such expense for the year ended December 31, 2016. This expense primarily
represents the non-recurring legal and professional fees incurred in connection with the Acquisition of KCG.
60
Reserve for Legal Matters. Reserve for legal matters increased $0.7 million for the year ended December 31,
2017. We had no such expenses for the year ended December 31, 2016. The increase was primarily due to accruals for
other legal reserves as a result of the Acquisition of KCG.
Charges related to share based compensation at IPO. Charges related to share based compensation at IPO
decreased $1.0 million, or 55.6%, to $0.8 million for the year ended December 31, 2017, compared to $1.8 million for
the year ended December 31, 2016. The decrease was primarily attributable to the fact that certain Class B and East MIP
Class B interests became fully vested, and as well as to the increase in forfeitures for the year ended December 31, 2017,
comparing to the year ended December 31, 2016.
Financing Interest Expense on Long-Term Borrowings. Financing interest expense on long-term borrowings
increased $35.8 million, or 126.5%, to $64.1 million, compared to $28.3 million for the year ended December 31, 2016.
This increase was primarily attributable to the increase in outstanding principal as a result from the refinancing of the
senior secured first lien term loan and the offering of the Notes, as discussed in Note 10 “Borrowings” of Part II Item 8
“Financial Statements and Supplementary Data” of this Form 10-K.
Provision for Income Taxes
Following the consummation of the Reorganization Transactions, we incur corporate tax at the U.S. federal
income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial. Our income tax
expense reflects such U.S. federal income tax as well as taxes payable by certain of our non-U.S. subsidiaries. Our
provision for income taxes increased $73.0 million, to $94.3 million for the year ended December 31, 2017, compared to
$21.3 million for the year ended December 31, 2016. The increase was primarily attributable to impact of the 2017 Tax
Act on our net deferred tax assets, which decreased in value as a result of the lower U.S. corporate income tax rate
effective January 1, 2018. This increase was offset in part by the effect of lower income before income taxes in 2017
compared to 2016, and the tax impact of the 2017 Tax Act on our tax receivable agreement obligations. See Note 13
“Income Taxes” of Part II Item 8 “Financial Statements and Supplementary Data” of this Form 10-K Item for additional
information.
On February 8, 2017, the Company issued an earnings release announcing its unaudited financial results for the
quarter and year ended December 31, 2017, and furnished a copy of the release as Exhibit 99.1 to the Company’s current
report on Form 8-K filed on the same date. The consolidated statements of comprehensive income for the year ended
December 31, 2017 in this Annual Report on Form 10-K revised the amount reported as “Net income available for
common stockholders” and “Basic and Diluted Earnings per share” of $17.3 million and $0.26, respectively, to $2.9
million and $0.03, respectively (See Item 8, “Financial Statements and Supplementary Data”). The reason for the
revision is a change in the Company’s estimated provision for income tax due to the decrease in deferred tax assets as a
result of the 2017 Tax Act that was passed on December 22, 2017.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Total Revenues
Our total revenues decreased $93.9 million, or 11.8%, to $702.3 million for the year ended December 31, 2016,
compared to $796.2 million for the year ended December 31, 2015. This decrease was primarily attributable to a
decrease in trading income, net, of $92.0 million, and a decrease in interest and dividend income of $1.7 million.
61
The following table shows the total revenues by operating segment for the years ended December 31, 2016 and
2015.
(in thousands, except for percentage)
Market Making
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from Market Making . . . . . . . . . . . .
Execution Services
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from Execution Services . . . . . . . . . .
Corporate
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from Corporate . . . . . . . . . . . . . . . . .
Consolidated
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends income . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
2016
2015
% Change
665,465
26,419
—
—
691,884
—
—
10,352
—
10,352
—
—
—
36
36
665,465
26,419
10,352
36
702,272
$
$
$
$
$
$
$
$
757,455
28,136
—
—
785,591
—
—
10,622
—
10,622
—
—
—
—
—
757,455
28,136
10,622
—
796,213
-12.1%
-6.1%
NM
NM
-11.9%
NM
NM
-2.5%
NM
-2.5%
NM
NM
NM
NM
NM
-12.1%
-6.1%
-2.5%
NM
-11.8%
Trading Income, Net. Trading income, net, decreased $92.0 million, or 12.1%, to $665.5 million for the year
ended December 31, 2016, compared to $757.5 million for the year ended December 31, 2015. The decrease was
primarily attributable to the less favorable conditions in the Americas Equities, Global Currencies, Global Commodities
and EMEA Equities categories as a result of overall lower market volume and volatility within those categories during
the year ended December 31, 2016. Rather than analyzing trading income, net, in isolation, we generally evaluate it in
the broader context of our Adjusted Net Trading Income, together with interest and dividends income, interest and
dividends expense and brokerage, exchange and clearance fees, net, each of which are described below.
Interest and Dividends Income. Interest and dividends income decreased $1.7 million, or 6.0%, to $26.4
million for the year ended December 31, 2016, compared to $28.1 million for the year ended December 31, 2015. This
decrease was primarily attributable to lower interest income earned on cash collateral posted as part of securities
borrowed transactions. As indicated above, rather than analyzing interest and dividends income in isolation, we generally
evaluate it in the broader context of our Adjusted Net Trading Income.
Commissions, Net and Technology Services. Commissions, net and technology services revenues include
technology licensing fees and agency commission fees. Technology licensing fees typically include an initial component
earned at the inception of a new contract and a recurring fee that may include both a fixed and variable component, and
are recognized ratably over the term of the contract and therefore do not change significantly period over period unless
there are new counterparties. Agency commission fees are positively correlated to the volume of the trades executed by
our broker dealer subsidiary. Commissions, net and technology services revenue decreased $0.2 million, or 1.9%, to
$10.4 million for the year ended December 31, 2016, compared to $10.6 million for the year ended December 31, 2015.
The slight decrease in the commissions, net and technology services revenue was mainly due to the upfront fee on one of
the arrangements that was fully recognized over the initial three-year term by the second quarter of 2016. The decrease
was partially offset by the new technology services contract executed with a new counterparty related to US Treasuries
Dealer to Dealer market making on electronic trading venues in July 2016, as well as the agency commission fees
generated from agency execution services started in April 2016.
62
Other, net. Other, net was incurred as a result of the foreign currency revaluations on the Japanese Yen based
minority investment and the SBI Bonds, which were $(3.1) million and $3.2 million, respectively, for the year ended
December 31, 2016. There were no such revenues (losses) for the year ended December 31, 2015.
Adjusted Net Trading Income
Adjusted Net Trading Income decreased $86.8 million, or 17.0%, to $424.5 million for the year ended
December 31, 2016, compared to $511.3 million for the year ended December 31, 2015. This decrease compared to the
prior period reflects decreases in Adjusted Net Trading Income from Americas Equities trading of $11.4 million, $14.1
million from EMEA equities $11.4 million from global commodities, $44.8 million from global currencies, and options,
fixed income and other securities of $3.9 million. These decreases in Adjusted Net Trading Income were partially offset
by an increase in Adjusted Net Trading Income from trading, $5.0 million from APAC equities compared to the prior
period. Adjusted Net Trading Income per day decreased $0.3 million, or 17.3%, to $1.65 million for the year ended
December 31, 2016, compared to $2.0 million for the year ended December 31, 2015. The number of trading days for the
year ended December 31, 2016 and 2015 were both 252.
Operating Expenses
Our operating expenses decreased $57.6 million, or 9.9%, to $522.7 million for the year ended
December 31, 2016, compared to $580.3 million for the year ended December 31, 2015. This decrease was primarily due
to decreases in brokerage, exchange, and clearance fees of $11.3 million, employee compensation and payroll taxes of
$2.7 million, operations and administrative expense of $3.0 million, depreciation and amortization expense of $3.9
million, reserve for legal matters of $5.4 million, and charges related to share based compensation at IPO of $42.4
million, and $1.0 million decrease in financing interest expense on our long-term borrowings. These decreases in
operating expenses were partially offset by increases in communication and data processing expense of $2.4 million,
interest and dividends expense of $4.2 million, and increase in debt issue cost related to refinancing of $5.6 million.
There was no change for the year ended December 31, 2016 compared to the year ended December 31, 2015 for
amortization of purchased intangible and acquired capitalized software.
Brokerage, Exchange and Clearance Fees, Net. Brokerage exchange and clearance fees, net, decreased $11.3
million, or 4.9%, to $221.2 million for the year ended December 31, 2016, compared to $232.5 million for the year
ended December 31, 2015. This decrease was primarily attributable to the decreases in market volume and volatility
traded in Americas Equities and EMEA Equities instruments in which we make markets. As indicated above, rather than
analyzing brokerage, exchange and clearance fees, net, in isolation, we generally evaluate it in the broader context of our
Adjusted Net Trading Income.
Communication and Data Processing. Communication and data processing expense increased $2.4 million, or
3.5%, to $71.0 million for the year ended December 31, 2016, compared to $68.6 million for the year ended
December 31, 2015. This increase was primarily due to commencement of new connectivity connections, as well as
increases in market data fees. The increase was partially offset by reductions in discontinued connectivity connections.
Employee Compensation and Payroll Taxes. Employee compensation and payroll taxes decreased $2.7
million, or 3.1%, to $85.3 million for the year ended December 31, 2016, compared to $88.0 million for the year ended
December 31, 2015. The decrease in compensation levels was attributable to the decrease in incentive compensation
accrual during the year ended December 31, 2016. Incentive compensation is recorded at management’s discretion and is
generally accrued in connection with the overall level of profitability.
Interest and Dividends Expense. Interest and dividends expense increased $4.2 million, or 8.0%, to $56.6
million for the year ended December 31, 2016, compared to $52.4 million for the year ended December 31, 2015. This
increase was primarily attributable to higher interest expense incurred on cash collateral received as part of securities
lending transactions. As indicated above, rather than analyzing interest and dividends expense in isolation, we generally
evaluate it in the broader context of our Adjusted Net Trading Income.
Operations and Administrative. Operations and administrative expense decreased $3.0 million, or 11.5%, to
$23.0 million for the year ended December 31, 2016, compared to $26.0 million for the year ended December 31, 2015.
This decrease was primarily due to an accelerated expense recognition of approximately $2.7 million from future lease
63
payments of one of our office locations that was abandoned during the year ended December 31, 2015. We had no such
expense during year ended December 31, 2016.
Depreciation and Amortization. Depreciation and amortization decreased $3.9 million, or 11.6%, to $29.7
million for the year ended December 31, 2016, compared to $33.6 million for the year ended December 31, 2015. This
decrease was primarily attributable to the decrease in capital expenditures on telecommunication, networking and other
assets.
Amortization of Purchased Intangibles and Acquired Capitalized Software. Amortization of purchased
intangibles and acquired capitalized software did not change, from $0.2 million for the year ended December 31, 2016,
compared to $0.2 million for the year ended December 31, 2015.
Debt issue cost related to Debt refinancing. Expense from debt issue costs related to debt refinancing was $5.6
million for the year ended December 31, 2016. These costs reflect nonrecurring expense incurred as a result of
refinancing of our senior secured credit facility under long-term borrowings in October 2016. We had no such expense in
the year ended December 31, 2015.
Reserve for Legal Matters. In December 2015, the enforcement committee of the AMF fined our European
subsidiary in the amount of €5.0 million (approximately $5.4 million) based on its allegations that the subsidiary of
MTH engaged in price manipulation and violations of the AMF General Regulation and Euronext Market Rules. In
accordance with the foregoing, though we are currently pursuing our rights of appeal, we have accrued an estimated loss
of €5.0 million (approximately $5.4 million) in relation to the fine imposed by the AMF. We had no such expense for the
year ended December 31, 2016.
Charges related to share based compensation at IPO. At the consummation of the IPO in April 2015, we
began recognizing non-cash compensation expenses in respect to vesting of Class B and East MIP Class B interests. For
the year ended December 31, 2015, we recognized compensation expenses of the approximately $44.2 million, which
includes a one-time charge upon IPO with respect the outstanding time vested Class B and East MIP Class B interests,
net of $9.2 million and $8.5 million in capitalization and amortization of capitalized costs attributable to employees
incurred in development of software for internal use, respectively. For the year ended December 31, 2016, the expense
was $1.1 million, which reflects monthly charges on the periodic vesting of awards over a specified service period, net of
approximately $0.1 million and $0.7 million of capitalization and amortization, respectively. For the year ended
December 31, 2015, the expense was $3.5 million, which reflects monthly charges on the periodic vesting of awards over
a specified service period, net of approximately $1.1 million and $1.7 million of capitalization and amortization,
respectively.
Financing Interest Expense on Long-Term Borrowings. Financing interest expense on long-term borrowings
decreased $1.0 million, or 3.4%, to $28.3 million, compared to $29.3 million for the year ended December 31, 2015.
This decrease was due to the 0.50% incremental spread reduction after the amendment of our existing senior secured
credit facility upon the consummation of the IPO on April 21, 2015, which was partially offset by the increase in
financing interest expense due to the increase in the amount of the senior secured credit facility, as discussed in Note 8 to
the notes of the consolidated financial statements.
Provision for Income Taxes
Following the consummation of the Reorganization Transactions, we incur corporate tax at the U.S. federal
income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial. Our income tax
expense reflects such U.S. federal income tax as well as taxes payable by certain of our non-U.S. subsidiaries. Provision
for income taxes increased $2.9 million, to $21.3 million for the year ended December 31, 2016, compared to $18.4
million for the year ended December 31, 2015. The increase was primarily attributable to the consummation of
Reorganization Transactions.
Prior to the Reorganization Transactions, as a limited liability company treated as a partnership for U.S. federal
income tax purposes, most of our income has not been subject to corporate tax, but instead our members have been taxed
on their proportionate share of our net income.
64
Liquidity and Capital Resources
General
As of December 31, 2017, we had $532.9 million in cash and cash equivalents. These balances are maintained
primarily to support operating activities and for capital expenditures and for short-term access to liquidity, and other
general corporate purposes. As of December 31, 2017, we had borrowings under our short-term credit facilities of
approximately $205.7 million, borrowing under broker dealer facilities of $32.0 million, and long-term debt outstanding
in an aggregate principal amount of approximately $1431.1 million. As of December 31, 2017, our regulatory capital
requirements for domestic U.S. subsidiaries were $7.1 million, in aggregate.
The majority of our assets consist of exchange-listed marketable securities, which are marked-to-market daily,
and collateralized receivables from broker-dealers and clearing organizations arising from proprietary securities
transactions. Collateralized receivables consist primarily of securities borrowed, receivables from clearing houses for
settlement of securities transactions and, to a lesser extent, securities purchased under agreements to resell. We actively
manage our liquidity, and we maintain significant borrowing facilities through the securities lending markets and with
banks and prime brokers. We have continually received the benefit of uncommitted margin financing from our prime
brokers globally. These margin facilities are secured by securities in accounts held at the prime broker. For purposes of
providing additional liquidity, we maintain an uncommitted credit facility with two of our wholly owned broker-dealer
subsidiaries. Additionally, we also maintain a revolving credit facility with three of our wholly owned broker-dealer
subsidiaries, as discussed in Note 10 “Borrowing” of Part II Item 8 “Financial Statements and Supplementary Data” of
this Form 10-K herein.
Based on our current level of operations, we believe our cash flows from operations, available cash and cash
equivalents, and available borrowings under our broker-dealer credit facilities will be adequate to meet our future
liquidity needs for more than the next twelve months. We anticipate that our primary upcoming cash and liquidity needs
will be increased margin requirements from increased trading activities in markets where we currently provide liquidity
and in new markets into which we expand. We manage and monitor our margin and liquidity needs on a real-time basis
and can adjust our requirements both intra-day and inter-day, as required.
We expect our principal sources of future liquidity to come from cash flows provided by operating activities
and financing activities. Certain of our cash balances are insured by the Federal Deposit Insurance Corporation, generally
up to $250,000 per account but without a cap under certain conditions. From time to time these cash balances may
exceed insured limits, but we select financial institutions deemed highly creditworthy to minimize risk. We consider
highly liquid investments with original maturities of less than three months when acquired to be cash equivalents.
Tax Receivable Agreements
Generally, we are required under the tax receivable agreements entered into in connection with our IPO to make
payments to certain direct or indirect equityholders of Virtu Financial that are generally equal to 85% of the applicable
cash tax savings, if any, that we actually realize as a result of favorable tax attributes that will be available to us as a
result of the Reorganization Transactions, exchanges of membership interests for Class A common stock or Class B
common stock and payments made under the tax receivable agreements. We will retain the remaining 15% of these cash
tax savings. We expect that future payments to certain direct or indirect equityholders of Virtu Financial described in
Note 16 “Tax Receivable Agreements” to the consolidated financial statements included herein are expected to aggregate
to approximately $147.0 million, ranging from approximately $0.3 million to $12.8 million per year over the next 15
years. Such payments will occur only after we have filed our U.S. federal and state income tax returns and realized the
cash tax savings from the favorable tax attributes. The first payment was due September 15, 2016, and we made our first
payment of $7.0 million in February 2017. Future payments under the tax receivable agreements in respect of subsequent
exchanges would be in addition to these amounts. We currently expect to fund these payments from the cash flow from
operations generated by our subsidiaries as well as from excess tax distributions that we receive from our subsidiaries.
Under the tax receivable agreements, as a result of certain types of transactions and other factors, including a
transaction resulting in a change of control, we may also be required to make payments to certain direct or indirect
equityholders of Virtu Financial in amounts equal to the present value of future payments we are obligated to make
under the tax receivable agreements. If the payments under the tax receivable agreements are accelerated, we may be
65
required to raise additional debt or equity to fund such payments. To the extent that we are unable to make payments
under the tax receivable agreements for any reason (including because our Fourth Amended and Restated Credit
Agreement or the indenture governing our Notes restricts the ability of our subsidiaries to make distributions to us) such
payments will be deferred and will accrue interest until paid.
Regulatory Capital Requirements
Certain of our principal operating subsidiaries are subject to separate regulation and capital requirements in the
United States and other jurisdictions. Virtu Financial BD LLC, Virtu Financial Capital Markets LLC and Virtu Americas
LLC, which become our subsidiary following the Acquisition of KCG, are registered U.S. broker-dealers, and their
primary regulators include the SEC, the Chicago Stock Exchange and FINRA. Virtu Financial Ireland Limited is a
registered investment firm under the Market in Financial Instruments Directive, and its primary regulator is the Central
Bank of Ireland.
The SEC and FINRA impose rules that require notification when regulatory capital falls below certain pre-
defined criteria. These rules also dictate the ratio of debt-to-equity in the regulatory capital composition of a broker-
dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a firm fails to
maintain the required regulatory capital, it may be subject to suspension or revocation of registration by the applicable
regulatory agency, and suspension or expulsion by these regulators could ultimately lead to the firm’s liquidation.
Additionally, certain applicable rules impose requirements that may have the effect of prohibiting a broker-dealer from
distributing or withdrawing capital and requiring prior notice to and/or approval from the SEC, the Chicago Stock
Exchange and FINRA for certain capital withdrawals. Virtu Financial Capital Markets LLC is also subject to rules set
forth by NYSE MKT (formerly NYSE Amex) and is required to maintain a certain level of capital in connection with the
operation of its DMM business. Virtu Financial Ireland Limited is regulated by the Central Bank of Ireland as an
Investment Firm and in accordance with European Union law is required to maintain a minimum amount of regulatory
capital based upon its positions, financial conditions, and other factors. In addition to periodic requirements to report its
regulatory capital and submit other regulatory reports, Virtu Financial Ireland Limited is required to obtain consent prior
to receiving capital contributions or making capital distributions from its regulatory capital. Failure to comply with its
regulatory capital requirements could result in regulatory sanction or revocation of its regulatory license. KCG Europe
Limited, as an FCA-regulated investment firm is also subject to similar prudential capital requirements.
See Note 18 “Regulatory Requirement” of Part II Item 8 “Financial Statements and Supplementary Data” of this
Form 10-K for a discussion of regulatory capital requirements of our regulated subsidiaries.
Long-Term Borrowings
We maintain various broker-dealer facilities and short-term credit facilities as part of our daily trading
operations. See Note 10 “Borrowings” of Part II Item 8 “Financial Statements and Supplementary Data” of this Form 10-
K for details on the Company’s various credit facilities. As of December 31, 2017, the outstanding principal balance on
our broker-dealer facilities was $32.0 million, and the outstanding aggregate short-term credit facilities with various
prime brokers was approximately $205.7 million, which was netted within receivables from broker dealers and clearing
organizations on the “Consolidated Statement of Financial Condition” of Part II Item 8 “Financial Statements and
Supplementary Data” of this Form 10-K..
Fourth Amended and Restated Credit Agreement
In connection with the Acquisition of KCG, we entered into the Fourth Amended and Restated Credit
Agreement, which amended and restated in its entirety the existing Credit Agreement. The Fourth Amended and
Restated Credit Agreement, provided for a $540.0 million first lien secured term loan, drawn in its entirety on June 30,
2017, and continued VFH’s existing $100.0 million first lien senior secured revolving credit facility. Also on June 30,
2017, the Escrow Issuer entered into the Escrow Credit Agreement with the lenders party thereto and JPMorgan Chase
Bank, N.A., as administrative agent, which provided for a $610.0 million term loan, the proceeds of which were
deposited into escrow pending the closing of the Acquisition.
Upon the closing of the Acquisition, the proceeds of the Escrow Term Loan were released to fund in part the
Acquisition consideration, the obligations of the Escrow Issuer in respect of the Escrow Term Loan were automatically
66
assumed by VFH Parent, the Escrow Term Loan was deemed to be outstanding under the Fourth Amended and Restated
Credit Agreement and the Escrow Credit Agreement and related credit documents automatically terminated and were
superseded by the provisions of the Fourth Amended and Restated Credit Agreement. In addition, the first lien senior
secured revolving credit facility under the Fourth Amended and Restated Credit Agreement terminated.
Under the Fourth Amended and Restated Credit Agreement, the $1,150.0 million aggregate principal amount of
first lien senior secured term loans, including the Escrow Term Loan, will mature on December 30, 2021 and will require
scheduled annual amortization payments on each of the first four anniversaries of the closing of the Acquisition in an
amount equal to the sum of 7.5% of the original aggregate principal amount of the term loan issued under the Fourth
Amended and Restated Credit Agreement and 7.5% of the aggregate principal amount of the Escrow Term Loan
outstanding on the closing date of the Acquisition.
All obligations under the Term Loan Facility are unconditionally guaranteed by Virtu Financial and the
Company’s existing direct and indirect wholly-owned domestic restricted subsidiaries (including, KCG and its wholly-
owned domestic restricted subsidiaries), subject to certain exceptions, including exceptions for our broker dealer
subsidiaries and certain immaterial subsidiaries. The Term Loan Facility and related guarantees are secured by first-
priority perfected liens, subject to certain exceptions, on substantially all of VFH’s and the guarantors’ existing and
future assets, including substantially all material personal property and a pledge of the capital stock of VFH, the
guarantors (other than Virtu Financial) and the direct domestic subsidiaries of VFH and the guarantors and 100% of the
non-voting capital stock and up to 65.0% of the voting capital stock of foreign subsidiaries that are directly owned by
VFH or any of the guarantors.
•
•
•
•
Amounts outstanding under the Fourth Amended and Restated Credit Agreement bear interest as follows:
in the case of the term loans, at VFH’s option, at either (a) the greatest of (i) the prime rate in effect, (ii) the
NYFRB rate plus 0.50%, (iii) an adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one
month plus 1.00%, and (iv) 2.00% plus, in each case, 2.75% per annum; or (b) the greater of (i) an adjusted
LIBOR rate for the interest period in effect and (ii) 1.00% plus, in each case, 3.75% per annum; and
in the case of revolving loans, at VFH’s option, at either (a) the greatest of (i) the prime rate in effect, (ii) the
NYFRB rate plus 0.50%, (iii) an adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one
month plus 1.00%, and (iv) 1.00% plus, in each case, 2.00% per annum; or (b) the greater of (i) an adjusted
LIBOR rate for the interest period in effect and (ii) zero plus, in each case, 3.00% per annum.
Under the Fourth Amended and Restated Credit Agreement, we must comply on a quarterly basis with:
a maximum total net leverage ratio of 5.00 to 1.0 with a step-down to (i) 4.25 to 1.0 from and after the fiscal
quarter ending March 31, 2019, (ii) 3.50 to 1.0 from and after the fiscal quarter ending March 31, 2020 and (iii)
3.25 to 1.0 from the fiscal quarter ending March 31, 2021 and thereafter; and
a minimum interest coverage ratio of 2.75 to 1.0, stepping up to 3.00 to 1.0 from and after the fiscal quarter
ending March 31, 2019.
The Fourth Amended and Restated Credit Agreement contains certain customary affirmative covenants. The
negative covenants in the Fourth Amended and Restated Credit Agreement include, among other things, limitations on
our ability to do the following, subject to certain exceptions: (i) incur additional debt; (ii) create liens on certain assets;
(iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of
our capital stock or make other restricted junior payments; (v) consolidate, merge, sell or otherwise dispose of all or
substantially all of our assets; (vi) sell or otherwise dispose of assets, including equity interests in our subsidiaries;
(vii) enter into certain transactions with our affiliates; (viii) enter into swaps, forwards and similar agreements; (ix) enter
into sale-leaseback transactions; (x) restrict liens and subsidiary dividends; (xi) change our fiscal year; and (xii) modify
the terms of certain debt agreements.
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The Fourth Amended and Restated Credit Agreement contains certain customary events of default, including
relating to a change of control. If an event of default occurs and is continuing, the lenders under the Fourth Amended and
Restated Credit Agreement will be entitled to take various actions, including the acceleration of amounts outstanding
under the Fourth Amended and Restated Credit Agreement and all actions permitted to be taken by a secured creditor in
respect of the collateral securing the obligations under the Fourth Amended and Restated Credit Agreement.
A portion of certain financing costs incurred in connection with the original credit facility that were scheduled
to be amortized over the term of the loan, including original issue discount and underwriting and legal fees, were
accelerated at the closing of the refinancing.
We were in compliance with all applicable covenants under the Fourth Amended and Restated Credit
Agreement as of December 31, 2017.
As of March 13, 2018, we have made total prepayments in the amount of $526.0 million under the Fourth
Amended and Restated Credit Agreement.
Senior Secured Second Lien Notes
On June 16, 2017, the Escrow Issuer and the Co-Issuer completed the offering of $500 million aggregate
principal amount of 6.750% Senior Secured Second Lien Notes due 2022 (the “Notes”). The Notes were issued under an
Indenture, dated as of June 16, 2017 (the “Indenture”), among the Escrow Issuer, the Co-Issuer and U.S. Bank National
Association, as the trustee and collateral agent. The Notes mature on June 15, 2022. Interest on the Notes accrues at
6.750% per annum, payable every six months through maturity on each June 15 and December 15, beginning on
December 15, 2017.
On July 20, 2017, VFH assumed all of the obligations of the Escrow Issuer under the Indenture and the Notes.
The Notes are guaranteed by Virtu Financial and each of Virtu Financial’s wholly-owned domestic restricted subsidiaries
that guarantee the Fourth Amended and Restated Credit Agreement, including KCG and certain of its subsidiaries and
the Escrow Issuer. We refer to VFH and the Co-Issuer together as, the “Issuers.”
The Notes and the related guarantees are secured by second-priority perfected liens on substantially all of the
Issuers’ and guarantors’ existing and future assets, subject to certain exceptions, including all material personal property,
a pledge of the capital stock of the Issuers, the guarantors (other than Virtu Financial) and the direct subsidiaries of the
Issuers and the guarantors and 100% of the non-voting capital stock and up to 65.0% of the voting capital stock of any
now-owned or later-acquired foreign subsidiaries that are directly owned by the Issuers or any of the guarantors, which
assets will also secure obligations under the Fourth Amended and Restated Credit Agreement on a first-priority basis.
The Indenture imposes certain limitations on our ability to (i) incur or guarantee additional indebtedness or
issue preferred stock; (ii) pay dividends, make certain investments and make repayments on indebtedness that is
subordinated in right of payment to the Notes and make other “restricted payments”; (iii) create liens on their assets to
secure debt; (iv) enter into transactions with affiliates; (v) merge, consolidate or amalgamate with another company; (vi)
transfer and sell assets; and (vii) permit restrictions on the payment of dividends by Virtu Financial’s subsidiaries. The
Indenture also contains customary events of default, including, among others, payment defaults related to the failure to
pay principal or interest on Notes, covenant defaults, final maturity default or cross-acceleration with respect to material
indebtedness and certain bankruptcy events.
Prior to June 15, 2019, we may redeem some or all of the Notes at a redemption price equal to 100% of the
principal amount plus accrued and unpaid interest, if any, to (but not including) the date of redemption, plus an
applicable “make whole” premium (calculated based upon the yield of certain U.S. treasury securities plus 0.50%).
Prior to June 15, 2019, we may redeem up to 35% of the aggregate principal amount of the Notes at a
redemption price equal to 106.750% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not
including) the date of redemption with the net cash proceeds from certain equity offerings.
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On or after June 15, 2019, we may redeem some or all of the Notes, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid interest to (but not including) the date of
redemption, if redeemed during the 12-month period beginning on June 15 of the years indicated below:
Period
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage
103.375%
101.688%
100.000%
Upon the occurrence of specified change of control events as defined in the indenture governing the Notes, we
must offer to repurchase the Notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to (but
excluding) the purchase date.
We were in compliance with all applicable covenants under the indenture governing our Notes as of
December 31, 2017.
Cash Flows
Our main sources of liquidity are cash flow from the operations of our subsidiaries, our broker-dealer credit
facilities (as described above), margin financing provided by our prime brokers and cash on hand.
The table below summarizes our primary sources and uses of cash for the years ended December 31, 2017, 2016
and 2015.
(in thousands)
Net cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 290,574 $ 239,599
(59,017)
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(161,237)
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,165)
Effect of exchange rate changes on cash and cash equivalents . . . . . . .
18,180
Net increase in cash, cash equivalents, and restricted cash . . . . . . . . . . $ 351,472 $
(838,016)
889,797
9,117
2017
$ 260,280
(24,299)
(144,355)
(4,255)
87,371
$
Years Ended December 31,
2016
2015
Operating Activities
Net cash provided by operating activities was $290.6 million for the year ended December 31, 2017, compared
to $239.6 million for the year ended December 31, 2016. The increase of $51.0 million in net cash provided by operating
activities was primarily attributable to the Acquisition of KCG, which significantly increased our trading capital.
Net cash provided by operating activities was $239.6 million for the year ended December 31, 2016, compared
to $260.3 million for the year ended December 31, 2015. The decrease of $20.7 million in net cash provided by operating
activities was primarily attributable to $39.2 million decrease in net income due to decreases in volume and volatility.
Investing Activities
Net cash used in investing activities was $838.0 million for the year ended December 31, 2017, compared to
$59.0 million for the year ended December 31, 2016. The increase of $779.0 million was primarily attributable to the net
cash used for the Acquisition of KCG, see Note 3 “Acquisition of KCG Holdings, Inc.” of Part II Item 8 “Financial
Statements and Supplementary Data” of this Form 10-K.
Net cash used in investing activities was $59.0 million for the year ended December 31, 2016, compared to
$24.3 million for the year ended December 31, 2015. The increase of $34.7 million was primarily attributable to the
minority interest investment in SBI, a Proprietary Trading System based in Tokyo, for approximately $38.8 million.
Financing Activities
Net cash provided by financing activities was $889.8 million for the year ended December 31, 2017 and net
cash used in financing activities of $161.2 million for the year ended December 31, 2016. The increase of $1,051.0
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million was primarily attributable to the $735 million cash provided from issuance of common stock as part of the
Acquisition of KCG, as well as the refinancing of the first lien senior secured credit facility of $1,150 million and the
issuance of senior secured second lien notes of $500.0 million during the year ended December 31, 2017. The increase in
Net cash provided by financing activities was partially offset by the $250.0 million voluntary prepayment on our Term
Loan Facility, and the repayment of certain indebtedness of KCG for $481.0 million.
Net cash used in financing activities was $161.2 million for the year ended December 31, 2016 and $144.4
million for the year ended December 31, 2015. The increase of $16.8 million was primarily attributable to the $50.2
million net cash provided as a result of the completion of the IPO and the Reorganization Transactions during the year
ended December 31, 2015, and we had no such events during the year ended December 31, 2016. The increase was
partially offset by a decrease of $28.0 million in distributions and dividends during the year ended December 31, 2016.
Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2017. Amounts we pay in future
periods may vary from those reflected in the table.
(in thousands)
Long-term debt obligations(1) . . . . .
Capital leases . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . .
Total contractual obligations . . . . . .
Total
1,431,059
43,530
260,084
$ 1,734,673
Payments due by periods
Less than
1 year
—
18,829
33,331
52,160
$
1-3 years
31,059
24,701
59,950
115,710
$
3-5 years
1,400,000
—
39,080
$ 1,439,080
More than
5 years
—
—
127,723
127,723
$
(1) Consists of principal payments under the note, Term Loan Facility and the SBI bonds. Does not include interest payments,
commitment fees or utilization fees.
The contractual obligation table above excludes contractual amounts owed under the tax receivable agreement
as the ultimate amount and timing of the amounts due are not presently known. As of December 31, 2017, a total of
$147.0 million has been recorded in amount due pursuant to tax receivable agreement in the consolidated financial
statements representing management’s best estimate of the amounts currently expected to be owed under the tax
receivable agreement, as savings are realized as a result of favorable tax attributes.
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk
support, or engage in any activities that expose us to any liability that is not reflected in our consolidated financial
statements except for those described under “Contractual Obligations” above.
Inflation
We believe inflation has not had a material effect on our financial condition, results of operations, or cash flows
for years ended December 31, 2017, 2016 and 2015.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses
during the applicable reporting period. Critical accounting policies are those that are the most important portrayal of our
financial condition, results of operations and cash flows, and that require our most difficult, subjective and complex
judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our
significant accounting policies are described in more detail in the notes to our consolidated financial statements, our most
critical accounting policies are discussed below. In applying such policies, we must use some amounts that are based
upon our informed judgments and best estimates. Estimates, by their nature, are based upon judgments and available
information. The estimates that we make are based upon historical factors, current circumstances and the experience and
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judgment of management. We evaluate our assumptions and estimates on an ongoing basis. Our actual results may differ
from these estimates under different assumptions or conditions.
Valuation of Financial Instruments
Due to the nature of our operations, substantially all of our financial instrument assets, comprised of financial
instruments owned, securities purchased under agreements to resell, and receivables from brokers, dealers and clearing
organizations are carried at fair value based on published market prices and are marked to market daily, or are assets
which are short-term in nature and are reflected at amounts approximating fair value. Similarly, all of our financial
instrument liabilities that arise from financial instruments sold but not yet purchased, securities sold under agreements to
repurchase, securities loaned, and payables to brokers, dealers and clearing organizations are short-term in nature and are
reported at quoted market prices or at amounts approximating fair value.
Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability
(i.e., the exit price) in an orderly transaction between market participants at the measurement date. Financial instruments
measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:
Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
Level 2 — Quoted prices in markets that are not active and financial instruments for which all significant inputs
are observable, either directly or indirectly; or
Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable
The fair values for substantially all of our financial instruments owned and financial instruments sold but not
yet purchased are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy.
Instruments categorized within level 3 of the fair value hierarchy are those which require one or more significant inputs
that are not observable. Estimating the fair value of level 3 financial instruments requires judgments to be made. See Note
11 “Financial Assets and Liabilities” of the Part II Item 8 “Financial Statements and Supplemental Data” on the Form 10-K
for further information about fair value measurements.
Revenue Recognition
Trading Income, Net
Trading income, net, consists of trading gains and losses that are recorded on a trade date basis and reported on
a net basis. Trading income, net, is comprised of changes in fair value of financial instruments owned and financial
instruments sold, not yet purchased assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses
on equities, fixed income securities, currencies and commodities.
Interest and Dividends Income/Interest and Dividends Expense
Interest income and interest expense are accrued in accordance with contractual rates. Interest income consists
of income earned on collateralized financing arrangements and on cash held by brokers. Interest expense includes
interest expense from collateralized transactions, margin and related short-term lending facilities. Dividends are recorded
on the ex-dividend date, and interest is recognized on an accrual basis.
Commissions, net and Technology Services
Commissions, net, which primarily comprise commissions and commission equivalents earned on institutional
client orders, are recorded on a trade date basis. Under a commission management program, we allow institutional clients
to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As we
act as an agent in these transactions, we record such expenses on a net basis within Commissions and technology
services in the consolidated statements of comprehensive income.
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Technology services revenues consist of fees paid by third parties for licensing of our proprietary risk
management and trading infrastructure technology and provision of associated management and hosting services. These
fees include both upfront and annual recurring fees. Income from existing arrangements for technology services is
recorded as a services contract in accordance with SEC Topic 13 (Staff Accounting Bulletin No. 104), SEC Topic 13.A.3
(f), with revenue being recognized once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable, and collectability is probable.
Share-Based Compensation
We account for share-based compensation transactions with employees under the provisions of ASC 718,
Compensation: Stock Compensation. Share-based compensation transactions with employees are measured based on the
fair value of equity instruments issued.
The fair value of awards issued for compensation prior to the Reorganization Transactions and the IPO was
determined by management, with the assistance of an independent third party valuation firm, using a projected annual
forfeiture rate, where applicable, on the date of grant.
Share-based awards issued for compensation in connection with or subsequent to the Reorganization
Transactions and the IPO pursuant to our 2015 Management Incentive Plan (the “2015 Management Incentive Plan”)
were in the form of stock options, Class A common stock and restricted stock units. The fair value of the stock option
grants is determined through the application of the Black-Scholes-Merton model. The fair value of the Class A common
stock and restricted stock units is determined based on the volume weighted average price for the three days preceding
the grant, and with respect to the restricted stock units, a projected annual forfeiture rate. The fair value of share-based
awards granted to employees is expensed based on the vesting conditions and is recognized on a straight line basis over
the vesting period. We record as treasury stock shares repurchased from employees for the purpose of settling tax
liabilities incurred upon the issuance of common stock, the vesting of restricted stock units or the exercise of stock
options.
Income Taxes and Tax Receivable Agreement Obligations
We conduct our business globally through a number of separate legal entities. Consequently, our effective tax
rate is dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations of each legal
jurisdiction in which we operate.
Certain of our wholly owned subsidiaries are subject to income taxes in foreign jurisdictions. The provision for
income tax is comprised of current tax and deferred tax. Current tax represents the tax on current year tax returns, using
tax rates enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that
future taxable income will be available against which the asset can be utilized.
We are currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income
tax liabilities against us. Developments in an audit, litigation, or the relevant laws, regulations, administrative practices,
principles, and interpretations could have a material effect on our operating results or cash flows in the period or periods
for which that development occurs, as well as for prior and subsequent periods. We recognize the tax benefit from an
uncertain tax position, in accordance with ASC 740, Income Taxes only if it is more likely than not that the tax position
will be sustained on examination by the applicable taxing authority, including resolution of the appeals or litigation
processes, based on the technical merits of the position. The tax benefits recognized in the consolidated financial
statements from such a position are measured based on the largest benefit for each such position that has a greater than
fifty percent likelihood of being realized upon ultimate resolution. Many factors are considered when evaluating and
estimating the tax positions and tax benefits. Such estimates involve interpretations of regulations, rulings, case law, etc.
and are inherently complex. Our estimates may require periodic adjustments and may not accurately anticipate actual
outcomes as resolution of income tax treatments in individual jurisdictions typically would not be known for several
years after completion of any fiscal year.
The 2017 Tax Act significantly changes how the U.S. taxes corporations. The 2017 Tax Act requires significant
judgments to be made in interpretation of its provisions and significant estimates in calculations, and the preparation and
analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other
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standard-setting bodies could interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or
otherwise administered that is different from our interpretation. As we complete our analysis of the 2017 Tax Act, collect
and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that
we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are
made.
Our tax receivable agreement obligations are closely tied to our U.S. income tax returns, and may be affected by
the aforementioned factors that impact our provision for income taxes and actual tax returns, including the impact of the
2017 Tax Act.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the underlying net tangible and intangible assets of
our acquisitions. Goodwill is not amortized but is tested for impairment on an annual basis and between annual tests
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is
tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment.
The goodwill impairment test is a two-step process. The first step is used to identify potential impairment and
compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed. The second step
is used to measure the amount of impairment loss, if any, and compares the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss must be recognized in an amount equal to that excess.
We test goodwill for impairment on an annual basis on July 1 and on an interim basis when certain events or
circumstances exist. In the impairment test as of July 1, 2017, the primary valuation method used to estimate the fair
value of the our reporting unit was the market capitalization approach based on the market price of its Class A common
stock, which the management believes to be an appropriate indicator of its fair value. Following the Acquisition, the
impairment testing is performed for each segment unit.
We amortize finite-lived intangible assets over their estimated useful lives. We test finite-lived intangible assets
for impairment annually or when impairment indicators are present, and if impaired, they are written down to fair value.
Recent Accounting Pronouncements
For a discussion of recently issued accounting developments and their impact or potential impact on our
consolidated financial statements, see Note 2 “Summary of Significant Accounting Policies” of Part II Item 8 “Financial
Statements and Supplementary Data” of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks in the ordinary course of business. The risks primarily relate to changes
in the value of financial instruments due to factors such as market prices, interest rates, and currency rates.
Our on exchange market making activities are not dependent on the direction of any particular market and are
designed to minimize capital at risk at any given time by limiting the notional size of our positions. Our on exchange
market making strategies involve continuously quoting two-sided markets in various financial instruments with the
intention of profiting by capturing the spread between the bid and offer price. If another market participant executes
against the strategy’s bid or offer by crossing the spread, the strategy will instantaneously attempt to lock in a return by
either exiting the position or hedging in one or more different correlated instruments that represent economically
equivalent value to the primary instrument. Such primary or hedging instruments include but are not limited to securities
and derivatives such as: common shares, exchange traded products, American Depositary Receipts (“ADRs”), options,
bonds, futures, spot currencies and commodities. Substantially all of the financial instruments we trade are liquid and can
be liquidated within a short time frame at low costs.
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The market making activities, where we interact with customers, involve taking on position risks. The risks at
any point in time are limited by the notional size of positions as well as other factors. The overall portfolio risks are
quantified using internal risk models and monitored by the CRO, the independent risk group and senior management.
We use various proprietary risk management tools in managing our market risk on a continuous basis (including
intraday). In order to minimize the likelihood of unintended activities by our market making strategies, if our risk
management system detects a trading strategy generating revenues outside of our preset limits, it will freeze, or
“lockdown”, that strategy and alert risk management personnel and management.
Interest Rate Risk, Derivative Instruments
In the normal course of business, we utilize derivative financial instruments in connection with our proprietary
trading activities. We do not designate our derivative financial instruments as hedging instruments under Financial
Accounting Standards Board’s (“FASB”) Accounting Standards Codification (ASC) 815 Derivatives and Hedging, other
than derivatives used to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-
U.S. operations as discussed in Note 12 “Derivative Instruments” of Part II Item 8 “Financial Statements and
Supplementary Data” of this Form 10-K. Instead, we carry our derivative instruments at fair value with gains and losses
included in trading income, net, in the accompanying consolidated statements of comprehensive income (loss). Fair
value of derivatives that are freely tradable and listed on a national exchange is determined at their last sale price as of
the last business day of the period. Since gains and losses are included in earnings, we have elected not to separately
disclose gains and losses on derivative instruments, but instead to disclose gains and losses within trading revenue for
both derivative and non-derivative instruments.
Futures Contracts. As part of our proprietary market making trading strategies, we use futures contracts to gain
exposure to changes in values of various indices, commodities, interest rates or foreign currencies. A futures contract
represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Upon entering
into a futures contract, we are required to pledge to the broker an amount of cash, U.S. government securities or other
assets equal to a certain percentage of the contract amount. Subsequent payments, known as variation margin, are made
or received by us each day, depending on the daily fluctuations in the fair values of the underlying securities. We
recognize a gain or loss equal to the daily variation margin.
Due from Broker Dealers and Clearing Organizations. Management periodically evaluates our counterparty
credit exposures to various brokers and clearing organizations with a view to limiting potential losses resulting from
counterparty insolvency.
Foreign Currency Risk
As a result of our international market making activities and accumulated earnings in our foreign subsidiaries,
our income and net worth are subject to fluctuation in foreign exchange rates. While we generate revenues in several
currencies, a majority of our operating expenses are denominated in U.S. dollars. Therefore, depreciation in these other
currencies against the U.S. dollar would negatively impact revenue upon translation to the U.S. dollar. The impact of any
translation of our foreign denominated earnings to the U.S. dollar is mitigated, however, through the impact of daily
hedging practices that are employed by the company.
Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at
period-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing
during the period. The resulting currency translation adjustments are recorded as foreign exchange translation adjustment
in our consolidated statements of comprehensive income (loss) and changes in equity. Our primary currency translation
exposures historically relate to net investments in subsidiaries having functional currencies denominated in the Euro.
Market Risk
Our on exchange market making activities are not dependent on the direction of any particular market and are
designed to minimize capital at risk at any given time by limiting the notional size of our positions. Our on exchange
market making strategies involve continuously quoting two-sided markets in various financial instruments with the
intention of profiting by capturing the spread between the bid and offer price. If another market participant executes
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against the strategy’s bid or offer by crossing the spread, the strategy will instantaneously attempt to lock in a return by
either exiting the position or hedging in one or more different correlated instruments that represent economically
equivalent value to the primary instrument. Such primary or hedging instruments include but are not limited to securities
and derivatives such as: common shares, exchange traded products, American Depositary Receipts (“ADRs”), options,
bonds, futures, spot currencies and commodities. Substantially all of the financial instruments we trade are liquid and can
be liquidated within a short time frame at low costs.
The market making activities, where we interact with customers, involve taking on position risks. The risks at
any point in time are limited by the notional size of positions as well as other factors. The overall portfolio risks are
quantified using internal risk models and monitored by the CRO, the independent risk group and senior management.
For working capital purposes, we invest in money market funds and maintain interest and non-interest bearing
balances at banks and in our trading accounts with clearing brokers, which are classified as Cash and cash equivalents
and Receivable from brokers, dealers and clearing organizations, respectively, on the consolidated statements of
financial condition. These financial instruments do not have maturity dates; the balances are short term, which helps to
mitigate our market risks. We also invest our working capital in short-term U.S. government securities, which are
included in Financial instruments owned on the consolidated statements of financial condition. Our cash and cash
equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are
monitored daily and are hedged or reduced when appropriate and therefore not material to our overall cash position.
We use various proprietary risk management tools in managing our market risk on a continuous basis (including
intraday). In order to minimize the likelihood of unintended activities by our market making strategies, if our risk
management system detects a trading strategy generating revenues outside of our preset limits, it will freeze, or
“lockdown”, that strategy and alert risk management personnel and management.
In the normal course of business, we maintain inventories of exchange-listed and other equity securities, and to
a lesser extent, fixed income securities and listed equity options. The fair value of these financial instruments at
December 31, 2017 and December 31, 2016 was $2.7 billion and $1.8 billion, respectively, in long positions and $2.4
billion and $1.4 billion, respectively, in short positions. We also enter into futures contracts, which are recorded on our
consolidated statements of financial condition within Receivable from brokers, dealers and clearing organizations or
Payable to brokers, dealers and clearing organizations as applicable.
We calculate daily the potential losses that might arise from a series of different stress events. These include
both single factor and multi factor shocks to asset prices based off both historical events and hypothetical scenarios. The
stress calculations include a full recalculation of any option positions, non-linear positions and leverage. Senior
management and the independent risk function carefully monitor the highest stress scenarios to ensure that the Company
is not unduly exposed to any extreme events.
The potential change in fair value is estimated to be a gain of $6.5 million using a hypothetical 10% increase in
equity prices as of December 31, 2017, and an estimated loss of $9.5 million using a hypothetical 10% decrease in equity
prices at December 31, 2017. These estimates take into account the offsetting effect of such hypothetical price
movements on the fair value of short positions against long positions, the effect on the fair value of options, futures,
nonlinear positions and leverage as well as assumed correlations with non-equity asset classes, such as fixed income,
commodities and foreign exchange. The Company relies on internally developed systems in order to model and calculate
stress risks to a variety of different scenarios.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant
(“FCM”). The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the
FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled
with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency,
recovery may be limited to the Company’s pro rata share of segregated customer funds available. It is possible that the
recovery amount could be less than the total cash and other equity deposited.
75
Financial Instruments with Off Balance Sheet Risk
We enter into various transactions involving derivatives and other off-balance sheet financial instruments.
These financial instruments include futures, forward contracts, and exchange-traded options. These derivative financial
instruments are used to conduct trading activities and manage market risks and are, therefore, subject to varying degrees
of market and credit risk. Derivative transactions are entered into for trading purposes or to economically hedge other
positions or transactions.
Futures and forward contracts provide for delayed delivery of the underlying instrument. In situations where we
write listed options, we receive a premium in exchange for giving the buyer the right to buy or sell the security at a future
date at a contracted price. The contractual or notional amounts related to these financial instruments reflect the volume
and activity and do not necessarily reflect the amounts at risk. Futures contracts are executed on an exchange, and cash
settlement is made on a daily basis for market movements, typically with a central clearing house as the counterparty.
Accordingly, futures contracts generally do not have credit risk. The credit risk for forward contracts, options, and swaps
is limited to the unrealized market valuation gains recorded in the statements of financial condition. Market risk is
substantially dependent upon the value of the underlying financial instruments and is affected by market forces, such as
volatility and changes in interest and foreign exchange rates.
76
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Financial Condition as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016, and 2015 . .
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015 . . . . . . . .
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Quarterly Results of Operations (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
NUMBER
78
79
80
81
82
83
127
127
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Virtu Financial, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Virtu Financial, Inc. and
Subsidiaries (the ‘‘Company’’) as of December 31, 2017 and 2016, and the related consolidated statements of
comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31,
2017 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion
/s/ Deloitte & Touche LLP
New York, NY
March 13, 2018
We have served as the Company’s auditor since 2011.
78
Virtu Financial, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(in thousands, except share and interest data)
Assets
As of December 31,
2016
2017
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables from broker dealers and clearing organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading assets, at fair value:
532,887 $
1,471,172
972,018
181,415
220,005
448,728
Financial instruments owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments owned and pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,117,579
595,043
1,683,999
143,883
Property, equipment and capitalized software (net of accumulated depreciation of $375,656 and
$113,184 as of December 31, 2017 and 2016, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles (net of accumulated amortization of $123,408 and $110,908 as of December 31, 2017
and December 31, 2016, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of business held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets ($98,364 and $36,480, at fair value, as of December 31, 2017 and 2016, respectively) . .
992
193,859
—
74,470
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,320,006 $ 3,692,390
137,018
844,883
29,660
715,379
111,224
125,760
55,070
357,352
Liabilities and equity
Liabilities
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payables to broker dealers and clearing organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading liabilities, at fair value:
27,883 $
754,687
390,642
716,205
25,000
222,203
—
695,978
Financial instruments sold, not yet purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax receivable agreement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,349,155
231,404
69,281
564,957
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,168,428 $ 3,157,978
2,384,598
147,040
358,825
1,388,548
Virtu Financial Inc. Stockholders' equity
Class A common stock (par value $0.00001), Authorized — 1,000,000,000 and 1,000,000,000
shares, Issued — 90,415,532 and 40,436,580 shares, Outstanding — 89,798,609 and 39,983,514
shares at December 31, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares,
Issued and Outstanding — 0 and 0 shares at December 31, 2017 and 2016, respectively . . . . . . . . . .
Class C common stock (par value $0.00001), Authorized — 90,000,000 and 90,000,000 shares,
Issued — 17,880,239 and 19,810,707 shares, Outstanding — 17,880,239 and 19,810,707, at
December 31, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class D common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares,
Issued and Outstanding — 79,610,490 and 79,610,490 shares at December 31, 2017 and 2016,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 616,923 and 453,066 shares at December 31, 2017 and 2016, respectively . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Virtu Financial Inc. stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,151,578 $
1
(11,041)
900,746
(62,129)
2,991
830,569 $
321,009
—
—
1
—
—
—
1
(8,358)
155,536
(1,254)
(252)
145,673
388,739
534,412
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,320,006 $ 3,692,390
See accompanying notes to the consolidated financial statements.
79
Virtu Financial, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands, except share and per share data)
Revenues:
For the Years Ended
December 31,
2016
2017
Trading income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest and dividends income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions, net and technology services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
766,027
50,407
116,503
95,045
1,027,982
$
665,465
26,419
10,352
36
702,272
$
Operating Expenses:
Brokerage, exchange and clearance fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communication and data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for order flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operations and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangibles and acquired capitalized software . . . . . .
Debt issue cost related to debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction advisory fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for legal matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges related to share based compensation at IPO . . . . . . . . . . . . . . . . . . . . . .
Financing interest expense on long-term borrowings . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes and noncontrolling interest . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
256,926
131,506
177,489
27,727
91,993
65,137
47,327
15,447
10,460
25,270
657
772
64,107
914,818
113,164
94,266
18,898
(15,959)
221,214
71,001
85,295
—
56,557
23,039
29,703
211
5,579
—
—
1,755
28,327
522,681
179,591
21,251
158,340
(125,360)
2015
757,455
28,136
10,622
—
796,213
232,469
68,647
88,026
—
52,423
25,991
33,629
211
—
—
5,440
44,194
29,254
580,284
215,929
18,439
197,490
(176,603)
Net income available for common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,939
$
32,980
20,887
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.03
0.03
0.83
0.83
0.60
0.59
Weighted average common shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,579,147
62,579,147
38,539,091
38,539,091
34,964,312
35,339,585
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income
Foreign exchange translation adjustment, net of taxes . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to noncontrolling interest . . . . . . . . . . .
Comprehensive income attributable to common stockholders . . . . . . . . . . . . . . . . . . $
18,898
$
158,340
$
197,490
9,117
28,015
(21,833)
6,182
(1,165)
157,175
(124,546)
32,629
$
$
(4,255)
193,235
(172,249)
20,986
See accompanying notes to the consolidated financial statements.
80
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S
81
Virtu Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
For the Years ended December 31,
2015
2016
2017
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
18,898
$ 158,340
$ 197,490
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangibles and acquired capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issue cost related to debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs and deferred financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of office leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for legal matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment writeoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax receivable agreement obligation reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
47,327
15,447
10,460
5,822
3,671
26,259
657
1,216
(86,599)
102,973
(4,577)
29,703
211
5,579
1,690
—
22,866
—
428
—
13,313
(1,070)
33,629
211
—
1,755
1,380
61,878
5,440
559
—
3,985
219
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables from broker dealers and clearing organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading assets, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payables to broker dealers and clearing organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading liabilities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
155,277
16,894
26,145
1,210,599
44,494
366,295
(450,964)
(516,376)
(721,204)
17,860
290,574
233,291
14,981
27,808
(530,668)
772
(302,400)
—
209,374
370,065
(14,684)
239,599
31,638
16,482
(88,884)
247,094
(5,796)
26,741
(2,006)
(199,599)
(58,544)
(13,392)
260,280
Cash flows from investing activities
Development of capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in SBI Japannext . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of KCG Holdings, net of cash acquired, described in Note 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Teza Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of DMM business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,158)
(18,932)
—
(799,632)
(5,594)
300
(838,016)
(8,404)
(11,859)
(38,754)
—
—
—
(59,017)
(8,028)
(16,271)
—
—
—
—
(24,299)
Cash flows from financing activities
Distribution to members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution from Virtu Financial to non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of Class A-2 interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of Class C common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of senior secured credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of KCG Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax receivable agreement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock, net of offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of Virtu Financial Units and corresponding number of Class A and C common stock in connection with secondary offering . . . . . . . . .
Issuance of common stock in connection with secondary offering, net of offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of Virtu Financial Units and corresponding number of Class C common stock in connection with secondary offering . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(89,563)
(63,814)
(11,143)
—
(2,683)
7,000
1,115,036
(256,473)
(480,987)
(7,045)
(56,505)
735,974
—
—
—
889,797
—
(162,969)
(37,759)
(2,000)
(98)
(4,539)
(20,000)
75,753
(3,825)
—
—
(5,094)
—
—
16,677
(17,383)
(161,237)
(130,000)
(81,377)
(17,362)
(2,097)
—
(3,819)
45,000
—
(2,914)
—
—
(976)
327,366
(277,153)
7,782
(8,805)
(144,355)
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,117
(1,165)
(4,255)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
351,472
181,415
532,887
18,180
163,235
$ 181,415
87,371
75,864
$ 163,235
Supplementary disclosure of cash flow information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,982
5,976
$
54,872
16,175
$
63,230
12,875
Non-cash investing activities
Share based compensation to developers relating to capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See Note 3 for a description of non-cash investing activities relating to the acquisition of KCG
1,605
2,750
11,278
Non-cash financing activities
Tax receivable agreement described in Note 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discount on issuance of senior secured credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secondary offerings described in Note 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,534
1,438
—
545
1,350
—
$ (21,854)
—
—
See accompanying notes to the consolidated financial statements.
82
Virtu Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
1. Organization and Basis of Presentation
Organization
The accompanying consolidated financial statements include the accounts and operations of Virtu Financial,
Inc. (“VFI” or, collectively with its wholly owned or controlled subsidiaries, the “Company”) beginning with its initial
public offering (“IPO”) in April of 2015, along with the historical accounts and operations of Virtu Financial LLC
(“Virtu Financial”) prior to the Company’s IPO. VFI is a Delaware corporation whose primary asset is its ownership
interest in Virtu Financial, which it acquired pursuant to and subsequent to certain reorganization transactions (the
“Reorganization Transactions”) consummated in connection with its IPO. As of December 31, 2017, VFI owned
approximately 48.3% of the membership interests of Virtu Financial. VFI is the sole managing member of Virtu
Financial and operates and controls all of the businesses and affairs of Virtu Financial and, through Virtu Financial and
its subsidiaries (the “Group”), continues to conduct the business now conducted by such subsidiaries.
The Company is a leading financial firm that leverages cutting edge technology to deliver liquidity to the global
markets and innovative, transparent trading solutions to its clients. The Company has broad diversification, in
combination with its proprietary technology platform and low-cost structure, which enables the Company to facilitate
risk transfer between global capital markets participants by supplying competitive liquidity and execution services while
at the same time earning attractive margins and returns.
Virtu Financial was formed as a Delaware limited liability company on April 8, 2011 in connection with a
corporate reorganization and acquisition of the outstanding equity interests of Madison Tyler Holdings, LLC (“MTH”),
an electronic trading firm and market maker. In connection with the reorganization, the members of Virtu Financial’s
predecessor entity, Virtu Financial Operating LLC (“VFO”), a Delaware limited liability company formed on March 19,
2008, exchanged their interests in VFO for interests in Virtu Financial and the members of MTH exchanged their
interests in MTH for cash and/or interests in Virtu Financial.
On July 20, 2017 (the “Closing Date”), the Company completed the all-cash acquisition (the “Acquisition”) of
KCG Holdings, Inc. (“KCG”). Pursuant to the terms of the Agreement and Plan of Merger, dated as of April 20, 2017
(the “Merger Agreement”), by and among the Company, Orchestra Merger Sub, Inc., a Delaware corporation and an
indirect wholly-owned subsidiary of the Company (“Merger Sub”), and KCG Merger Sub merged with and into KCG
(the “Merger”), with KCG surviving the Merger as a wholly owned subsidiary of the Company. The transaction will
extend Virtu’s scaled operating model to KCG’s wholesale market making businesses and broaden the distribution of
Virtu’s Execution Services to KCG’s extensive institutional client base. See Note 3 “Acquisition of KCG Holdings Inc.”
for further details.
Virtu Financial’s principal subsidiaries include Virtu Financial BD LLC (“VFBD”) and Virtu Americas LLC
(“VAL”), which are self-clearing U.S. broker-dealers, Virtu Financial Capital Markets LLC (“VFCM”), a U.S. broker-
dealer, which self-clears its proprietary transactions and introduces the accounts of its affiliates and non-affiliated
broker-dealers on an agency basis to other clearing firms that clear and settle transactions in those accounts. Virtu
Financial Global Markets LLC (“VFGM”), a U.S. trading entity focused on futures and currencies, Virtu Financial
Ireland Limited (“VFIL”), formed in Ireland, Virtu Financial Asia Pty Ltd (“VFAP”), formed in Australia, and Virtu
Financial Singapore Pte. Ltd. (“VFSing”), formed in Singapore, each of which are trading entities focused on asset
classes in their respective geographic regions.
On October 24, 2017, the Company announced it has entered into a definitive agreement to sell its fixed income
trading venue, BondPoint, to Intercontinental Exchange (“ICE”). See Note 4 “Business Held for Sale” and Note 22
“Subsequent Events” for further details.
83
Prior to the Acquisition of KCG, the Company was managed and operated as one business, under one
reportable segment. As a result of the acquisition of KCG, beginning in the third quarter of 2017 the Company has three
operating segments: (i) Market Making; (ii) Execution Services; and (iii) Corporate. See Note 19 “Geographic
Information and Business Segments” for a further discussion of the Company’s segments.
Basis of Consolidation and Form of Presentation
These consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with
respect to Form 10-K and accounting standards generally accepted in the United States of America (“U.S. GAAP”)
promulgated in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the
“Codification”). The consolidated financial statements of the Company include its equity interests in Virtu Financial, and
its subsidiaries. The Company operates and controls all business and affairs of Virtu Financial and its operating
subsidiaries indirectly through its equity interest in Virtu Financial.
Certain reclassifications have been made to the prior periods’ consolidated financial statements in order to
conform to the current period presentation. Such reclassifications are immaterial to both current and all previously
issued financial statements taken as a whole and have no effect on previously reported consolidated net income available
to common stockholders.
The consolidated financial statements include the accounts of the Company and its majority and wholly owned
subsidiaries. As sole managing member of Virtu Financial, the Company exerts control over the Group’s operations. The
Company consolidates Virtu Financial and its subsidiaries’ financial statements and records the interests in Virtu
Financial that the Company does not own as noncontrolling interests. All intercompany accounts and transactions have
been eliminated in consolidation.
As discussed in Note 3 “Acquisition of KCG Holdings Inc.”, the Company is accounting for the acquisition of
KCG under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities
of KCG, as of July 20, 2017, were recorded at their respective fair values and added to the carrying value of the
Company's existing assets and liabilities. The reported financial condition, results of operations and cash flows of the
Company for the periods following the Acquisition reflect KCG's and the Company's balances and reflect the impact of
purchase accounting adjustments. As the Company is the accounting acquirer, the financial results for the year ended
December 31, 2017 comprise the results of the Company for the entire applicable period and the results of KCG from
Closing Date through December 31, 2017. All periods prior to the Closing Date comprise solely the results of the
Company.
2. Summary of Significant Accounting Policies
Use of Estimates
The Company's consolidated financial statements are prepared in conformity with U.S. GAAP, which require
management to make estimates and assumptions regarding measurements including the fair value of trading assets and
liabilities, goodwill and intangibles, compensation accruals, capitalized software, income tax, and other matters that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Accordingly, actual results could differ materially from those estimates.
Earnings Per Share
Earnings per share (“EPS”) is calculated on both a basic and diluted basis. Basic EPS excludes dilution and is
calculated by dividing income available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is calculated by dividing the net income available for common stockholders by
the diluted weighted average shares outstanding for that period. Diluted EPS includes the determinants of the basic EPS
and, in addition, reflects the dilutive effect of shares of common stock estimated to be distributed in the future under the
Company’s share based compensation plans.
84
The Company grants restricted stock units (“RSUs”), which entitle recipients to receive nonforfeitable
dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. As a result,
the unvested RSUs meet the definition of a participating security requiring the application of the two-class method.
Under the two-class method, earnings available to common shareholders, including both distributed and undistributed
earnings, are allocated to each class of common stock and participating securities according to dividends declared and
participating rights in undistributed earnings, which may cause diluted EPS to be more dilutive than the calculation using
the treasury stock method.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts, which are payable on demand, and short-term
investments with an original maturity of less than 90 days.
The Company maintains cash in bank deposit accounts that, at times, may exceed federally insured limits. The
Company manages this risk by selecting financial institutions deemed highly creditworthy to minimize the risk.
Securities Borrowed and Securities Loaned
The Company conducts securities borrowing and lending activities with external counterparties. In connection
with these transactions, the Company receives or posts collateral, which comprises by cash and/or securities. In
accordance with substantially all of its stock borrow agreements, the Company is permitted to sell or repledge the
securities received. Securities borrowed or loaned are recorded based on the amount of cash collateral advanced or
received. The initial cash collateral advanced or received generally approximates or is greater than 102% of the fair
value of the underlying securities borrowed or loaned. The Company monitors the fair value of securities borrowed and
loaned, and delivers or obtains additional collateral as appropriate. Receivables and payables with the same counterparty
are not offset in the consolidated statements of financial condition. Interest received or paid by the Company for these
transactions is recorded gross on an accrual basis under interest and dividends income or interest and dividends expense
in the consolidated statements of comprehensive income.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
In a repurchase agreement, securities sold under agreements to repurchase are treated as collateralized financing
transactions and are recorded at contract value, plus accrued interest, which approximates fair value. It is the Company's
policy that its custodian takes possession of the underlying collateral securities with a fair value approximately equal to
the principal amount of the repurchase transaction, including accrued interest. For reverse repurchase agreements, the
Company typically requires delivery of collateral with a fair value approximately equal to the carrying value of the
relevant assets in the consolidated statements of financial condition. To ensure that the fair value of the underlying
collateral remains sufficient, the collateral is valued daily with additional collateral obtained or excess collateral
returned, as permitted under contractual provisions. The Company does not net securities purchased under agreements to
resell transactions with securities sold under agreements to repurchase transactions entered into with the same
counterparty.
The Company has also entered into bilateral and tri-party term and overnight repurchase and other
collateralized financing agreements which bear interest at negotiated rates. The Company receives cash and makes
delivery of financial instruments to a custodian who monitors the market value of these instruments on a daily basis. The
market value of the instruments delivered must be equal to or in excess of the principal amount loaned under the
repurchase agreements plus the agreed upon margin requirement. The custodian may request additional collateral, if
appropriate. Interest received or paid by the Company for these transactions is recorded gross on an accrual basis under
interest and dividends income or interest and dividends expense in the consolidated statements of comprehensive
income.
Receivables from/Payables to Broker-dealers and Clearing Organizations
Amounts receivable from broker-dealers and clearing organizations may be restricted to the extent that they
serve as deposits for securities sold, not yet purchased. At December 31, 2017 and 2016, receivables from and payables
to broker-dealers and clearing organizations primarily represented amounts due for unsettled trades, open equity in
85
futures transactions, securities failed to deliver or failed to receive, deposits with clearing organizations or exchanges
and balances due from or due to prime brokers in relation to the Company’s trading. The Company presents its balances,
including outstanding principal balances on all credit facilities, on a net by counterparty basis within receivables from
and payable to broker-dealers and clearing organizations when the criteria for offsetting are met.
In the normal course of business, a significant portion of the Company’s securities transactions, money
balances, and security positions are transacted with several third-party brokers. The Company is subject to credit risk to
the extent any broker with whom it conducts business is unable to fulfill contractual obligations on its behalf. The
Company monitors the financial condition of such brokers and to minimize the risk of any losses from these
counterparties.
Financial Instruments Owned Including Those Pledged as Collateral and Financial Instruments Sold, Not Yet
Purchased
Financial instruments owned and Financial instruments sold, not yet purchased relate to market making and
trading activities, and include listed and other equity securities, listed equity options and fixed income securities.
The Company records financial instruments owned, including those pledged as collateral, and financial
instruments sold, not yet purchased at fair value. Gains and losses arising from financial instrument transactions are
recorded net on a trade-date basis in trading income, net, in the consolidated statements of comprehensive income.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability
(i.e., the exit price) in an orderly transaction between market participants at the measurement date. Fair value
measurements are not adjusted for transaction costs. The recognition of “block discounts” for large holdings of
unrestricted financial instruments where quoted prices are readily and regularly available in an active market is
prohibited. The Company categorizes its financial instruments into a three level hierarchy which prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy level assigned to each financial instrument is based on the
assessment of the transparency and reliability of the inputs used in the valuation of such financial instruments at the
measurement date based on the lowest level of input that is significant to the fair value measurement. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurement) and the lowest priority to unobservable inputs (level 3 measurements).
Financial instruments measured and reported at fair value are classified and disclosed in one of the following
categories based on inputs:
Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
Level 2 — Quoted prices in markets that are not active and financial instruments for which all significant inputs
are observable, either directly or indirectly; or
Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable.
Transfers in or out of levels are recognized based on the beginning fair value of the period in which they
occurred.
Fair Value Option
The fair value option election allows entities to make an irrevocable election of fair value as the initial and
subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items
for which the fair value option has been elected are recorded in other, net in the consolidated statements of
comprehensive income. The decision to elect the fair value option is determined on an instrument by instrument basis
must be applied to an entire instrument and is irrevocable once elected.
86
Derivative Instruments
Derivative instruments are used for trading purposes, including economic hedges of trading instruments, which
are carried at fair value include futures, forward contracts, and options. Gains or losses on these derivative instruments
are recognized currently within trading income, net in the consolidated statement of comprehensive income. Fair values
for exchange-traded derivatives, principally futures, are based on quoted market prices. Fair values for over-the-counter
derivative instruments, principally forward contracts, are based on the values of the underlying financial instruments
within the contract. The underlying instruments are currencies, which are actively traded. The Company presents its
derivatives balances on a net-by-counterparty basis when the criteria for offsetting are met.
Property, Equipment and Occupancy
Property and equipment are carried at cost, less accumulated depreciation, except for the assets acquired in
connection with the acquisitions of MTH and KCG which were recorded at fair value on the respective date of
acquisitions. Depreciation is provided using the straight-line method over estimated useful lives of the underlying assets.
Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that appreciably extend
the useful life of the assets are capitalized. When property and equipment are sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. Furniture, fixtures, and equipment are depreciated over three to seven
years. Leasehold improvements are amortized over the lesser of the life of the improvement or the term of the lease.
The Company recognizes rent expense under operating leases with fixed rent escalations, lease incentives and
free rent periods on a straight-line basis over the lease term beginning on the date the Company takes possession of or
controls the use of the space, including during free rent periods.
Lease Loss Accrual
The Company’s policy is to identify excess real estate capacity and where applicable, accrue for related future
costs, net of projected sub-lease income upon the date the Company ceases to use the excess real estate, which is
recorded under operating and administrative in the consolidated statements of comprehensive income. Such accrual is
adjusted to the extent the actual terms of sub-leased property differ from the previous assumptions used in the
calculation of the accrual.
Capitalized Software
The Company capitalizes costs of materials, consultants, and payroll and payroll related costs for employees
incurred in developing internal-use software. Costs incurred during the preliminary project and post-implementation
stages are charged to expense.
Management’s judgment is required in determining the point at which various projects enter the stages at which
costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful
lives over which the costs are amortized.
Capitalized software development costs and related accumulated amortization are included in property,
equipment and capitalized software in the accompanying consolidated statements of financial condition and are
amortized over a period of 1.5 to 2.5 years, which represents the estimated useful lives of the underlying software.
Goodwill
Goodwill represents the excess of the purchase price over the underlying net tangible and intangible assets of
the Company’s acquisitions. Goodwill is not amortized but is tested for impairment on an annual basis and between
annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating
segment.
87
The Company tests goodwill for impairment on an annual basis on July 1 and on an interim basis when certain
events or circumstances exist. In the impairment test as of July 1, 2017, the primary valuation method used to estimate
the fair value of the Company’s reporting unit was the market capitalization approach based on the market price of its
Class A common stock, which the Company’s management believes to be an appropriate indicator of its fair value.
Following the Acquisition, our impairment testing is performed for each reporting unit.
Intangible Assets
The Company amortizes finite-lived intangible assets over their estimated useful lives. Finite-lived intangible
assets are tested for impairment annually or when impairment indicators are present, and if impaired, they are written
down to fair value.
Exchange Memberships and Stock
Exchange memberships are recorded at cost or, if any other than temporary impairment in value has occurred,
at a value that reflects management’s estimate of fair value. Exchange memberships acquired in connection with the
Acquisition were recorded at their fair value on the date of acquisition. Exchange stock includes shares that entitle the
Company to certain trading privileges. The Company’s exchange memberships and stock are included in intangibles in
the consolidated statements of financial condition.
Trading Income, net
Trading income is comprised of changes in the fair value of trading assets and liabilities (i.e., unrealized gains
and losses) and realized gains and losses on trading assets and liabilities. Trading gains and losses on financial
instruments owned and financial instruments sold, not yet purchased are recorded on the trade date and reported on a net
basis in the consolidated statements of comprehensive income.
Commissions, net and Technology Services
Commissions, net, which primarily comprise commissions and commission equivalents earned on institutional
client orders, are recorded on a trade date basis. Under a commission management program, the Company allows
institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by
third parties. As the Company acts as an agent in these transactions, it records such expenses on a net basis within
Commissions and technology services in the consolidated statements of comprehensive income.
Technology services revenues consist of technology licensing fees and agency commission fees. Technology
licensing fees are earned from third parties for licensing of the Company’s proprietary risk management and trading
infrastructure technology and the provision of associated management and hosting services. These fees include both
upfront and annual recurring fees. Revenue from technology services is recognized once persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Revenue is
recognized ratably over the contractual service period.
Interest and Dividends Income/Interest and Dividends Expense
Interest income and interest expense are accrued in accordance with contractual rates. Interest income consists
of interest earned on collateralized financing arrangements and on cash held by brokers. Interest expense includes
interest expense from collateralized transactions, margin and related lines of credit. Dividends on financial instruments
owned including those pledged as collateral and financial instruments sold, not yet purchased are recorded on the ex-
dividend date and interest is recognized on an accrual basis.
Brokerage, Exchange and Clearance Fees, Net
Brokerage, exchange and clearance fees, net, comprise the costs of executing and clearing trades and are
recorded on a trade date basis. Rebates consist of volume discounts, credits or payments received from exchanges or
other market places related to the placement and/or removal of liquidity from the order flow in the marketplace. Rebates
are recorded on an accrual basis and included net within brokerage, exchange and clearance fees in the accompanying
consolidated statements of comprehensive income.
88
Payments for Order Flow
Payments for order flow represent payments to broker-dealer clients, in the normal course of business, for
directing their order flow in U.S. equities to the Company. Payments for order flow are recorded on a trade-date basis in
the consolidated statements of comprehensive income.
Income Taxes
Subsequent to consummation of the Reorganization Transactions and the IPO, the Company is subject to U.S.
federal, state and local income taxes on its taxable income. The Company's subsidiaries are subject to income taxes in
the respective jurisdictions (including foreign jurisdictions) in which they operate. Prior to the consummation of the
Reorganization Transactions and the IPO, no provision for United States federal, state and local income tax was
required, as Virtu Financial is a limited liability company and is treated as a pass-through entity for United States
federal, state, and local income tax purposes.
The provision for income tax is comprised of current tax and deferred tax. Current tax represents the tax on
current year tax returns, using tax rates enacted at the balance sheet date. The deferred tax assets are recognized in full
and then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not
be recognized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the applicable taxing authority, including resolution of the appeals or
litigation processes, based on the technical merits of the position. The tax benefits recognized in the consolidated
financial statements from such a position are measured based on the largest benefit for each such position that has a
greater than fifty percent likelihood of being realized upon ultimate resolution. Many factors are considered when
evaluating and estimating the tax positions and tax benefits. Such estimates involve interpretations of regulations,
rulings, case law, etc. and are inherently complex. The Company’s estimates may require periodic adjustments and may
not accurately anticipate actual outcomes as resolution of income tax treatments in individual jurisdictions typically
would not be known for several years after completion of any fiscal year.
The 2017 Tax Act significantly changes how the U.S. taxes corporations. The 2017 Tax Act requires significant
judgments to be made in interpretation of its provisions and significant estimates in calculations, and the preparation and
analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other
standard-setting bodies could interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or
otherwise administered that is different from our interpretation. As we complete our analysis of the 2017 Tax Act,
collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional
amounts that we have recorded that may materially impact our provision for income taxes in the period in which the
adjustments are made.
Comprehensive Income and Foreign Currency Translation
Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). The
Company’s OCI is comprised of foreign currency translation adjustments. Assets and liabilities of operations having
non-U.S. dollar functional currencies are translated at period-end exchange rates, and revenues and expenses are
translated at weighted average exchange rates for the period. Gains and losses resulting from translating foreign currency
financial statements, net of related tax effects, are reflected in accumulated other comprehensive income, a separate
component of stockholders’ equity.
The Company's foreign subsidiaries generally use the U.S. dollar as their functional currency. The Company
also has subsidiaries that utilize a functional currency other than the U.S. dollar, primarily comprising its Irish
subsidiaries, which utilizes the Euro as the functional currency.
The Company may seek to reduce the impact of fluctuations in foreign exchange rates on its net investment in
certain non-U.S. operations through the use of foreign currency forward contracts. For foreign currency forward
contracts designated as hedges, the Company assesses its risk management objectives and strategy, including
identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed
89
prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair
value of the forward contracts. For qualifying net investment hedges, any gains or losses, to the extent effective, are
included in Accumulated other comprehensive income on the consolidated statements of financial condition and
Cumulative translation adjustment, net of tax, on the consolidated statements of comprehensive income. The ineffective
portion, if any, is recorded in Investment income and other, net on the consolidated statements of operations.
Share-Based Compensation
The fair value of awards issued for compensation prior to the Reorganization Transactions and the IPO was
determined by management, with the assistance of an independent third party valuation firm, using a projected annual
forfeiture rate, where applicable, on the date of grant.
Share-based awards issued for compensation in connection with or subsequent to the Reorganization
Transaction and the IPO pursuant to the VFI 2015 Management Incentive Plan (as amended, the “2015 Amended and
Restated Management Incentive Plan”) were in the form of stock options, Class A common stock and RSUs. The fair
value of the stock option grants is determined through the application of the Black-Scholes-Merton model. The fair value
of the Class A common stock and RSUs are determined based on the volume weighted average price for the three days
preceding the grant, and with respect to the RSUs, a projected annual forfeiture rate. The fair value of share-based
awards granted to employees is expensed based on the vesting conditions and are recognized on a straight line basis over
the vesting period. The Company records as treasury stock shares repurchased from its employees for the purpose of
settling tax liabilities incurred upon the issuance of Class A common stock, the vesting of RSUs or the exercise of stock
options.
Variable Interest Entities
A variable interest entity (“VIE”) is an entity that lacks one or more of the following characteristics (i) the total
equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders
have the power to direct the activities of the entity that most significantly impact its economic performance, the
obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The Company will
be considered to have a controlling financial interest and will consolidate a VIE if it has both (i) the power to direct the
activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb
losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
In October 2016, the Company invested in a joint venture (“JV”) with nine other parties. One of the parties was
KCG. Upon the Merger, KCG was required to relinquish their ownership in the JV. As of December 31, 2017, each of
the remaining parties owns approximately 11% of the voting shares and 11% of the equity of this JV, which is building
microwave communication networks in the U.S. and Asia, and which is considered to be a VIE. The Company and all of
its JV partners each pay monthly fees for the funding of the construction of the microwave communication networks.
When completed, this JV may sell excess bandwidth that is not utilized by its joint venture members to third parties. As
a result of the Acquisition, the Company owns 50% of the voting shares and 50% of the equity of a JV which maintains
microwave communication networks in the U.S. and Europe, and which is considered to be a VIE. The Company and its
JV partner each pay monthly fees for the use of the microwave communication networks in connection with their
respective trading activities, and the JV may sell excess bandwidth that is not utilized by the JV members to third parties.
In each of the JVs, the Company does not have the power to direct the activities of the VIE that most
significantly impact the VIE’s economic performance; therefore it does not have a controlling financial interest in the JV
and does not consolidate the JVs. The Company records its interest in each JV under the equity method of accounting
and records its investment in the JVs within Other assets and its amounts payable for communication services provided
by the JV within Accrued expenses and other liabilities on the consolidated statements of financial condition. The
Company records its pro-rata share of each JVs earnings or losses within Other, net and fees related to the use of
communication services provided by the JVs within Communications and data processing on the consolidated statements
of comprehensive income.
The Company’s exposure to the obligations of these VIEs is generally limited to its interests in each respective
JV, which is the carrying value of the equity investment in each JV.
90
The following table presents the Company’s nonconsolidated VIE at December 31, 2017:
(in thousands)
Equity investment . . . . . . . . . . . . . . . . . . . $
Recent Accounting Pronouncements
Carrying Amount
Asset
Liability
18,799
$
—
Maximum
Exposure to
loss
18,799
$
VIE's assets
41,936
$
Revenue - In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, Revenue from
Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to
recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it
expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August
2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date. ASU 2015-14 defers the effective date of ASU 2014-09 by one year for public companies. ASU 2015-14 applies
to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period. In December 2016, FASB issued ASU 2016-20 Technical Correction and Improvement (Topic 606): Revenue
from Contracts with Customers, which amends the guidance in ASU 2014-09. The effective date and transition
requirements for the ASU are the same as ASU 2014-09. The Company adopted the new revenue standard on January 1,
2018 by applying the modified retrospective method, which did not result in a transition adjustment. The new standard
does not apply to revenue associated with financial instruments that are accounted for under other GAAP, and as a result,
did not have an impact on the Company’s consolidated statements of comprehensive income, most closely associated
with financial instrument, including Trading income, net, and Interest and dividends income. The new revenue standard
primarily impacts the revenue recognition and accounting policy related to technology services. The Company’s
technology services contracts include certain variable considerations which will be estimated and included in the
transaction price only to the extent that it is probable when a significant reversal in the amount of the cumulative revenue
recognized will occur in the future period. The new revenue standard requires enhanced disclosures, which the Company
will include in the notes to the condensed consolidated financial statements beginning with the three months ended
March 31, 2018.
Financial Assets and Liabilities — In January 2016, the FASB issued ASU 2016-01, Financial Instruments –
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU
intends to enhance the reporting model for financial instruments to provide users of financial statements with more
decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure
of financial instruments. The new ASU affects all entities that hold financial assets or owe financial liabilities and is
effective for annual reporting periods (including interim periods) beginning after December 15, 2017. The Company
does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements, as it
does not currently classify any equity securities as available for sale, and it does not apply the fair value option to its own
debt issuances.
Leases — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new ASU, a
lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. The
liability will be equal to the present value of the future lease payments. The asset, referred to as a “right-of-use asset”
will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes,
leases will be classified as either operating or finance. Operating leases will result in straight-line expense (similar to
current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital
leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but
without explicit bright lines. New quantitative and qualitative disclosures, including significant judgments made by
management, will be required to provide greater information regarding the extent of revenue and expense recognized
and expected to be recognized from existing contracts. The standard is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. . The Company anticipates adopting this ASU on
January 1, 2019. The Company is not anticipating recognizing lease assets and lease liabilities for leases with a term of
twelve months or less. As of December 31, 2017, the Company has not yet identified any significant changes in the
timing of operating leases recognition when considering this ASU, but the Company’s implementation efforts are
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ongoing and such assessments may change prior to the January 1, 2019, anticipated implementation date. Upon
adoption of this ASU, the Company expects to report increased assets and liabilities on its consolidated statement of
financial condition as a result of recognizing right-of-use assets and lease liabilities related to certain equipment under
noncancelable operating lease agreements, which currently are not reflected in its consolidated statement of financial
condition.
Statement of Cash Flows – In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments. The ASU intended to reduce diversity in practice
how certain transactions are classified in the statement of cash flows by mandating classification of certain activities.
The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual
periods. The Company has adopted this ASU, and it does not have a material impact on its consolidated financial
statements.
Income Taxes – In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 749): Intra-Entity
Transfers of Assets Other Than Inventory. The ASU requires the reporting entity to recognize the tax expense from the
sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of the transactions
are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at
the time of the transfer. The ASU is effective for annual periods beginning after December 15, 2018, and interim
reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently
evaluating the potential effects of adoption of ASU 2016-16 on the Company’s consolidated financial statements.
Restricted cash – In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flow (Topic 230):
Restricted Cash, which is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalent
in the statements. The statement requires that restricted cash and restricted cash equivalents be included as components
of total cash and cash equivalents as presented on the statement of cash flows. This ASU is effective for annual reporting
periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company elected to early
adopt this ASU effective June 30, 2017.
Accounting Changes – In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error
Correction (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323), which amends SEC
Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC
update). The SEC staff view is that a registrant should evaluate the impact of new accounting standards that have not yet
been adopted to determine the appropriate financial disclosures on the potential material effects, especially on new
standards on revenue recognition, leases, and financial instruments – credit losses. If a registrant cannot reasonably
estimate the impact that adoption of the ASUs, the registrant should consider additional qualitative financial statement
disclosures to assist the reader in assessing the significance of the impact. Additional qualitative disclosures should
include a description of the effect of the accounting policies expected to be applied compared to current accounting
policies. Furthermore, the registrant should describe the status of its process to implement the new standards and the
significant implementation matters yet to be addressed. The Company adopted this ASU on January 1, 2017, and
appropriate disclosures have been included in this Note for each recently issued accounting standard.
Goodwill - In January, 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350),
Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, this ASU
eliminated Step 2 from the goodwill impairment test. (In computing the implied fair value of goodwill under Step 2, an
entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities
(including unrecognized assets and liabilities) following the procedure that would be required in determining the fair
value of assets acquired and liabilities assumed in a business combination. Instead, under this ASU, an entity should
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that
reporting unit. This ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount
to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.
This ASU is effective for public entities in fiscal years beginning after December 15, 2019. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not
expect the adoption of this ASU to have a material impact on the its consolidated financial statements.
92
Business Combinations - In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic
805), Clarifying the Definition of a Business, to amend the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of
assets or businesses. The ASU is effective for reporting periods beginning after December 15, 2017. The impact of this
ASU will depend on the nature of the Company’s activities after adoption.
3. Acquisition of KCG Holdings, Inc.
As of the Closing Date of the Acquisition, each of KCG’s issued and outstanding shares of Class A common
stock, par value $0.01 per share were cancelled and extinguished and converted into the right to receive $20.00 in cash,
without interest, less any applicable withholding taxes.
On the Closing Date, and in connection with the financing of the Acquisition, as described in Note 10,
“Borrowings”, the Company issued to Aranda Investments Pte. Ltd. (“Aranda”), an affiliate of Temasek Holdings
(Private) Limited (“Temasek”), 6,346,155 shares of the Company’s Class A common stock, pursuant to the investment
agreement with Aranda (as amended, the “Aranda Investment Agreement”) for an aggregate purchase price of
approximately $99.0 million. On August 10, 2017, the Company issued an additional 1,666,666 shares of its Class A
common stock for an aggregate purchase price of $26.0 million (collectively, the “Temasek Investment”).
On the Closing Date, and in connection with the financing of the Acquisition, the Company issued to North
Island Holdings I, LP (“NIH”) 39,725,979 shares of the Company’s Class A common stock for an aggregate purchase
price of approximately $613.5 million. On August 10, 2017 the Company issued an additional 338,124 shares of its
Class A common stock for an aggregate purchase price of $5.2 million (collectively, the “NIH Investment”). In
connection with the Temasek Investment and NIH Investment, the Company incurred approximately $7.8 million in fees
which were recorded as a reduction to additional paid-in capital.
On July 21, 2017, the outstanding 6.875% Senior Secured Notes due 2020 issued by KCG were redeemed at a
redemption price equal to 103.438% of the $465.0 million principal amount, plus accrued and unpaid interest. The
redemption was pursuant to the indenture, dated as of March 13, 2015 (as amended, restated, supplemented or otherwise
modified), by and among KCG, the subsidiary guarantors party thereto and The Bank of New York Mellon, as trustee
and collateral agent.
Accounting treatment of the Acquisition
The Acquisition is accounted for as a purchase of KCG by the Company, pursuant to provisions of ASC 805,
Business Combinations. Under the acquisition method of accounting, the assets and liabilities of KCG, as of July 20,
2017, were recorded at their respective fair values and added to the carrying value of the Company's existing assets and
liabilities. These fair values were determined with the assistance of third party valuation professionals. The reported
financial condition, results of operations and cash flows of the Company for the periods following the Acquisition reflect
KCG’s and the Company's balances and reflect the impact of purchase accounting adjustments. As the Company is the
accounting acquirer, the financial results for the year ended December 31, 2017 comprise the results of the Company for
the entire applicable period and the results of KCG from Closing Date through December 31, 2017. All periods prior to
2017 comprise solely the results of the Company.
Certain former KCG management employees were terminated upon the Acquisition, and as a result were paid
an aggregate of $6.4 million pursuant to their existing employment contracts. This amount has been recognized as an
expense by the Company and is included in Employee compensation and payroll taxes in the consolidated statements of
comprehensive income for the year ending December 31, 2017. The Company also expects to make annual incentive
compensation payments to former KCG employees who became employees of the Company following the Merger, and
accrued related compensation expense of approximately $35.3 million during the year ended December 31, 2017, which
is included in Employee compensation and payroll taxes in the consolidated statements of comprehensive income.
93
Purchase price and goodwill
The aggregate cash purchase price of $1.40 billion was determined as the sum of the fair value, at $20.00 per
share, of KCG shares and warrants outstanding to former KCG stockholders at closing and the fair value of KCG
employee stock based awards that were outstanding, and which vested at the Closing Date.
The purchase price has been allocated to the assets acquired and liabilities assumed using their estimated fair
values at the Closing Date of the Acquisition. Although the Company has substantially completed its analysis to record
the allocation of the purchase price to the KCG acquired assets and liabilities, the allocation of the purchase price may be
modified over the measurement period, which does not exceed twelve months from the Closing Date, as more
information is obtained about the fair values of assets acquired and liabilities assumed. Adjustments to the provisional
values during the measurement period will be recorded in the reporting period in which the adjustment amounts are
determined. The Company has engaged third party specialists for the purchase price allocation.
During the quarter ended December 31, 2017, the Company recorded adjustments to its initial fair value
estimates in the Acquisition. Among the adjustments recorded, the fair value of acquired intangible assets and property,
equipment and capitalized software were increased by $18.7 million and $2.2 million, respectively, and other assets,
primarily income taxes receivable, decreased by $8.6 million. Cash and securities segregated under federal regulations
of $3.0 million was reclassified into cash and equivalents, and payables to customers of $17.6 million were reclassified
to accounts payable and accrued expenses and other liabilities. Deferred tax assets were adjusted to account for the
effects of the aforementioned adjustments, and goodwill decreased by $14.7 million as a result of these adjustments.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the
Closing Date:
September
30, 2017
Measurement
Period
$
$
$
$
$
$
$
592,993
3,000
1,406,444
16,894
553,031
2,095,339
112,204
156,300
22,928
331,820
5,290,953
166,189
841,606
536,653
17,583
1,756,647
239,004
480,987
4,038,669
1,252,284
143,012
1,395,296
$
$
$
$
$
$
December 31,
2017
595,669
—
1,406,444
16,894
552,820
2,095,339
114,367
174,995
23,908
323,184
5,303,620
166,189
841,606
536,653
—
1,756,647
254,528
480,987
4,036,610
2,676 $
(3,000)
—
—
(211)
—
2,163
18,695
980
(8,636)
12,667 $
— $
—
—
(17,583)
—
15,524
—
(2,059) $
14,726 $
1,267,010
(14,726) $
128,286
— $
1,395,296
(in thousands)
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and securities segregated under federal regulations . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . .
Receivables from broker dealers and clearing organizations . . . . . . . . . .
Financial instruments owned, at fair value . . . . . . . . . . . . . . . . . . . . . . .
Property, equipment and capitalized software . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . .
Payables to broker dealers and clearing organizations . . . . . . . . . . . . . . .
Payables to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments sold, not yet purchased, at fair value . . . . . . . . . .
Accounts payable and accrued expenses and other liabilities . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identified assets acquired, net of assumed liabilities . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
Amounts allocated to intangible assets, the amortization period and goodwill were as follows
(in thousands)
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Favorable leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange memberships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amount
Amortization
Years
67,700 1-6 years
94,000 13 - 17 years
1,000 10 years
5,895 2-15 years
6,400
Indefinite
174,995
128,286
303,281
Of the total Goodwill of $128.3 million, $96.2 million has been assigned to the Market Making segment and
$32.1 million has been assigned to the Execution Services segment. Such goodwill is attributable to the expansion of
products offerings and expected synergies of the combined workforce, products and technologies of the Company and
KCG.
Tax treatment of the Acquisition
The Company believes that the Acquisition will be treated as a tax-free transaction to the Company that does
not result in a step up in tax basis in the acquired assets and, therefore, KCG’s tax basis in its assets and liabilities
generally carries over to the Company following the Acquisition. None of the goodwill is expected to be deductible for
tax purposes.
The Company recorded net deferred tax assets of $23.9 million with respect to recording KCG’s assets and
liabilities under the purchase method of accounting as described above as well as recording the value of other tax
attributes acquired as a result of the Acquisition, as described in Note 13 “Income Tax”.
Pro forma results
Included in the Company’s results for the year ended December 31, 2017 are results from the business acquired
as a result of the Acquisition, from the Closing Date through December 31, 2017 as follows:
(in thousands)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income before income taxes and noncontrolling interest . . . . . . . . . . . . . . . . . . . . .
379,203
14,340
The financial information in the table below summarizes the combined pro forma results of operations of the
Company and KCG, based on adding the pre-tax historical results of KCG and the Company, and adjusting primarily for
amortization of intangibles created in the Acquisition, debt raised in conjunction with the Acquisition and nonrecurring
costs associated with the Acquisition, which comprise advisory and other professional fees incurred by the Company and
KCG of $24.2 and $22.5 million, respectively. The pro forma data assumes all of KCG’s issued and outstanding shares
of Class A common stock, par value $0.01 per share were cancelled and extinguished and converted into the right to
receive $20.00 in cash, without interest, less any applicable withholding taxes on January 1, 2016 and does not include
adjustments to reflect the Company's operating costs or expected differences in the way funds generated by the Company
are invested.
This pro forma financial information is based on estimates and assumptions that have been made solely for
purposes of developing such pro forma information, including, without limitation, preliminary purchase accounting
adjustments. The pro forma financial information does not reflect any synergies or operating cost reductions that may be
95
achieved from the combined operations. The pro forma financial information combines the historical results for the
Company and KCG for the years ended December 31, 2017 and 2016:
(in thousands, except per share amounts)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
1,528,588 $
2016
2,153,008
For the Years Ended
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,151)
443,101
Net income (loss) attributable to common stockholders . . . . . .
(5,219)
163,407
4. Business Held for Sale
In October 2017, the Company entered into an Asset Purchase Agreement (the “BondPoint Agreement”) with
ICE pursuant to which the Company has agreed to sell specified assets and to assign specified liabilities constituting its
BondPoint division and fixed income venue (“BondPoint”). BondPoint is a provider of electronic fixed income trading
solutions for the buy-side and sell-side offering access to centralized liquidity and automated trade execution services,
and is included in the Company’s Execution Services segment, see Note 19 “Geographic Information and Business
Segments”.
The purchase price payable by ICE for BondPoint at the closing of the transaction is $400.0 million in cash
subject to a customary adjustment for working capital of BondPoint. The consummation of the transaction is subject to
the satisfaction of customary closing conditions and receipt of certain regulatory clearances, including from the Financial
Industry Regulatory Authority, Inc. and the Municipal Securities Rulemaking Board and the expiration or termination of
the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
The BondPoint Agreement contains customary representations, warranties, covenants and indemnification
provisions. The parties have agreed to execute a transition services agreement simultaneously with the closing of the
transaction. The transaction closed on January 2, 2018, which is further discussed in Note 22 “Subsequent Events”.
The assets and liabilities of businesses held for sale as of December 31, 2017 are summarized as follows:
(in thousand)
Receivables from broker dealers and clearing organizations . . . . . .
Intangibles
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,383
5,982
43,819
955
518
413
$55,070
Payable to brokers, dealers and clearing organizations . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
50
678
728
The total assets and total liabilities are included in assets of business held for sale and accounts payables and
accrued expenses and other liabilities, respectively, on the Company’s consolidated statement of financial condition.
96
5. Earnings per Share
The below table contains a reconciliation of net income before noncontrolling interest to net income available
for common stockholders:
(in thousands)
Income before income taxes and noncontrolling interest . . . . . . . . . . . . . $ 113,164 $ 179,591 $ 215,929
18,439
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
197,490
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,251
158,340
94,266
18,898
For the Year ended December 31
2015
2016
2017
Net income allocable to members of Virtu Financial (for the period
January 1, 2015 through April 15, 2015) . . . . . . . . . . . . . . . . . . . . . . .
—
—
(83,147)
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,959) (125,360)
(93,456)
Net income available for common stockholders . . . . . . . . . . . . . . . . . . . . $
2,939 $
32,980 $
20,887
The calculation of basic and diluted earnings per share is presented below:
(in thousands, except for share or per share data)
Basic earnings per share:
Net income available for common stockholders . . . . . . . . . . . . . . . . . . . . $
For the Year Ended December 31,
2015
2016
2017
2,939 $
32,980 $
20,887
Less: Dividends and undistributed earnings allocated to participating
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,326)
(809)
—
Net income available for common stockholders, net of dividends and
undistributed earnings allocated to participating securities . . . . . . . . . .
1,613
32,171
20,887
Weighted average shares of common stock outstanding:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,579,147 38,539,091 34,964,312
Basic Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.03 $
0.83 $
0.60
(in thousands, except for share or per share data)
Diluted earnings per share:
Net income available for common stockholders, net of dividends and
For the Year Ended December 31,
2015
2016
2017
undistributed earnings allocated to participating securities . . . . . . . . . . $
1,613 $
32,171 $
20,887
Weighted average shares of common stock outstanding:
Class A
Issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,579,147 38,539,091 34,964,312
Issuable pursuant to 2015 Management Incentive Plan(1) . . . . . . . .
375,273
62,579,147 38,539,091 35,339,585
—
—
Diluted Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.03 $
0.83 $
0.59
(1) The dilutive impact of unexercised stock options excludes from the computation of EPS 1,740,630, 743,096 and 0 options for the years ended
December 31, 2017, 2016 and 2015, respectively, because inclusion of the options would have been anti-dilutive.
6. Tax Receivable Agreements
In connection with the IPO and the Reorganization Transactions, the Company entered into tax receivable
agreements to make payments to certain Virtu Members, as defined in Note 15 “Capital Structure”, that are generally equal
to 85% of the applicable cash tax savings, if any, that the Company actually realizes as a result of favorable tax attributes
that were and will continue to be available to the Company as a result of the Reorganization Transactions, exchanges of
membership interests for Class A common stock or Class B common stock and payments made under the tax receivable
agreements. Payments will occur only after the filing of the U.S. federal and state income tax returns and realization of the
cash tax savings from the favorable tax attributes. The first payment was due 120 days after the filing of the Company’s tax
return for the year ended December 31, 2015, which was due March 15, 2016, but the due date was extended until
97
September 15, 2016. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in
addition to these amounts. The Company made its first payment of $7.0 million in February 2017.
As a result of (i) the purchase of equity interests in Virtu Financial from certain Virtu Members in connection
with the Reorganization Transactions, (ii) the purchase of non-voting common interest units in Virtu Financial (the
“Virtu Financial Units”) (along with the corresponding shares of Class C common stock) from certain of the Virtu
Members in connection with the IPO, (iii) the purchase of Virtu Financial Units (along with the corresponding shares of
Class C common stock) and the exchange of Virtu Financial Units (along with the corresponding shares of Class C
common stock) for shares of Class A common stock in connection with the Secondary Offerings, the Company recorded
a deferred tax asset of $220.8 million associated with the increase in tax basis that results from such events. Payments to
certain Virtu Members in respect of the purchases were expected to range from approximately $0.3 million to $12.8
million per year over the next 15 years. The corresponding deduction to additional paid-in capital was approximately
$19.9 million for the difference between the tax receivable agreements liability and the related deferred tax asset.
In connection with the February 2017, May 2017, August 2017 and November 2017 employee exchanges (as
described in Note 15 “Capital Structure”), the Company recorded an additional deferred tax asset of $10.8 million and
payment liability pursuant to the tax receivable agreements of $9.3 million, with the $1.5 million difference recorded as
an increase to additional paid-in capital.
As a result of the reduction in the U.S. federal income tax rate as described below, the aforementioned deferred
tax asset and related payment liability were subsequently reduced as described below. The amounts recorded as of
December 31, 2017 are based on best estimates available at the respective dates and may be subject to change after the
filing of the Company’s U.S. federal and state income tax returns for the years in which tax savings were realized.
On December 22, 2017, the Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law. This act includes,
among other items, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1,
2018 as further described in Note 13 “Income Taxes”. As a result, at December 31, 2017, the Company recorded a
reduction of its tax receivable agreement obligation of $86.6 million which is included in other, net in the consolidated
statement of operations for the year ended December 31, 2017. As further described in Note 13 “Income Taxes”, the
Company also recorded a reduction of its deferred tax assets, including deferred tax assets relating to the deferred tax
assets described above. At December 31, 2017 and December 31, 2016, the Company’s remaining deferred tax assets
were approximately $101.6 million and $185.7 million, respectively, and the Company’s payment liabilities pursuant to
the tax receivable agreements were approximately $147.0 million and $231.4 million, respectively.
For the tax receivable agreements discussed above, the cash savings realized by the Company are computed by
comparing the actual income tax liability of the Company to the amount of such taxes the Company would have been
required to pay had there been (i) no increase to the tax basis of the assets of Virtu Financial as a result of the purchase
or exchange of Virtu Financial Units, (ii) no tax benefit from the tax basis in the intangible assets of Virtu Financial on
the date of the IPO and (iii) no tax benefit as a result of the Net Operating Losses (“NOLs”) and other tax attributes of
Virtu Financial. Subsequent adjustments of the tax receivable agreements obligations due to certain events (e.g., changes
to the expected realization of NOLs or changes in tax rates) will be recognized within income before taxes and
noncontrolling interests in the consolidated statements of comprehensive income.
7. Goodwill and Intangible Assets
Prior to the Acquisition, the Company was managed and operated as one business, and accordingly, operated
under one reportable segment. As a result of the acquisition of KCG, beginning in the third quarter of 2017 the
Company has three operating segments: (i) Market Making; (ii) Execution Services; and (iii) Corporate. The Company
allocated goodwill to the new reporting units using a relative fair value approach. In addition, the Company performed
an assessment of potential goodwill impairment for all reporting units immediately prior to the reallocation and
determined that no impairment was indicated.
98
The following table presents the details of goodwill by segment:
(in thousands)
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Market
Making
Execution
Services
Corporate
657,985 $
97,307
755,292 $
57,394 $
32,197
89,591 $
— $
—
— $
Total
715,379
129,504
844,883
On May 3, 2017, the Company completed the acquisition of certain legal entities that owned select strategic
telecommunications assets from Teza Technologies. The total purchase price incurred was $5.6 million, of which $1.2
million was recorded as goodwill, and $2.0 million was recorded as intangible assets. This acquisition was accounted for
as a business combination.
As described in Note 3 “Acquisition of KCG Holdings, Inc.”, on July 20, 2017 the Company completed the
acquisition of KCG. The aggregate cash purchase price of $1.40 billion has been allocated to the assets acquired and
liabilities assumed using their estimated fair values at the Closing Date of the Acquisition. The Company has allocated
$128.3 million and $175.0 million to goodwill and identified intangible assets, respectively.
As of December 31, 2017 and December 31, 2016, the Company’s total amount of goodwill recorded was
$844.9 million and $715.4 million, respectively. No goodwill impairment was recognized in the years ended December
31, 2017 and 2016.
As described in Note 4 “Business Held for Sale”, the Company reclassified net assets related to the BondPoint
Sale to Business held for sale on the consolidated statement of financial condition as of December 31, 2017. An
aggregated net carrying amount of $50.8 million ( $53.7 million of gross carrying amount net of $2.9 million
accumulated amortization from the period between the Closing Date of the Acquisition of KCG to December 31, 2017)
was reclassified from intangible assets to Business held for sale.
Acquired intangible assets consisted of the following as of December 31, 2017 and December 31, 2016:
As of December 31, 2017
Gross
Carrying
Accumulated
Amortization
Net Carrying
Amount
Amount
(in thousands)
Purchased technology . . . . . . . . . . . . . . $ 110,000 $
ETF issuer relationships . . . . . . . . . . . .
ETF buyer relationships . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . .
FCC licenses . . . . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . .
Favorable occupancy leases . . . . . . . . .
Exchange memberships . . . . . . . . . . . .
950
950
1,800
200
60,000
49,000
5,895
5,838
$ 234,633
$
110,000 $
559
559
397
19
9,644
1,822
408
—
123,408
$
—
391
390
1,403
181
50,356
47,178
5,487
5,838
111,224
(in thousands)
Purchased technology . . . . . . . . . . . . . $
ETF issuer relationships . . . . . . . . . . .
ETF buyer relationships . . . . . . . . . . .
Gross
Carrying
Accumulated
Net Carrying
As of December 31, 2016
Amount Amortization
Amount
110,000 $
950
950
111,900
$
110,000 $
454
454
110,908
$
—
496
496
992
$
Useful Lives
(Years)
1.4 to 2.5
9
9
3
7
1 to 6
12 to 17
7
Indefinite
Useful Lives
(Years)
1.4 to 2.5
9
9
Amortization expense relating to finite-lived intangible assets was approximately $15.4 million, $0.2 million, and
$0.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. This is included in amortization of
purchased intangibles and acquired capitalized software in the accompanying consolidated statements of comprehensive income.
99
8. Receivables from/Payables to Broker-Dealers and Clearing Organizations
The following is a summary of receivables from and payables to brokers-dealers and clearing organizations at
December 31, 2017 and December 31, 2016:
(in thousands)
Assets
Due from prime brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits with clearing organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net equity with futures commission merchants . . . . . . . . . . . . . . . . . . . . . . . . .
Unsettled trades with clearing organization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities failed to deliver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total receivables from broker-dealers and clearing organizations . . . . . . . . .
Liabilities
Due to prime brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net equity with futures commission merchants . . . . . . . . . . . . . . . . . . . . . . . . .
Unsettled trades with clearing organization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities failed to receive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total payables to broker-dealers and clearing organizations . . . . . . . . . . . . .
$
$
$
$
2017
2016
219,573
112,847
203,711
173,778
248,088
14,021
972,018
197,439
44,526
420,029
51,143
3,068
716,205
$
$
$
$
91,476
21,995
213,030
44,312
77,915
—
448,728
227,335
38,838
429,800
5
—
695,978
Included as a deduction from “Due from prime brokers” and “Net equity with futures commission merchants”
is the outstanding principal balance on all of the Company’s short-term credit facilities (described in Note 9
“Collateralized Transactions”) of approximately $205.7 million and $309.1 million as of December 31, 2017 and 2016,
respectively. The loan proceeds from the credit facilities are available only to meet the initial margin requirements
associated with the Company’s ordinary course futures and other trading positions, which are held in the Company’s
trading accounts with an affiliate of the respective financial institutions. The credit facilities are fully collateralized by
the Company’s trading accounts and deposit accounts with these financial institutions. “Securities failed to deliver” and
“Securities failed to receive” include amounts with a clearing organization and other broker-dealers.
9. Collateralized Transactions
The Company is permitted to sell or repledge securities received as collateral and use these securities to secure
repurchase agreements, enter into securities lending transactions or deliver these securities to counterparties or clearing
organizations to cover short positions. At December 31, 2017 and December 31, 2016, substantially all of the securities
received as collateral have been repledged. The fair value of the collateralized transactions at December 31, 2017 and
December 31, 2016 are summarized as follows:
(in thousands)
Securities received as collateral:
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
$
$
1,415,793
1,415,793
$
$
213,203
213,203
In the normal course of business, the Company pledges qualified securities with clearing organizations to
satisfy daily margin and clearing fund requirements.
Financial instruments owned and pledged, where the counterparty has the right to repledge, at
December 31, 2017 and December 31, 2016 consisted of the following:
(in thousands)
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. and Non-U.S. government obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange traded notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2017
586,251 $
99
8,693
595,043
$
2016
128,202
—
15,681
143,883
100
10. Borrowings
Broker-Dealer Credit Facilities
The Company is a party to two secured credit facilities with a financial institution to finance overnight
securities positions purchased as part of its ordinary course broker-dealer market making activities. One of the facilities
(the “Uncommitted Facility”), is provided on an uncommitted basis collateralized by one of the Company’s broker-
dealer subsidiaries trading and deposit account with the financial institution.
On November 3, 2017, the Company entered the second credit facility (“Revolving Credit Facility”) with the
same financial institution for an aggregated borrowing limit of $500.0 million. The Revolving Credit Facility consists
two borrowing bases: Borrowing Base A Loan is to be used to finance the purchase and settlement of securities;
Borrowing Base B Loan is to be used to fund margin deposit with the NSCC. Each of the three broker-dealers has a
sublimit under Borrowing Base A Loan, from $25.0 million to $500.0 million, which bears interest at the adjusted
LIBOR or base rate plus 1.25% per annum. Two out of the three broker-dealers have sublimit under Borrowing Base B
Loan, from $40.0 million to $100.0 million, which bears interest at the adjusted LIBOR or base rate plus 2.50% per
annum. A commitment fee of 0.50% per annum on the average daily unused portion of this facility is payable quarterly
in arrears.
The following summarizes the Company’s broker-dealer credit facilities carrying value, net of unamortized debt
issuance costs, where applicable:
(in thousands)
Broker-dealer credit facilities:
Interest Rate Available Principal
Financing Outstanding Deferred Debt Outstanding
Issuance Cost Borrowings, net
At December 31, 2017
Uncommitted facility . . . . . . . . . . .
Revolving credit facility . . . . . . . .
2.42%
2.81%
$ 150,000 $
500,000
25,000 $
7,000
— $
(4,117)
$ 650,000 $
32,000 $
(4,117) $
At December 31, 2016
25,000
2,883
27,883
(in thousands)
Broker-dealer credit facilities:
Interest Rate Available Outstanding Issuance Cost Borrowings, net
Financing
Borrowing Deferred Debt Outstanding
Uncommitted facility . . . . . . . . . . .
Committed facility (1) . . . . . . . . . .
1.66%
n/a
$ 125,000 $
75,000
$ 200,000 $
25,000 $
—
25,000 $
— $
—
—
$
25,000
—
25,000
The following summarizes interest expense for the broker-dealer facilities. Interest expense is included within
interest and dividends expense in the accompanying consolidated statements of comprehensive income.
(in thousands)
Broker-dealer credit facilities:
For the Years Ended December 31,
2017
2016
2015
Uncommitted facility . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Committed facility (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,667 $
33
19
1,719 $
1,191 $
41
—
1,232 $
903
15
—
918
(1) Facility was terminated in July 2017.
Short-Term Credit Facilities
The Company maintains short-term credit facilities with various prime brokers and other financial institutions
from which it receives execution or clearing services. The proceeds of these facilities are used to meet margin
requirements associated with the products traded by the Company in the ordinary course, and amounts borrowed are
collateralized by the Company’s trading accounts with the applicable financial institution.
101
At December 31, 2017
Weighted Average
Interest Rate
Financing
Available
Borrowing
Outstanding
Short-Term Credit Facilities:
Short-term credit facilities (2) . . . . . . . . .
3.86%
$
$
543,000 $
543,000 $
205,677
205,677
At December 31, 2016
Weighted Average
Interest Rate
Financing
Available
Borrowing
Outstanding
Short-Term Credit Facilities:
Short-term credit facilities (2) . . . . . . . . .
3.12%
$
$
493,000 $
493,000 $
309,086
309,086
(2) Outstanding borrowings were included with receivable from broker-dealers and clearing organization within the
consolidated statements of financial condition.
Interest expense in relation to the facilities for the years ended December 31, 2017, 2016 and 2015 was
approximately $6.6 million, $6.3 million, and $5.5 million, respectively.
Long-Term Borrowings
The following summarizes the Company’s long-term borrowings, net of unamortized discount and debt
issuance costs, where applicable:
(in thousands)
Long-term borrowings:
Maturity
Interest Outstanding
Deferred Debt Outstanding
Date
Rate Principal
Discount Issuance Cost Borrowings, net
At December, 2017
Fourth Amended and Restate Credit
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2021
Senior secured Second Lien Notes . . . . . . . . .
SBI bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 2022
January 2020
5.13% $
6.75%
5.00%
900,000 $
500,000
31,059
$ 1,431,059 $
(999) $
—
—
(999) $
(18,504) $
(22,961)
(47)
(41,512) $
880,497
477,039
31,012
1,388,548
(in thousands)
Long-term borrowings:
Senior secured credit facility . . . . . . . . . . . . . December 2021
Revolving credit facility . . . . . . . . . . . . . . . .
SBI bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
(3)
January 2020
Maturity
Date
Rate
Interest Outstanding
Principal
Discount
Deferred Debt Outstanding
Issuance Cost Borrowings, net
At December 31, 2016
4.25% $
5.50%
5.00%
$
540,000 $
—
29,925
569,925 $
(956) $
—
—
(956) $
(3,941) $
—
(71)
(4,012) $
535,103
—
29,854
564,957
(3) Prior to the Fourth Amended Restated Credit Agreement described below, the Company entered into a revolving
credit facility with the lenders for an aggregated commitment of $100.0 million. This facility was terminated in July
2017 as a result of refinancing.
Fourth Amended and Restated Credit Agreement
On June 30, 2017, Virtu Financial and VFH Parent LLC (“VFH”) entered into a fourth amended and restated
credit agreement (the “Fourth Amended and Restated Credit Agreement”) for an aggregate $1.15 billion of first lien
secured term loans (the “Term Loan Facility”) with the lenders party thereto and JPMorgan Chase Bank, N.A., as
administrative agent, sole lead arranger and bookrunner, which amended and restated in its entirety the existing Credit
Agreement.
For the year ended December 31, 2017, $250.0 million of prepayments were made under the Fourth Amended
and Restated Credit Agreement. In connection with the debt refinancing and the debt prepayment, the Company
102
accelerated approximately $10.5 million unamortized financing costs incurred that were scheduled to be amortized over
the term of the loan, including original issue discount and underwriting and legal fees, which is included within debt
issue cost related to debt refinancing in the consolidated statements of comprehensive income.
The Fourth Amended and Restated Credit Agreement contains certain customary covenant and certain
customary events of default, including relating to a change of control. If an event of default occurs and is continuing, the
lenders under the Fourth Amended and Restated Credit Agreement will be entitled to take various actions, including the
acceleration of amounts outstanding under the Fourth Amended and Restated Credit Agreement and all actions permitted
to be taken by a secured creditor in respect of the collateral securing the obligations under the Fourth Amended and
Restated Credit Agreement.
Senior Secured Second Lien Notes
On June 16, 2017, the Escrow Issuer and Orchestra Co-Issuer, Inc. (the “Co-Issuer”) completed the offering of
$500.0 million aggregate principal amount of 6.750% Senior Secured Second Lien Notes due 2022 (the “Notes”). The
Notes were issued under an Indenture, dated June 16, 2017 (the “Indenture”), among the Escrow Issuer, the Co-Issuer
and U.S. Bank National Associations, as trustee and collateral agent.
On July 20, 2017, VFH assumed all of the obligations of the Escrow Issuer under the Indenture and the Notes.
The Notes are guaranteed by Virtu Financial and each of Virtu Financial’s wholly-owned domestic restricted
subsidiaries that guarantees the Fourth Amended and Restated Credit Agreement.
The Indenture imposes certain limitations on the Company, and contains certain customary events of default,
including, among others, payment defaults related to the failure to pay principal or interest on Notes, covenant defaults,
final maturity default or cross-acceleration with respect to material indebtedness and certain bankruptcy events. The
gross proceeds from the Notes were deposited into a segregated escrow account with an escrow agent. The proceeds
were released from escrow as of the Closing Date and were used to finance, in part, the Acquisition, and to repay certain
indebtedness of the Company and KCG. (See Note 3 “Acquisition of KCG Holdings, Inc.” for further details).
SBI Bonds
On July 25, 2016, VFH issued Japanese Yen Bonds (collectively the “SBI Bonds”) in the aggregate principal
amount of ¥3.5 billion ($33.1 million at issuance date) to SBI Life Insurance Co., Ltd. and SBI Insurance Co., Ltd. The
proceeds from the SBI Bonds were used to partially fund the investment in SBI (as described in Note 11 “Financial
assets and liabilities”). The SBI Bonds are guaranteed by Virtu Financial. The SBI Bonds are subject to fluctuations on
the Japanese Yen currency rates relative to the Company’s reporting currency (U.S. Dollar) with the changes reflected in
other, net in the consolidated statements of comprehensive income. The principal balance was ¥3.5 billion ($31.0
million) as of December 31, 2017 and ¥3.5 billion ($29.9 million) as of December 31, 2016. The Company recorded a
gain of $1.1 million and a loss of $3.2 million due to the change in currency rates during the years ended December 31,
2017 and 2016, respectively.
Aggregate future required minimum principal payments based on the terms of the long-term borrowings at
December 31, 2017 were as follows:
(in thousands)
—
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,059
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,400,000
Total principal of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . $ 1,431,059
103
11. Financial Assets and Liabilities
Financial Instruments Measured at Fair Value
The fair value of equities, options, on the run U.S. government obligations and exchange traded notes is
estimated using recently executed transactions and market price quotations in active markets and are categorized as
Level 1 with the exception of inactively traded equities and certain financial instruments noted in the preceding
paragraph, which are categorized as Level 2. The Company’s corporate bonds, derivative contracts and other U.S. and
non-U.S. government obligations have been categorized as Level 2. Fair value of the Company’s derivative contracts is
based on the indicative prices obtained from broadly distributed bank and broker dealers, as well as management’s own
analyses. The indicative prices have been independently validated through the Company’s risk management systems,
which are designed to check prices with information independently obtained from exchanges and venues where such
financial instruments are listed or to compare prices of similar instruments with similar maturities for listed financial
futures in foreign exchange.
As of March 31, 2017, the Company began pricing certain financial instruments held for trading at fair value
based on theoretical prices which can differ from quoted market prices. The theoretical prices reflect price adjustments
primarily caused by the fact that the Company continuously prices its financial instruments based on all available
information. This information includes prices for identical and near-identical positions, as well as the prices for
securities underlying the Company’s positions, on other exchanges that are open after the exchange on which the
financial instruments is traded closes. The Company validates that all price adjustments can be substantiated with market
inputs and checks the theoretical prices independently. Consequently, such financial instruments are classified as Level
2. The Company concluded that this is a change in accounting estimate and no retrospective adjustments were necessary.
104
Fair value measurements for those items measured on a recurring basis are summarized below as of
December 31, 2017:
December 31, 2017
Quoted Prices
in Active
Significant
Other
Observable
Markets for
Identical Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
Counterparty
and Cash
Collateral
Netting
Total Fair
Value
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
40,588
—
—
40,588
—
—
—
—
(2,027,697)
—
(2,027,697)
—
—
—
—
—
—
—
—
$
$
$
1,926,591
22,783
60,975
82,395
17,790
7,045
2,117,579
586,251
99
8,693
595,043
40,588
1,952
55,824
98,364
Inputs
(Level 2)
1,167,995
16,815
60,975
68,819
2,045,487
—
3,360,091
175,581
—
8,611
184,192
—
—
55,824
55,824
(in thousands)
Assets
Financial instruments owned, at fair value:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. and Non-U.S. government obligations . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange traded notes . . . . . . . . . . . . . . . . . . . . . . . .
Currency forwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments owned, pledged as collateral:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. and Non-U.S. government obligations . . . . . . . .
Exchange traded notes . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets
Equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Exchange stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
758,596
5,968
—
13,576
—
7,045
785,185
410,670
99
82
410,851
—
1,952
—
1,952
Liabilities
Financial instruments sold, not yet purchased, at fair
value:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. and Non-U.S. government obligations . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange traded notes . . . . . . . . . . . . . . . . . . . . . . . .
Currency forwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
847,816 $
18,940
—
1,514
—
5,839
1,355,616 $
12,481
81,118
54,248
2,032,017
—
$
874,109 $ 3,535,480 $
— $
—
—
—
—
—
—
$
— $
—
—
—
(2,024,991)
—
2,203,432
31,421
81,118
55,762
7,026
5,839
(2,024,991) $ 2,384,598
(1) Other primarily consists of a $55.8 million receivable from Bats related to the sale of KCG Hotspot.
105
Fair value measurements for those items measured on a recurring basis are summarized below as of
December 31, 2016:
December 31, 2016
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Counterparty
and Cash
Collateral
Netting
Total Fair
Value
(in thousands)
Assets
Financial instruments owned, at fair value:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. government obligations . . . . . . . . . . .
Exchange traded notes . . . . . . . . . . . . . . . . . . . .
Currency forwards . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments owned, pledged as collateral:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Exchange traded notes . . . . . . . . . . . . . . . . . . . .
Other Assets
Equity investment . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange stock . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Financial instruments sold, not yet purchased, at
fair value:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Exchange traded notes . . . . . . . . . . . . . . . . . . . .
Currency forwards . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,597,049
—
37,034
—
—
$ 1,634,083
$
31,988
10,765
—
1,147,261
141
$ 1,190,155
$
$
$
$
128,202
15,681
143,883
—
449
449
$
$
$
$
—
—
—
—
—
—
$ 1,323,693
18,744
—
—
$ 1,342,437
$
6,638
—
1,009,038
80
$ 1,015,756
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
36,031
—
36,031
$
—
—
—
(1,140,239)
—
$ (1,140,239)
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
$
—
—
(1,009,038)
—
$ (1,009,038)
$
$
$
$
$
$
$
$
1,629,037
10,765
37,034
7,022
141
1,683,999
128,202
15,681
143,883
36,031
449
36,480
1,330,331
18,744
—
80
1,349,155
On July 27, 2016, the Company purchased an additional minority investment (29.4%) in SBI Japannext Co.,
Ltd (“SBI Japannext”), a proprietary trading system based in Tokyo for $38.8 million in cash (“SBI Investment”), which
increased the Company’s total minority investment in SBI Japannext to 29.9%.The Company elected the fair value
option to account for this equity investment because it believes that fair value is the most relevant measurement attribute
for this investment, as well as to reduce operational and accounting complexity. This investment has been categorized as
Level 3, and the valuation process involved for Level 3 measurements is completed on a quarterly basis. The Company
employs two valuation methodologies when determining the fair value of investments categorized as Level 3, market
comparable analysis and discounted cash flow analysis. The market comparable analysis considers key financial inputs,
recent public and private transactions and other available measures. The discounted cash flow analysis incorporates
significant assumptions and judgments and the estimates of key inputs used in this methodology include the discount rate
for the investment and assumed inputs used to calculate terminal values, such as price/earnings multiples. Upon
completion of the valuations conducted using these methodologies, a weighting is ascribed to each method and to the
ultimate fair value recorded for a particular investment. When determining the weighting ascribed to each valuation
methodology, the Company considers, among other factors, the availability of direct market comparables, the
applicability of a discounted cash flow analysis and the expected holding period.
As of December 31, 2017, the fair value of SBI Investment was determined using the discounted cash flow
method, an income approach, with the discount rate of 15.0% applied to the cash flow forecasts. The Company also used
a market approach based on 14x average price/earnings multiples of comparable companies to corroborate the income
approach. The fair value of the SBI Investment at December 31, 2017 was determined by taking the weighted average of
enterprise valuations based on discounted cash flow on projected income from the next five years, the implied enterprise
valuations on comparable companies, and the implied enterprise valuations on comparable transactions. The fair value
measurement is highly sensitive to significant changes in the unobservable inputs and significant increases (decreases) in
discount rate or decreases (increases) in price/earnings multiples would result in a significantly lower (higher) fair value
106
measurement. Changes in the fair value of the SBI Investment are reflected in other, net in the consolidated statements of
comprehensive income.
There were no transfers of financial instruments between levels during the years ended December 31, 2017 and
2016.
Receivable from Bats Global Markets, Inc. (“Bats”)
In March 2015, KCG sold KCG Hotspot, an institutional spot foreign exchange electronic communications
networks (“ECN”), to Bats, which is now a subsidiary of CBOE Holdings, Inc. KCG and Bats agreed to share certain
tax benefits, which as of December 31, 2017 comprise a $50.0 million payment and an annual payment of up to $6.6
million, both of which are due in April 2018. The $6.8 million annual payment is contingent on Bats (and CBOE)
generating sufficient taxable net income to receive the tax benefits.
The Company has elected the fair value option related to the receivable from Bats and considers the receivable
to be a Level 2 asset in the fair value hierarchy as the fair value is derived from observable significant inputs such as
contractual cash flows and market discount rates. The remaining additional potential payments of $56.8 million are
recorded at a fair value of $55.8 million in other assets on the consolidated statements of financial condition as of
December 31, 2017.
Financial Instruments Not Measured at Fair Value
The table below presents the carrying value, fair value and fair value hierarchy category of certain financial
instruments that are not measured at fair value on the consolidated statement of financial condition. The table below
excludes non-financial assets and liabilities. The carrying value of financial instruments not measured at fair value
categorized in the fair value hierarchy as Level 1 and Level 2 approximates fair value due to the relatively short-term
nature of the underlying assets. The fair value of the Company’s long-term borrowings is categorized as Level 2 in the
fair value hierarchy, which is based on quoted prices from the market.
107
Financial assets and liabilities not measured at fair value as of December 31, 2017:
December 31, 2017
Quoted Prices
in Active
Significant
Other
Markets for
Observable
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $
532,887 $ 532,887 $
532,887 $
—
Carrying Value Fair Value
Identical Assets
(Level 1)
Inputs
(Level 2)
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,471,172 $ 1,471,172 $
— $
1,471,172
Receivables from broker dealers and clearing
organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
972,018
972,018
36,513
935,505
$
$
Significant
Unobservable
Inputs
(Level 3)
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,976,077 $ 2,976,077 $
569,400 $
2,406,677 $
Liabilities
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . $
27,883 $
27,883 $
— $
27,883
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . $
1,388,548 $ 1,465,489 $
— $
1,465,489
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
754,687 $ 754,687 $
— $
754,687
Securities sold under agreements to repurchase . . . . . . . $
390,642 $ 390,642 $
— $
390,642
Payables to broker dealer and clearing organizations . . .
716,205
716,205
2,925
713,280
$
$
$
$
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,277,965 $ 3,354,906 $
2,925 $
3,351,981 $
Financial assets and liabilities not measured at fair value as of December 31, 2016:
December 31, 2016
Quoted Prices
in Active
Significant
Other
Markets for
Observable
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $
181,415 $ 181,415
$
181,415 $
—
Carrying Value Fair Value
Identical Assets
(Level 1)
Inputs
(Level 2)
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . $
220,005 $ 220,005
$
— $
220,005
Receivables from broker dealers and clearing
organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
448,728
972,018
—
972,018
$
$
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
850,148 $ 1,373,438 $
181,415 $
1,192,023 $
Liabilities
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . $
25,000 $
25,000
$
— $
25,000
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . $
564,957 $ 564,957
$
— $
564,957
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
222,203 $ 222,203
$
— $
222,203
Payables to broker dealer and clearing organizations . . .
695,978
695,978
—
695,978
$
$
$
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,508,138 $ 1,508,138 $
— $
1,508,138 $
108
—
—
—
—
—
—
—
—
—
—
—
—
—
0
—
—
—
—
—
Significant
Unobservable
Inputs
(Level 3)
The following presents the changes in Level 3 financial instruments measured at fair value on a
recurring basis:
Year Ended December 31, 2017
Balance at
December 31,
2016
Total Realized
and Unrealized
Purchases Gains / (Losses) Level 3
Net Transfers
into (out of)
Settlement
2017
2017
Change in Net
Unrealized Gains
/ (Losses) on
Investments
Balance at
still held at
December 31 December 31
(in thousands)
Assets
Other assets:
Equity investment. . . . . . . . . . $
Other . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . $
36,031 $
—
36,031 $
— $
3,000
3,000 $
4,557 $
—
4,557 $
— $
—
— $
— $
(3,000)
(3,000) $
40,588 $
—
40,588 $
4,557
—
4,557
Year Ended December 31, 2016
Balance at
December 31,
2015
(in thousands)
Assets
Other assets:
Total Realized
and Unrealized
Net Transfers
into (out of)
Level 3
Purchases Gains / (Losses)
Change in Net
Unrealized Gains
/ (Losses) on
Investments
still held at
December 31
2016
Balance at
December 31
2016
Equity investment. . . . . . . . . . $
Total . . . . . . . . . . . . . . . . . . . . . $
— $
— $
38,754 $
38,754 $
(3,117) $
(3,117) $
394 $
394 $
36,031 $
36,031 $
(3,117)
(3,117)
Offsetting of Financial Assets and Liabilities
The Company does not net securities borrowed and securities loaned, or securities purchased under agreements
to resell and securities sold under agreements to repurchase. These financial instruments are presented on a gross basis in
the consolidated statements of financial condition. In the tables below, the amounts of financial instruments owned that
are not offset in the consolidated statements of financial condition, but could be netted against financial liabilities with
specific counterparties under legally enforceable master netting agreements in the event of default, are presented to
provide financial statement readers with the Company’s estimate of its net exposure to counterparties for these financial
instruments.
The following tables set forth the gross and net presentation of certain financial assets and financial liabilities as
of December 31, 2017 and 2016.
December 31, 2017
(in thousands)
Offsetting of Financial Assets:
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset in the
Consolidated
Statement of
Net Amounts of
Assets Presented
in the
Consolidated
Statement of
Financial Condition Financial Condition Instruments
Financial
Cash Collateral
Received
Net Amount
Gross Amounts Not Offset In the
Statement of Financial Condition
Securities borrowed . . . . . . . . $
Trading assets, at fair value:
Currency forwards . . . . . . . .
Options . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . $
1,471,172 $
— $
1,471,172 $
(1,418,672) $
(13,318) $
39,182
2,045,487
7,045
3,523,704 $
(2,027,697)
—
(2,027,697) $
17,790
7,045
1,496,007 $
—
(45)
(1,418,717) $
—
—
(13,318) $
17,790
7,000
63,972
109
Gross Amounts
Offset in the
Consolidated
Statement of
Net Amounts of
Liabilities Presented
in the
Consolidated
Statement of
Gross Amounts
of Recognized
Liabilities
Financial Condition Financial Condition Instruments
Financial
Cash Collateral
Pledged
Net Amount
Gross Amounts Not Offset In the
Statement of Financial Condition
Offsetting of Financial Liabilities:
Securities loaned . . . . . . . . . . $
Securities sold under
agreements to repurchase . . . .
Trading liabilities, at fair value:
Currency forwards . . . . . . . .
Options . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . $
754,687 $
— $
754,687 $
(737,731) $
(10,776) $
6,180
390,642
—
390,642
(390,642)
—
—
2,032,017
5,839
3,183,185 $
(2,024,991)
—
(2,024,991) $
7,026
5,839
1,158,194 $
—
(56)
(1,128,429) $
—
(10,776) $
7,026
5,783
18,989
Gross Amounts
Offset in the
Consolidated
Statement of
Gross Amounts
of Recognized
Assets
December 31, 2016
Net Amounts of
Assets Presented
in the
Consolidated
Statement of
Gross Amounts Not Offset In the
Statement of Financial Condition
Financial
Cash Collateral
(in thousands)
Offsetting of Financial Assets:
Financial Condition Financial Condition Instruments Received
Net Amount
Securities borrowed . . . . . . . . . $
Trading assets, at fair value:
Currency forwards . . . . . . . . .
Options . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
220,005 $
— $
220,005 $
(216,778) $
(248) $
2,979
1,147,261
141
1,367,407 $
(1,140,239)
—
(1,140,239) $
7,022
141
227,168 $
—
(80)
(216,858) $
—
(13)
(261) $
7,022
48
10,049
(in thousands)
Offsetting of Financial Liabilities:
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset in the
Consolidated
Statement of
Net Amounts of
Liabilities
Presented
in the
Consolidated
Statement of
Gross Amounts Not Offset In the
Consolidated
Statement of Financial Condition
Financial Condition Financial Condition Instruments
Financial
Cash Collateral
Pledged
Net Amount
Securities loaned . . . . . . . . . . . $
Trading liabilities, at fair value:
Currency forwards . . . . . . . . .
Options . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
222,203 $
— $
222,203 $
(221,792) $
— $
411
1,009,038
80
1,231,321 $
(1,009,038)
—
(1,009,038) $
—
80
222,283 $
—
(80)
(221,872) $
—
—
— $
—
—
411
The following table presents gross obligations for securities lending transactions by remaining contractual
maturity and the class of collateral pledged.
(in thousands)
Repurchase agreements:
Overnight and
Continuous
December 31, 2017
Remaining Contractual Maturity
30 - 60
days
61 - 90
Days
Less than
30 days
Total
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. and Non-U.S. government obligations . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities lending transactions:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
—
642
642
754,687
754,687
$
$
$
$
100,000
—
100,000
—
—
$
$
$
$
90,000
—
90,000
—
—
$
$
$
$
200,000
—
200,000
—
—
$
$
$
$
390,000
642
390,642
754,687
754,687
110
(in thousands)
Repurchase agreements:
Overnight and
Continuous
December 31, 2016
Remaining Contractual Maturity
30 - 60
days
61 - 90
Days
Less than
30 days
Total
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
222,203
222,203
$
$
—
—
$
$
—
—
$
$
—
—
$
$
222,203
222,203
12. Derivative Instruments
The fair value of the Company’s derivative instruments on a gross basis consisted of the following at
December 31, 2017 and December 31, 2016:
Financial Statements Location
Fair Value
Notional
Fair Value Notional
December 31, 2017
December 31, 2016
(in thousands)
Derivatives Assets
Derivative instruments
not designated as
hedging instruments:
Equities futures . . . . . . . .
Commodity futures . . . . .
Currency futures . . . . . . .
Fixed income futures . . . .
Derivatives Liabilities
Derivative instruments
not designated as
hedging instruments:
Equities futures . . . . . . .
Commodity futures . . . .
Currency futures . . . . . .
Fixed income futures . . .
Receivables from broker dealers and clearing
organizations
Receivables from broker dealers and clearing
organizations
Receivables from broker dealers and clearing
organizations
Receivables from broker dealers and clearing
organizations
$
(505)
$
1,985,770
$
2,403
$
1,461,286
971
21,231,001
13,964
3,918,778
26,548
3,994,412
1,591
3,264,093
73
7,045
2,045,487
44,395
682,369
124,000,221
31
141
1,147,261
5,730
6,844
94,192,414
Options . . . . . . . . . . . . . . Financial instruments owned
Currency forwards. . . . . . Financial instruments owned
Financial Statements Location
Fair Value
Notional
Fair Value Notional
Payables to broker dealers and clearing
organizations
Payables to broker dealers and clearing
organizations
Payables to broker dealers and clearing
organizations
Payables to broker dealers and clearing
organizations
Options . . . . . . . . . . . . . Financial instruments sold, not yet purchased
Currency forwards. . . . . Financial instruments sold, not yet purchased
Derivative instruments
designated as hedging
instruments:
Currency forwards. . . . . Financial instruments sold, not yet purchased
$
(575)
$
142,658
$
(43)
$
62,417
(1,602)
130,042
2,842
22,616,170
(13,947)
7,756,958
(6,282)
1,137,908
(1)
5,839
2,032,017
2,584
681,147
123,993,234
—
80
1,009,038
—
4,486
85,874,684
(514)
16,115
—
—
Amounts included in receivables from and payables to broker-dealers and clearing organizations represent net
variation margin on long and short futures contracts.
The following table summarizes the net gain from derivative instruments not designated as hedging instruments
under ASC 815, which are recorded in trading income, net, and from those designated as hedging instrument under ASC
815, which are recorded in accumulated other comprehensive income in the accompanying consolidated statements of
comprehensive income for the years ended December 31, 2017, 2016, and 2015.
111
Financial Statements
Location
(in thousands)
Derivative instruments not designated as
hedging instruments:
Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading income, net
Currency forwards . . . . . . . . . . . . . . . . . . . . Trading income, net
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading income, net
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading income, net
December 31,
2017
2016
2015
$ 290,609 $ 559,626 $ 1,180,483
(16,431)
(1,784)
4
$ 286,046 $ 561,125 $ 1,162,272
2,603
(7,166)
—
1,915
(410)
(6)
Derivative instruments designated as
hedging instruments:
Foreign exchange - forward contract . . . . . .
Accumulated other
comprehensive income
$
(642) $
— $
—
13. Income Taxes
Income before income taxes and noncontrolling interest is as follows for the years ended December 31, 2017,
2016 and 2015:
(in thousands)
U.S. operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-U.S. operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,484 $
42,680
138,950 $
40,641
$
113,164 $
179,591 $
154,947
60,982
215,929
2017
December 31,
2016
2015
The provision for income taxes consists of the following for the years ended December 31, 2017, 2016 and
2015.
(in thousands)
Current provision (benefit)
For the years ended
December 31,
2016
2015
2017
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and Local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,991) $
65
1,219
Deferred provision (benefit)
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and Local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . $
106,415
(3,380)
(62)
94,266 $
2,690 $
38
5,210
13,547
194
(428)
21,251 $
7,584
108
6,762
3,345
48
592
18,439
The Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act
significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from
35% to 21%, and eliminating certain deductions. The Company has not completed its determination of the accounting
implications of the 2017 Tax Act on its tax accruals. However, the Company has reasonably estimated the effects of the
2017 Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. The Company
recorded a provisional deferred tax expense for the impact of the 2017 Tax Act of approximately $90.6 million, which is
primarily composed of the remeasurement of federal net deferred tax assets as a result of the permanent reduction in the
U.S. statutory corporate tax rate to 21% from 35%. The Company expects to complete its analysis of the 2017 Tax Act
by the third quarter of 2018, which is within the one-year measurement period prescribed by SEC Staff Accounting
Bulletin No. 118. As the Company completes its analysis, collects and prepares necessary data, and interprets any
additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make
adjustments to the provisional amounts. Those adjustments may materially impact the Company’s provision for income
taxes in the period in which the adjustments are made.
As discussed in Note 6 “Tax Receivable Agreements” the Company revalued its tax receivable agreement
obligation as a result of this decrease in the U.S. corporate income tax rate and recorded a gain of $86.6 million, which is
112
reported in Other, net on the consolidated statements of operations for the year ended December 31, 2017. This gain
does not impact the Company’s provision for income taxes.
The reconciliation of the tax provision at the U.S. Federal Statutory Rate to the provision for income taxes for
the years ended December 31, 2017, 2016 and 2015 is as follows:
(in thousands, except percentages)
Tax provision at the U.S. federal statutory rate . . . . . .
Less: rate attributable to noncontrolling interest . . . . . .
State and local taxes, net of federal benefit . . . . . . . . .
Impact of 2017 Tax Act on deferred tax assets. . . . . . .
Impact of 2017 Tax Act on tax receivable agreement
obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses, net . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
2017
December 31,
2016
2015
35.0 %
(19.1)
(1.9)
80.1
(12.9)
1.9
0.2
83.3 %
35.0 %
(24.4)
1.3
—
—
—
—
11.9 %
35.0 %
(27.8)
1.4
—
—
—
—
8.6 %
The components of the deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
(in thousands)
Deferred income tax assets
Tax Receivable Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits and net operating loss carryforwards . . . . . . . . . . . . . . . . . . .
Less: Valuation allowance on net operating loss carryforwards and tax
credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
2016
101,594 $
5,213
14,547
13,425
50,867
(43,544)
142,102 $
185,677
5,664
—
2,518
—
—
193,859
16,342
—
16,342 $
—
84
84
$
$
$
Subsequent to consummation of the Reorganization Transactions and the IPO, the Company is subject to U.S.
federal, state and local income tax at the rate applicable to corporations less the rate attributable to the noncontrolling
interest in Virtu Financial. These noncontrolling interests are subject to U.S. taxation as partnerships. Accordingly, for
years ended December 31, 2017, 2016 and 2015, the income attributable to these noncontrolling interests is reported in
the consolidated statements of comprehensive income, but the related U.S. income tax expense attributable to these
noncontrolling interests is not reported by the Company as it is the obligation of the individual partners. Income tax
expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the
Company’s subsidiaries are subject to corporate taxation.
Included in other assets on the consolidated statements of financial condition at December 31, 2017 and 2016
are current income tax receivables of $115.2 million and $5.8 million, respectively. The balance at December 31, 2017
primarily comprises the income tax benefit of KCG net operating losses that were generated prior to the Acquisition of
KCG and that are eligible to be carried back by the Company.
Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in
connection with the IPO (Note 6 “Tax Receivable Agreements” and Note 15 “Capital Structure”) and the Acquisition of
KCG (Note 3 “Acquisition of KCG Holdings, Inc”), differences in the valuation of financial assets and liabilities, and in
connection with other temporary differences arising from the deductibility of compensation and depreciation expenses in
different time periods for book and income tax return purposes.
There are no expiration dates on the deferred tax assets. The Company’s deferred tax asset at December 31,
2017 includes an alternative minimum tax credit carryforward of $0.6 million, which can be either be refunded or
113
applied against future income tax liability pursuant to the 2017 Tax Act. The provisions of ASC 740 require that
carrying amounts of deferred tax assets be reduced by a valuation allowance if, based on the available evidence, it is
more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, the need to
establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all
positive and negative evidence related to the realization of the deferred tax assets. As a result of the Acquisition of KCG,
the Company has non-U.S. net operating losses of $231.8 million at December 31, 2017 and has recorded a related
deferred tax asset of $43.5 million. A full valuation allowance was also recorded against this deferred tax asset at
December 31, 2017 as it is more likely than not that this deferred tax asset will not be realized. No valuation allowance
against the remaining deferred taxes was recorded as of December 31, 2017 and 2016 because it is more likely than not
that these deferred tax assets will be fully realized.
The Company is subject to taxation in U.S. federal, state, local and foreign jurisdictions. As of December 31,
2017, the Company’s tax years for 2013 through 2016 and 2010 through 2017 are subject to examination by U.S. and
non-U.S. tax authorities, respectively. As a result of the Acquisition of KCG, the Company has assumed any KCG tax
exposures. KCG is currently subject to U.S. Federal income tax examinations for 2013 through 2017, and to non-U.S.
income tax examinations for the tax years 2007 through 2016. In addition, the Company is subject to state and local
income tax examinations in various jurisdictions for the tax years 2007 through 2016. The final outcome of these
examinations is not yet determinable. However, the Company anticipates that adjustments to the unrecognized tax
benefits, if any, will not result in a material change to the financial condition, results of operations and cash flows.
The Company’s policy for recording interest and penalties associated with audits is to record such items as a
component of income or loss before income taxes and noncontrolling interest. Penalties, if any, are recorded in
operations and administrative expense and interest received or paid is recorded in other, net or operations and
administrative expense in the consolidated statement of comprehensive income
The Company had $7.3 million of unrecognized tax benefits as of December 31, 2017, all of which would
affect the Company’s effective tax rate if recognized. The Company has determined that there are no uncertain tax
positions that would have a material impact on the Company’s financial position as of December 31, 2016.
The following table reconciles the beginning and ending amount of unrecognized tax benefits:
(in thousands)
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increase from Acquisition of KCG . . . . . . . . . . . . . . . . . . . . .
Decreases based on tax positions related to prior period . . . . .
Increase based on tax positions related to current period . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
—
7,232
—
68
7,300
December 31,
14. Commitments, Contingencies and Guarantees
At December 31, 2017, minimum rental commitments under non-cancellable leases are approximately as
follows:
Year Ending December 31
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . $
Minimum Rental Commitments
Capital
Operating
18,829
17,759
6,942
—
—
—
43,530 $
33,331
30,712
29,238
21,017
18,063
127,723
260,084
Total operating lease expense, net of amortization expense related to landlord incentives, for the years ended
December 31, 2017, 2016 and 2015 was approximately $13.1 million, $2.4 million, and $5.3 million, respectively.
Occupancy lease expense for the years ended December 31, 2017, 2016 and 2015 of $12.9 million, $1.3 million and $3.9
114
million, respectively, is included within operations and administrative expenses in the consolidated statements of
comprehensive income. Communication equipment lease expense for the years ended December 31, 2017, 2016 and
2015 of $0.2 million, $1.1 million and $1.4 million, respectively, is included within communication and data processing
in the accompanying consolidated statements of comprehensive income.
Legal Proceedings
In the ordinary course of business, the nature of the Company’s business subjects it to claims, lawsuits,
regulatory examinations or investigations and other proceedings. The Company and its subsidiaries are subject to several
of these matters at the present time. Given the inherent difficulty of predicting the outcome of litigation and regulatory
matters, particularly in regulatory examinations or investigations or other proceedings in which substantial or
indeterminate damages or fines are sought, or where such matters are in the early stages, the Company cannot estimate
losses or ranges of losses for such matters where there is only a reasonable possibility that a loss may be incurred. In
addition, there are numerous factors that result in a greater degree of complexity in class-action lawsuits as compared to
other types of litigation. There can be no assurance that these matters will not have a material adverse effect on the
Company’s results of operations in any future period, and a material judgment, fine or sanction could have a material
adverse impact on the Company’s financial condition, results of operations and cash flows. However, it is the opinion of
management, after consultation with legal counsel that, based on information currently available, the ultimate outcome
of these matters will not have a material adverse impact on the business, financial condition or operating results of the
Company although they might be material to the operating results for any particular reporting period. The Company
carries directors’ and officers’ liability insurance coverage for potential claims, including securities actions, against the
Company and its respective directors and officers.
In connection with the Acquisition of KCG, a previously filed complaint, which was initially captioned
Greenway v. KCG Holdings, Inc., et al., Case No. 2017-0421-JTL and filed on behalf of a putative class in Delaware
Chancery Court, was recaptioned Chester County Employees’ Retirement Fund v. KCG Holdings, Inc., et al., amended
and refiled on February 14, 2018 to include claims for the alleged breach of fiduciary duties against former KCG board
members, claims against each of Virtu and Jefferies for allegedly aiding and abetting the KCG board members’ alleged
breaches of fiduciary duty and a claim against Virtu and Jefferies for alleged civil conspiracy. No amount of damages is
stated in the amended complaint, which Virtu intends to defend vigorously.
Other Legal and Regulatory Matters
The Company owns subsidiaries including regulated entities that are subject to extensive oversight under
federal, state and applicable international laws as well as self-regulatory organization ("SRO") rules. Changes in market
structure and the need to remain competitive require constant changes to the Company's systems, order routing and order
handling procedures. The Company makes these changes while continuously endeavoring to comply with many complex
laws and rules. Compliance, surveillance and trading issues common in the securities industry are monitored by, reported
to, and/or reviewed in the ordinary course of business by the Company's regulators in the U.S. and abroad. As a major
order flow execution destination, the Company is named from time to time in, or is asked to respond to a number of
regulatory matters brought by U.S. regulators, foreign regulators, SROs, as well as actions brought by private plaintiffs,
which arise from its business activities. There has recently been an increased focus by regulators on Anti-Money
Laundering and sanctions compliance by broker-dealers and similar entities, as well as an enhanced interest on
suspicious activity reporting and transactions involving microcap securities. In addition, there has been an increased
focus by Congress, federal and state regulators, SROs and the media on market structure issues, and in particular, high
frequency trading, best execution, internalization, ATS manner of operations, market fragmentation and complexity,
colocation, cybersecurity, access to market data feeds and remuneration arrangements, such as payment for order flow
and exchange fee structures. The Company has received information requests from various authorities, including the
SEC, requesting, among other items, information regarding these market structure matters, to which the Company has
responded or is in the process of responding.
The Company is currently the subject of various regulatory reviews and investigations by federal, state and
foreign regulators and SROs, including the SEC and the Financial Industry Regulatory Authority. In some instances,
these matters may rise to a disciplinary action and/or a civil or administrative action. For example, the Autorité des
Marchés Financiers ("AMF") fined the Company’s European subsidiary in the amount of €5.0 million (approximately
$5.4 million) based on its allegations that the subsidiary of a predecessor entity engaged in price manipulation and
115
violations of the AMF General Regulation and Euronext Market Rules. The fine was subsequently reduced in 2017 to
€3.3 million (approximately $3.9 million). The Company had fully reserved for the monetary penalty as of December 31,
2017 and anticipates paying the fine during the year ended December 31, 2018.
Indemnification Arrangements
Consistent with standard business practices in the normal course of business, the Company has provided
general indemnifications to its managers, officers, directors, employees, and agents against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred by such persons under certain circumstances as more
fully disclosed in its operating agreement. The overall maximum amount of the obligations (if any) cannot reasonably be
estimated as it will depend on the facts and circumstances that give rise to any future claims.
15. Capital Structure
The Company has four classes of authorized common stock. The Class A common stock and the Class C
common stock have one vote per share. The Class B common stock and the Class D common stock have 10 votes per
share. Shares of the Company’s common stock generally vote together as a single class on all matters submitted to a vote
of the Company’s stockholders.
Initial Public Offering and Reorganization Transactions
Prior to the IPO, the Company’s business was conducted through Virtu Financial and its subsidiaries. In a series
of transactions that occurred in connection with the IPO, (i) the Company became the sole managing member of Virtu
Financial and acquired Virtu Financial Units, (ii) certain direct or indirect equityholders of Virtu Financial acquired
shares of the Company’s Class A common stock and (iii) certain direct or indirect equityholders of Virtu Financial had
their interests reclassified into Virtu Financial Units and acquired shares of the Company’s Class C common stock or, in
the case of the TJMT Holdings LLC only, shares of the Company’s Class D common stock (collectively, the “Virtu
Members”).
On April 21, 2015, the Company completed its IPO of 19,012,112 shares of its Class A common stock, par
value $0.00001 per share, including 2,479,840 shares of Class A common stock sold in connection with the full exercise
of the option to purchase additional shares granted to the underwriters, at a price to the public of $19.00 per share. The
shares began trading on NASDAQ on April 16, 2015 under the ticker symbol “VIRT” and the offering was closed on
April 21, 2015. In connection with the Reorganization Transactions, the Company sold 16,532,272 shares of Class A
common stock. The Company used its net proceeds from its IPO to purchase shares of Class A common stock from an
affiliate of Silver Lake Partners, purchase Virtu Financial Units and corresponding shares of Class C common stock
from certain Virtu Members, and for working capital and general corporate purposes.
Amended and Restated 2015 Management Incentive Plan
The Company’s board of directors and stockholders adopted the 2015 Management Incentive Plan, which
became effective upon consummation of the IPO, and was subsequently amended and restated following receipt of
approval from the Company’s stockholders on June 30, 2017. The Amended and Restated 2015 Management Incentive
Plan provides for the grant of stock options, restricted stock units, and other awards based on an aggregate of 16,000,000
shares of Class A common stock, subject to additional sublimits, including limits on the total option grant to any one
participant in a single year and the total performance award to any one participant in a single year.
Secondary Offerings
In September 2016, the Company completed a public offering (the “September 2016 Secondary Offering,”
collectively with the November 2015 Secondary Offering, the “Secondary Offerings”) of 1,103,668 shares of the
Company’s Class A common stock. The Company sold 1,103,668 shares of Class A common stock at a price to the
public of $15.75 per share. The Company used the net proceeds from the September 2016 Secondary Offering to
purchase Virtu Financial Units (together with corresponding shares of Class C common stock) from certain employees at
a net price equal to the price paid by the underwriters for shares of its Class A common stock, which was the price at
which the shares were offered to the public less underwriting discounts and commissions of $0.10 per share.
116
Acquisition of KCG
On the Closing Date and in connection with the financing of the Acquisition, the Company issued 6,346,155
shares of the Company’s Class A common stock to Aranda for an aggregate purchase price of approximately $99.0
million and 39,725,979 shares of the Company Class A Common Stock to NIH for an aggregate purchase price of
approximately $613.5 million. On August 10, 2017, the Company issued an additional 1,666,666 shares of its Class A
Common Stock for an aggregate purchase price of $26.0 million and an additional 338,124 shares of its Class A
Common Stock for an aggregate purchase price of $5.2 million. See Note 3 for further details.
Employee Exchanges
In February, May, August and November 2017, pursuant to the exchange agreement by and among the
Company, Virtu Financial and holders of Virtu Financial common units, certain current and former employees elected to
exchange 683,762, 307,544, 155,009, and 209,448 units, respectively, in Virtu Financial held on their behalf by Virtu
Financial Employee Holdco LLC (“Employee Holdco”) on a one-for-one basis for shares of Class A common stock.
As a result of the completion of the IPO, the Reorganization Transactions, the Secondary Offerings, employee
exchange, and the share issuance in connection with the Acquisition, the Company holds approximately 48.3% interest
in Virtu Financial at December 31, 2017.
16. Share-based Compensation
Share-based compensation prior to the Company’s Reorganization completed on April 15, 2015 and IPO
commenced on April 16, 2015:
Class A-2 profits interests were issued to Employee Holdco LLC, a holding company that holds the interests on
behalf of certain key employees or stakeholders. During the years ended December 31, 2017, 2016 and 2015, the
Company recorded expense relating to non-voting common interest units, which were originally granted as Class A-2
profits interests and were reclassified into non-voting common interest units in connection with the Reorganization
Transactions. The non-voting common interest units are subject to the same vesting requirements as the prior Class A-2
profits interests, which were either fully vested upon issuance or vested over a period of up to four years, and in each
case are subject to repurchase provisions upon certain termination events. These awards were accounted for as equity
awards and were measured at fair value at the date of grant. The Company recognized compensation expense related to
the vesting of non-voting common interest units (formerly Class A-2 profits interests) of $0.7 million, $1.3 million and
$1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016,
total unrecognized share-based compensation expense related to unvested non-voting common interest units (formerly
Class A-2 profits interests), was $0.1 million and $0.8 million, respectively; and this amount is expected to be
recognized over a weighted average period of 0.1 years and 0.8 years, respectively.
On July 8, 2011, 2,625,000 Class A-2 capital interests were contributed by Class A-2 members to Virtu East
MIP LLC (“East MIP”). East MIP issued Class A interests to the members who contributed the Class A-2 capital
interests, and Class B interests (“East MIP Class B interests”) to certain key employees. Additionally, Class B interests
were issued to Employee Holdco on behalf of certain key employees and stakeholders on July 8, 2011, and on
subsequent dates. East MIP Class B interests and Class B interests were each subject to time based vesting over four
years and only fully vested upon the consummation of a qualifying capital transaction by the Company, including an
IPO. In connection with the Reorganization Transactions, East MIP was liquidated and a portion of the Class A-2
capital interests held by East MIP were contributed to Virtu Employee Holdco on behalf of holders of East MIP Class B
Interests (or, in the case of certain employees located outside the United States, contributed to a trust whose trustee is
one of the Company’s subsidiaries), which Class A-2 capital interests were subsequently reclassified into non-voting
common interest units. The Company recognized compensation expense in respect of non-voting common interest units
(formerly Class B interests) vested of $0.7 million, $1.1 million and $44.9 million for the years ended December 31,
2017, 2016 and 2015, respectively. The compensation expense related to non-voting common interest units (formerly
Class B interests) was included within charges related to share based compensation at IPO in the consolidated statements
of comprehensive income. As of December 31, 2017 and 2016, total unrecognized share-based compensation expense
related to unvested non-voting common interest units (formerly Class B interests) was $0.1 million and $0.8 million,
respectively; and this amount is expected to be recognized over a weighted average period of 0.1 years and 1.0 years,
respectively.
117
Additionally, in connection with the compensation charges related to non-voting common interest units
(formerly Class B interests) mentioned above, the Company capitalized $0.04 million, $0.09 million and $9.2 million for
the years ended December 31, 2017, 2016 and 2015, respectively. The amortization costs related to these capitalized
compensation charges and previously capitalized compensation charges related to East MIP Class B interests and Class
B interests were approximately $0.07 million, $0.7 million and $8.5 million for the years ended December 31, 2017,
2016 and 2015, respectively. The costs attributable to employees incurred in development of software for internal use
were included within charges related to share based compensation at IPO in the consolidated statements of
comprehensive income.
The fair value of the Class A-2 profit, Class B and East MIP Class B interest was estimated by the Company
using an option pricing methodology based on expected volatility, risk-free rates and expected life. Expected volatility is
calculated based on companies in the same peer group as the Company.
In connection with the Reorganization Transactions, all Class A-2 profits interests, Class B and East MIP Class
B interests were reclassified into non-voting common interest units. As of December 31, 2017 and 2016, there were
12,301,067 and 14,231,535 non-voting common interest units outstanding, respectively, and 1,930,468, 1,162,891 and
57,106 non-voting common interest units and corresponding Class C common stock were exchanged into Class A
common stock, forfeited or repurchased during the years ended December 31, 2017, 2016 and 2015, respectively.
Share-based compensation after the Company’s Reorganization completed on April 15, 2015 and IPO completed
on April 16, 2015:
Pursuant to 2015 Management Incentive Plan as described in Note 15 “Capital Structure”, and in connection
with the IPO, non-qualified stock options to purchase shares of Class A common stock were granted, each of which vests
in equal annual installments over a period of the four years from grant date and expires not later than 10 years from the
date of grant.
The following table summarizes activity related to stock options for the year ended December 31, 2017 and
2016:
Options Outstanding
Weighted Average Weighted Average
Exercise Price
Remaining
Options Exercisable
Weighted Average
Number of Exercise Price
Per Share
Contractual Life Options
Per Share
Number of
Options
At December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . .
— $
9,228,000
—
(234,000)
8,994,000 $
—
—
(760,000)
8,234,000 $
—
—
(496,000)
7,738,000 $
—
19.00
—
—
19.00
—
—
—
19.00
—
—
—
19.00
—
10.00
—
—
9.29
—
—
—
8.29
—
—
—
7.29
— $
—
—
—
— $
—
—
—
2,058,500 $
—
—
—
3,869,000 $
—
—
—
—
—
—
—
—
19.00
—
—
—
19.00
The expected life has been determined based on an average of vesting and contractual period. The risk-free
interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price
volatility was determined based on historical volatilities of comparable companies. The expected dividend yield was
determined based on estimated future dividend payments divided by the IPO stock price.
The Company recognized $5.2 million, $5.6 million and $4.7 million of compensation expense in relation to the
stock options issued and outstanding for the years ended December 31, 2017, 2016 and 2015, respectively. As of
December 31, 2017 and 2016, total unrecognized share-based compensation expense related to unvested stock options
was $7.5 million and $14.2 million, respectively, and these amounts are to be recognized over a weighted average period
of 1.3 years and 2.3 years, respectively.
118
Class A common stock and Restricted Stock Units
Pursuant to the 2015 Management Incentive Plan as described in Note 15, “Capital Structure”, subsequent to
the IPO, shares of immediately vested Class A common stock and restricted stock units were granted, the latter which
vest over a period of up to 4 years. The fair value of the Class A common stock and RSUs was determined based on a
volume weighted average price and is being recognized on a straight line basis over the vesting period. For the years
ended December 31, 2017, 2016 and 2015, there were 19,719, 656,019 and 576,693 shares of immediately vested Class
A common stock granted as part of year-end compensation, and the Company recorded compensation expense of $0.3
million, $10.6 million and $13.2 million, respectively. In addition, the Company accrued compensation expense of $11.0
million for the year ended December 31, 2017 related to immediately vested Class A common stock expected to be
awarded in early 2018 as part of year-end incentive compensation for the 2017 performance year, which is included in
employee compensation and payroll taxes on the Consolidated Statements of Comprehensive Income and accounts
payable and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.
The following table summarizes activity related to the RSUs:
At December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
—
984,466
—
—
984,466
1,019,148
(133,138)
(297,035)
1,573,441
64,402
(258,250)
(526,546)
853,047
Weighted
Average Fair
Value
$
$
$
$
—
22.32
—
—
22.32
16.06
22.51
16.48
18.28
18.09
18.40
18.75
17.94
The Company recognized $9.9 million, $6.3 million and $0.5 million of compensation expense in relation to the
restricted stock units for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017
and 2016, total unrecognized share-based compensation expense related to unvested RSUs was $14.3 million and $28.5
million, respectively, and this amount is to be recognized over a weighted average period of 1.5 years and 2.6 years,
respectively.
17. Property, Equipment and Capitalized Software
Property, equipment and capitalized software consisted of the following at December 31, 2017 and 2016:
(in thousands)
Capitalized software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . .
Total property, equipment and capitalized software, net . . . . . . . . . . . . . . . . $
2017
94,915 $
93,624
324,135
—
512,674
(375,656)
137,018 $
2016
77,591
3,636
61,540
77
142,844
(113,184)
29,660
Depreciation expense for property and equipment for the years ended December 31, 2017, 2016, and 2015 was
approximately $36.8 million, $19.6 million and $24.0 million, respectively, and is included within depreciation and
amortization expense in the accompanying consolidated statements of comprehensive income.
The Company’s capitalized software development costs excluding the compensation charges recognized in
relation to the IPO disclosed below were approximately $15.7 million, $11.1 million, and $10.1 million for years ended
December 31, 2017, 2016 and 2015, respectively. The related amortization expense was approximately $10.1 million,
119
$10.1 million, and $9.6 million for the years ended December 31, 2017, 2016, and 2015, respectively, and is included
within depreciation and amortization expense in the accompanying consolidated statements of comprehensive income.
Additionally, in connection with the compensation charges related to non-voting interest units (formerly Class
B interests) recognized upon the IPO (Note 16 “Share-based Compensation”), the Company capitalized approximately
$0.04 million, $0.09 million and $9.2 million for the years ended December 31, 2017, 2016 and 2015 respectively. The
amortization costs related to these capitalized compensation charges and previously capitalized compensation charges
related to East MIP Class B interests and Class B interests were approximately $0.07 million, $0.7 million and $8.5
million for the years ended December 31, 2017, 2016 and 2015, respectively.
18. Regulatory Requirement
As of December 31, 2017 and 2016, broker-dealer subsidiaries of the Company are subject to the SEC Uniform
Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital of $1.0 million for each of the three
broker-dealer subsidiaries. Pursuant to NYSE and NYSE MKT (formerly NYSE Amex) rules, Virtu Financial Capital
Markets LLC was also required to maintain $4.1 million and $1.9 million of capital in connection with the operation of
its DMM business as of December 31, 2017 and December 31, 2016, respectively. The required amount is determined
under the exchange rules as the greater of $1 million or 15% of the market value of 60 trading units for each symbol in
which the broker-dealer subsidiary is registered as the DMM.
The regulatory capital and regulatory capital requirements of these subsidiaries as of December 31, 2017 was as
follows:
Regulatory Regulatory Capital Excess Regulatory
(in thousands)
Virtu Americas LLC . . . . . . . . . . . . . . . . . . . . . . $ 379,875 $
Virtu Financial BD LLC . . . . . . . . . . . . . . . . . . .
Virtu Financial Capital Markets LLC . . . . . . . . .
40,683
8,308
Capital
Requirement
Capital
1,000 $
1,000
5,114
378,875
39,683
3,194
The regulatory capital and regulatory capital requirements of these subsidiaries as of December 31, 2016 was as
follows:
(in thousands)
Regulatory Regulatory Capital Excess Regulatory
Capital
Requirement
Capital
Virtu Financial BD LLC . . . . . . . . . . . . . . . . . . .
Virtu Financial Capital Markets LLC . . . . . . . . .
74,467
10,830
1,000
2,886
73,467
7,944
19. Geographic Information and Business Segments
The Company operates its business in the U.S. and internationally, primarily in Europe and Asia. Significant
transactions and balances between geographic regions occur primarily as a result of certain Company’s subsidiaries
incurring operating expenses such as employee compensation, communications and data processing and other overhead
costs, for the purpose of providing execution, clearing and other support services to affiliates. Charges for transactions
between regions are designed to approximate full costs. Intra-region income and expenses and related balances have
been eliminated in the geographic information presented below to accurately reflect the external business conducted in
each geographical region. The revenues are attributed to countries based on the locations of the subsidiaries. The
following table presents total revenues by geographic area for the years ended December 31, 2017, 2016, and 2015:
120
(in thousands)
Revenues:
791,044
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
97,637
Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,143
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113,891
Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,986
Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
281
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,027,982
2017
December 31,
2016
2015
$
$
455,418
139,642
—
106,813
—
399
702,272
$
$
537,310
166,739
—
91,816
—
348
796,213
Prior to the Acquisition, the Company was managed and operated as one business, and, accordingly, operated
under one reportable segment. As a result of the acquisition of KCG, beginning in the third quarter of 2017 the
Company has three operating segments: (i) Market Making; (ii) Execution Services; and (iii) Corporate.
The Market Making segment principally consists of market making in the cash, futures and options markets
across global equities, options, fixed income, currencies and commodities. As a market maker, the Company commits
capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions.
The Company engages in principal trading in the Market Making segment direct to clients as well as in a supplemental
capacity on exchanges, ECNs and alternative trading systems ATSs. The Company is an active participant on all major
global equity and futures exchanges and also trades on substantially all domestic electronic options exchanges. As a
complement to electronic market making, the cash trading business handles specialized orders and also transacts on the
OTC Bulletin Board marketplaces operated by the OTC Markets Group Inc. and the AIM.
The Execution Services segment comprises agency-based trading and trading venues, offering execution
services in global equities, options, futures and fixed income on behalf of institutions, banks and broker dealers as well
as technology services revenues. The Company earns commissions and commission equivalents as an agent on behalf of
clients as well as between principals to transactions; in addition, the Company will commit capital on behalf of clients as
needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points
including: (i) algorithmic trading and order routing in global equities and options; (ii) institutional sales traders executing
program, block and riskless principal trades in global equities and ETFs; (iii) a fixed income ECN that also offers trading
applications; and (iv) an ATS for U.S. equities. Technology licensing fees are earned from third parties for licensing of
the Company’s proprietary risk management and trading infrastructure technology and the provision of associated
management and hosting services.
The Corporate segment contains the Company's investments, principally in strategic trading-related
opportunities and maintains corporate overhead expenses and all other income and expenses that are not attributable to
the Company's other segments.
Management evaluates the performance of its segments on a pre-tax basis. Segment assets and liabilities are not
used for evaluating segment performance or in deciding how to allocate resources to segments. The Company’s total
revenues and income before income taxes and noncontrolling interest (“Pre-tax earnings”) by segment are summarized
in the following table:
(in thousands)
2017:
Market
Making
Execution
Services
Corporate
(1)
Consolidated
Total
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income before income taxes and noncontrolling interest . . .
836,707 $
74,633
99,135 $
(12,519)
92,140 $
51,050
1,027,982
113,164
2016:
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) before income taxes and noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
691,884 $
10,352 $
36 $
702,272
176,145
4,403
(957)
179,591
2015:
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income before income taxes and noncontrolling interest . . .
785,591 $
211,443
10,622 $
4,486
— $
—
796,213
215,929
121
(1) Amounts shown in the Corporate segment include eliminations of income statement and balance sheet items included in the Company's other
segments.
20. Related Party Transactions
The Company incurs expenses and maintains balances with its affiliates in the ordinary course of business. As
of December 31, 2017, and December 31, 2016, the Company had a receivable of $0.08 million and a payable of $0.2
million to its affiliates, respectively.
The Company conducts securities lending transactions with Industrial and Commercial Bank of China
(“ICBC”), which is partially owned by Temasek Holdings (Private) Limited and its affiliates. As of December 31, 2017,
the Company had a securities borrowed contract of $23.1 million and a securities loaned contract of $1.1 million with
ICBC. The Company did not have outstanding securities with ICBC as of December 31, 2016.
The Company purchases network connections services from affiliates of Level 3 Communications (“Level 3”).
Temasek Holdings (Private) Limited and its affiliates have a significant ownership interest in Level 3. During the years
ended December 31, 2017, 2016 and 2015 the Company paid $2.5 million, $2.4 million, and $4.3 million, respectively,
to Level 3 for these services.
The Company purchases and leases computer equipment and maintenance and support from affiliates of Dell
Inc. (“Dell”). Temasek Holdings (Private) Limited and its affiliates have a significant ownership interest in Dell. During
the years ended December 31, 2017. 2016 and 2015, the Company paid $2.5 million, $2.7 million and $3.6 million,
respectively, to Dell for these purchases and leases.
The Company purchases telecommunications services from Singapore Telecommunications Limited
(“Singtel”). Temasek and its affiliates have a significant ownership interest in Singtel. During the years ended
December 31, 2017, 2016, and 2015, the Company paid $0.1 million, $0.2 million, and $0.1 million, respectively, to
Singtel for these purchases.
The Company employed the son of the Company’s Founder and Executive Chairman, as a trader during the
year ended December 31, 2015, This employee was paid approximately $0.8 million of employee compensation during
year ended December 31, 2015, and granted 60,000 stock options with respect to shares of the Company’s Class A
common stock under the 2015 Management Incentive Plan. The Company had no such expense during the years ended
December 31, 2017 and 2016.
The Company has engaged a member of the Board of Directors to provide leadership consulting services. The
Company has paid approximately $4 thousand, $0.03 million and $0.1 million for such engagement for the years ended
December 31, 2017, 2016, and 2015, respectively.
Additionally, the Company entered into sublease arrangements with affiliates of the Company’s Founder and
Executive Chairman for office space no longer used by the Company. For the years ended December 31, 2017, 2016
and 2015, the Company received $0.06 million, $0.04 million and $0.1 million, respectively, pursuant to these
arrangements.
The Company has held a minority interest in SBI since 2016 (See Note 11, “Financial Assets and Liabilities”).
The Company pays exchange fees to SBI for the trading activities conducted on its proprietary trading system. The
Company paid $6.0 million and $2.2 million for the year ended December 31, 2017 and for the period since the
completion of the minority interest investment to December 31, 2016, respectively.
The Company makes payments to two JVs (See Note 2, “Summary of Significant Accounting Policies”) to fund
the construction of the microwave communication networks, and to purchase microwave communication networks,
which are recorded within communications and data processing on the consolidated statements of comprehensive
income. The Company made payments of $8.3 million and $0.6 million to the JVs for the years ended December 31,
2017 and 2016, respectively. The Company made no such payments for the year ended December 31, 2015.
122
21. Parent Company
VFI is the sole managing member of Virtu Financial, which guarantees the indebtedness of its direct subsidiary
under the senior secured facility and senior secured second lien notes (Note 10 “Borrowings”). VFI is limited to its
ability to receive distributions (including for purposes of paying corporate and other overhead expenses and dividends)
from Virtu Financial under its Fourth Amended and Restated Credit Agreement and senior secured second lien notes.
The following financial statements (the “Parent Company Only Financial Statements”) should be read in conjunction
with the consolidated financial statements of the Company and the foregoing.
The condensed statements of financial condition as of December 31, 2017 and 2016 reflect the condensed
financial condition of VFI. The condensed statements of comprehensive income and of cash flows for the year ended
December 31, 2015 reflect the condensed operating results and cash flows of Virtu Financial prior to April 15, 2015 and
reflect the condensed operating results and cash flows of VFI from April 16, 2015 through December 31, 2015.
Virtu Financial, Inc.
(Parent Company Only)
Condensed Statements of Financial Condition
(In thousands except interest data)
Assets
As of December 31,
December 31, December 31,
2017
2016
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
60,193 $
124,631
1,549,162
10,731
1,744,717 $
17,149
192,961
165,204
1,892
377,206
Liabilities, redeemable membership interest and equity
Liabilities
Payable to affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable and accrued expenses and other liabilities . . . . . . . . . . . . . . . . . .
Tax receivable agreement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
767,101 $
7
147,040
914,148 $
129
—
231,404
231,533
Virtu Financial Inc. Stockholders' equity
Class A-1 — Authorized and Issued — 0 and 0 interests, Outstanding — 0 and 0
interests, at December 31, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . .
Class A-2 — Authorized and Issued — 0 and 0 interests, Outstanding — 0 and 0
interests, at December 31, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . .
Class A common stock (par value $0.00001), Authorized — 1,000,000,000 and
1,000,000,000 shares, Issued — 90,415,532 and 40,436,580 shares,
Outstanding — 89,798,609 and 39,983,514 shares at December 31, 2017 and
2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B common stock (par value $0.00001), Authorized — 175,000,000 and
175,000,000 shares, Issued and Outstanding — 0 and 0 shares at
December 31, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class C common stock (par value $0.00001), Authorized — 90,000,000 and
90,000,000 shares, Issued — 17,880,239 and 19,810,707 shares, Outstanding —
17,880,239 and 19,810,707, at December 31, 2017 and 2016, respectively . . . . . . .
Class D common stock (par value $0.00001), Authorized — 175,000,000 and
175,000,000 shares, Issued and Outstanding — 79,610,490 and 79,610,490
shares at December 31, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 616,923 and 453,066 shares at December 31, 2017 and
2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Virtu Financial Inc. stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
1
—
—
1
—
—
—
—
—
1
(11,041)
900,746
(62,129)
2,991
830,569 $
(8,358)
155,536
(1,254)
(252)
145,673
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,744,717 $
377,206
123
Virtu Financial, Inc.
(Parent Company Only)
Condensed Statements of Comprehensive Income
(in thousands)
Revenues:
Service fee revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended
December 31,
2016
2017
2015
— $
86,599
86,599
— $
—
—
445
—
445
Operating Expenses:
Operations and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181
198
447
Income (loss) before equity in income of subsidiary . . . . . . . . . . . .
Equity in income of subsidiary, net of tax . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income attributable to common stockholders . . . . . . . . . . . . . .
Other comprehensive income (loss):
86,418
(83,479)
2,939 $
2,939
(198)
33,178
32,980 $
32,980
(2)
104,036
104,034
20,887
Foreign currency translation adjustment, net of taxes . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,243
6,182 $
(351)
32,629 $
(4,534)
16,353
124
Virtu Financial, Inc.
(Parent Company Only)
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities
For the Years Ended
December 31,
2016
2015
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,939 $
32,980 $
104,034
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in income of subsidiary, net of tax . . . . . . . . . . . . . . . . . . . .
Tax receivable agreement obligation reduction . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities: . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . .
(513,601)
(86,599)
102,973
(8,500)
(8,832)
(511,620)
157,975
—
13,197
—
(4,012)
200,140
(18,237)
—
3,392
—
5,900
95,089
Cash flows from investing activities
Acquisition of KCG Holdings, net of cash acquired, described in
Note 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries, equity basis . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . .
(23,908)
16,846
(7,062)
—
24,893
24,893
—
64,624
64,624
Cash flows from financing activities
Distribution to members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution from Virtu Financial to non-controlling interest . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on repurchase of non-voting common interest . . . . . . . . .
Repurchase of Class C common stock . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax receivable agreement obligations . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock, net of offering costs . . . . . . . . . . . . . . .
Repurchase of Virtu Financial Units and
corresponding number of Class A and C common stock in
connections with IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in connection with secondary offering,
net of offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of Virtu Financial Units and corresponding number of
Class C common stock in connection with secondary offering . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . $
—
(89,563)
(63,814)
(11,143)
—
(2,683)
(7,045)
735,974
—
(162,969)
(37,759)
(2,000)
(98)
(4,539)
—
—
(130,000)
(81,377)
(17,362)
(2,097)
—
(3,819)
—
327,366
—
—
—
(277,153)
16,677
7,782
—
(8,805)
(17,383)
561,726 $ (208,071) $ (185,465)
Net increase (decrease) in Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
43,044 $
17,149
60,193 $
16,962 $
187
17,149 $
(25,752)
25,939
187
Supplemental disclosure of cash flow information:
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
133 $
8,813 $
5,615
Non-cash financing activities
Tax receivable agreement described in Note 6 . . . . . . . . . . . . . . . . . .
Secondary offerings described in Note 15 . . . . . . . . . . . . . . . . . . . . . .
1,534
—
—
1,350
(21,854)
—
22. Subsequent Events
The Company has evaluated subsequent events for adjustment to or disclosure in its consolidated financial
statements through the date of this report, and has not identified any recordable or disclosable events, not otherwise
reported in these consolidated financial statements or the notes thereto, except for the following:
On January 2, 2018, the Company completed the sale of its BondPoint business to ICE for total gross proceeds
of $400 million. The Company used the after-tax net proceeds to prepay $250.0 million of principal under its Fourth
Amended and Restated Credit Agreement. Concurrently with the closing of the sale of BondPoint, on January 8, 2018,
the Company entered into a refinancing transaction to reprice its senior secured term loan at LIBOR plus 3.25%, along
125
with additional principal repayment of $26.0 million. Following the refinancing the transaction, the total principal
outstanding under the senior secured facility is $624 million.
The following table contains information about the Company’s purchases of its Class A common stock during
the period from January 1, 2018 to the date of this report (in thousands, except average price paid per share):
Total Number of
Shares Purchased
Average Price Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
—
—
—
—
Period
January 1, 2018 - January 31, 2018
Common stock repurchases . . . . . . . . .
February 1, 2018 - February 28, 2018
Common stock repurchases . . . . . . . . .
375,000
$
29.27
375,000
39,023,750
March 1, 2018 - March 13, 2018
Common stock repurchases . . . . . . . . .
—
—
—
39,023,750
Total
Common stock repurchases . . . . . . . . .
375,000
29.27
375,000
39,023,750
(1) On February 8, 2018, the Company’s board of directors authorized a new share repurchase program of up to $50.0
million in Class A common stock and common units by March 31, 2019. The Company may repurchase shares
from time to time in open market transactions, privately negotiated transactions or by other means. Repurchases
may also be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions will be determined
by the Company’s management based on its evaluation of market conditions, share price, legal requirements and
other factors. The program may be suspended, modified or discontinued at any time without prior notice. There are
no assurances that any further repurchases will actually occur.
On February 8, 2018, the Company’s board of directors declared a dividend of $0.24 per share of Class A
common stock and Class B common stock and per Restricted Stock Unit that will be paid on March 15, 2018 to holders
of record as of March 1, 2018.
126
SUPPLEMENTAL FINANCIAL INFORMATION
Consolidated Quarterly Results of Operations (Unaudited)
(in thousands, except share and per share data)
March 31,
2017
For the Three Months Ended
June 30,
2017
September 30,
2017
December 31,
2017
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 147,287 $ 144,888 $
123,405 139,696
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . .
5,192 $
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 23,882 $
4,413 $
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,074 $
271,286 $
317,781
(46,495) $
(39,990) $
Less: net income (loss) attributable to noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to Virtu Financial, Inc. . . $
Net income per share of common stock:
16,494
4,580 $
3,512
901 $
(26,472)
(13,518) $
464,521
333,936
130,585
33,401
22,425
10,976
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.10
0.10
$
$
0.01 $
0.01 $
(0.17) $
(0.17) $
0.12
0.12
(in thousands, except share and per share data)
March 31,
2016
For the Three Months Ended
June 30,
2016
September 30,
2016
December 31,
2016
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 192,638 $ 174,181 $
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
58,702 $ 44,414 $
51,356 $ 39,286 $
133,936 129,767
164,806 $
126,932
37,874 $
33,023 $
170,647
132,046
38,601
34,675
Less: net income attributable to noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Virtu Financial, Inc. . . . . . . $
Net income per share of common stock:
41,008
10,348 $
30,908
8,378 $
25,997
7,026 $
27,447
7,228
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.27
0.26
$
$
0.21 $
0.21 $
0.18 $
0.18 $
0.18
0.18
127
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer,
management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, (the “Exchange Act”)) as of
December 31, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of December 31, 2017, our disclosure controls and procedures were effective to ensure information required to
be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the
Company have been detected. These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people or by management override of controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree
of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and may not be detected.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external reporting purposes in accordance with generally accepted accounting principles. Our internal control over
financial reporting includes those written policies and procedures that:
•
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles;
provide reasonable assurance that receipts and expenditures are being made only in accordance with
management and director authorization; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
128
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31,
2017. Management based this assessment on criteria described in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment,
management determined that as of December 31, 2017, we maintained effective internal control over financial reporting.
We acquired KCG Holdings, Inc. (“KCG”) on July 20, 2017, and have not yet included KCG in our assessment
of the effectiveness of our internal control over financial reporting. SEC staff guidance permits a company to exclude an
acquired business from management’s assessment of the effectiveness of internal control over financial reporting for the
year in which the acquisition completed. As of December 31, 2017, KCG accounted for 3.5 billion of our total assets,
and $379 million of our total revenue for the year end December 31, 2017.
Attestation Report on Internal Control over Financial Reporting
As an emerging growth company under Section 103 of the JOBS Act, we are not required to provide, and this
report does not include, an attestation report of our independent registered public accounting firm regarding our internal
control over financial reporting.
Changes to Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act) occurred during the year ended December 31, 2017 that has or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
129
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information with respect to this Item will be set forth in our 2018 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2017. For the limited purpose of
providing the information necessary to comply with this Item 10, the 2018 Proxy Statement is incorporated herein by
this reference. All references to the Proxy Statement in this Part III are exclusive of the information set forth under the
caption “Audit Committee Report.”
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all officers, directors
and employees, which is available on our website (www.virtu.com) under “Corporate Governance.” We intend to satisfy
the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our
Code of Business Conduct and Ethics by posting such information on our website at the address and location specified
above.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item will be set forth in our 2018 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2017. For the limited purpose of
providing the information necessary to comply with this Item 11, the 2018 Proxy Statement is incorporated herein by
this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to this Item will be set forth in our 2018 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2017. For the limited purpose of
providing the information necessary to comply with this Item 12, the 2018 Proxy Statement is incorporated herein by
this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information with respect to this Item will be set forth in our 2018 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2017. For the limited purpose of
providing the information necessary to comply with this Item 13, the 2018 Proxy Statement is incorporated herein by
this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this Item will be set forth in our 2018 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2017. For the limited purpose of
providing the information necessary to comply with this Item 14, the 2018 Proxy Statement is incorporated herein by
this reference.
130
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial statements
PART IV
The consolidated financial statement required to be filed in the Form 10-K are listed in Part II, Item 8 hereof.
2. Financial Statement Schedule
See “Index to Consolidated Financial Statements” in this Form 10-K listed in Part II, Item 8 hereof.
3. Exhibits
Exhibit Number
2.1
2.2
2.3
2.4
2.5
3.1
3.2
4.1
4.2
10.1†
Description
Reorganization Agreement, dated April 15, 2015, by and among Virtu Financial, Inc., Virtu Financial
Merger Sub LLC, Virtu Financial Intermediate Holdings LLC, Virtu Financial Merger Sub II LLC,
Virtu Financial Intermediate Holdings II LLC, Virtu Financial LLC, VFH Parent LLC, SLP Virtu
Investors, LLC, SLP III EW Feeder I, L.P., SLP III EW Feeder II, L.P., Silver Lake Technology
Associates III, L.P., SLP III EW Feeder LLC, Havelock Fund Investments Pte Ltd., Wilbur
Investments LLC, VV Investment LLC, Virtu East MIP LLC, Virtu Employee Holdco LLC, TJMT
Holdings LLC (f/k/a Virtu Holdings LLC), Virtu Financial Holdings LLC and the Other Class A
Members named therein (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly
Report on Form 10-Q, as amended (File No. 001-37352), filed on May 29, 2015).
Merger Agreement, dated April 15, 2015, by and among Virtu Financial, Inc., Virtu Financial Merger
Sub LLC, Virtu Financial Intermediate Holdings LLC, SLP III EW Feeder Corp., SLP III EW Feeder
I, L.P. and Havelock Fund Investments Pte Ltd (incorporated herein by reference to Exhibit 2.2 to the
Company’s quarterly report on Form 10-Q, as amended (File No. 001-37352), filed on May 29, 2015).
Merger Agreement, dated April 15, 2015, by and among Virtu Financial, Inc., Virtu Financial Merger
Sub II LLC, Virtu Financial Intermediate Holdings II LLC and Wilbur Investments LLC (incorporated
herein by reference to Exhibit 2.3 to the Company’s Quarterly Report on Form 10-Q, as amended (File
No. 001-37352), filed on May 29, 2015).
Agreement and Plan of Merger, dated April 20, 2017, by and among Virtu Financial, Inc., Orchestra
Merger Sub, Inc. and KCG Holdings, Inc. (incorporated herein by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K (File No. 001-37352) filed on April 21, 2017).
Temasek Investment Agreement, dated April 20, 2017, by and between Virtu Financial, Inc. and
Aranda Investments Pte. Ltd. (incorporated herein by reference to Exhibit 2.2 to the Company’s
Quarterly Report on Form 10-Q (File No. 001-37352) filed on May 10, 2017).
Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference
to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, as amended (File No. 001-37352),
filed on May 29, 2015).
Amended and Restated By-laws of the Registrant (incorporated herein by reference to Exhibit 3.2 to
the Company’s Quarterly Report on Form 10-Q, as amended (File No. 001-37352), filed on May 29,
2015).
Indenture, dated as of June 16, 2017, by and among Orchestra Borrower LLC, Orchestra Co-Issuer ,
Inc. and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 to the
Company’s Quarterly Report on Form 10-Q (File No. 001-37352) filed on August 9, 2017).
Escrow End Date Supplemental Indenture, dated as July 20, 2017, by and among VFH Parent LLC,
Orchestra Borrower LLC, Orchestra Co-Issuer, Inc. Virtu Financial LLC, the other parties that are
signatories thereto as Guarantors and U.S. Bank National Association (incorporated herein by
reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37352) filed
on August 9, 2017).
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.2 to the
Company’s Amendment No. 2 to Form S-1 Registration Statement (File No. 333-194473) filed on
February 20, 2015).
131
Exhibit Number
10.2†
10.3†
10.4†*
10.5†
10.6†
10.7†*
10.8†*
10.9†*
10.10†*
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Description
Employment Agreement, dated as of August 7, 2013, by and between Virtu Financial, Inc. and
Mr. Joseph Molluso (incorporated herein by reference to Exhibit 10.23 to the Company’s Amendment
No. 1 to Form S-1 Registration Statement (File No. 333-194473) filed on March 26, 2014)
Employment Agreement, dated as of April 15, 2015, by and between Virtu Financial, Inc. and
Mr. Vincent Viola (incorporated herein by reference to Exhibit 10.14 to the Company’s Quarterly
Report on Form 10-Q, as amended, (File No. 001-37352) filed on May 29, 2015).
Amended and Restated Employment Agreement, dated as of November 15, 2017, by and between
Virtu Financial, Inc. and Mr. Douglas A. Cifu.
Virtu Financial, Inc. 2015 Management Incentive Plan Employee Restricted Stock Unit and Common
Stock Award Agreement, dated as of December 31, 2015, by and between Virtu Financial, Inc. and
Joseph Molluso (incorporated herein by reference to Exhibit 10.12 to the Company’s Quarterly Report
on Form 10-Q, (File No. 001-37352) filed on August 9, 2017).
Virtu Financial, Inc. 2015 Management Incentive Plan Employee Restricted Stock Unit and Common
Stock Award Agreement, dated as of December 31, 2016, by and between Virtu Financial, Inc. and
Joseph Molluso (incorporated herein by reference to Exhibit 10.13 to the Company’s Quarterly Report
on Form 10-Q (File No. 001-37352) filed on August 9, 2017).
Confidential Separation Agreement, Interest Repurchase and General Release of Claims, dated as of
September 11, 2017, by and between Virtu Financial Inc. and Mr. Venu Palaparthi.
Virtu Financial, Inc. 2015 Management Incentive Plan Employee Restricted Stock Unit and Common
Stock Award Agreement, dated as of January 23, 2018, by and between Virtu Financial, Inc. and
Joseph Molluso.
Virtu Financial, Inc. 2015 Management Incentive Plan Employee Restricted Stock Unit and Common
Stock Award Agreement, dated as of January 23, 2018, by and between Virtu Financial, Inc. and
Douglas A. Cifu.
Virtu Financial, Inc. 2015 Amended and Restated Management Incentive Plan Employee Restricted
Stock Award Agreement, dated as of February 2, 2018, by and between Virtu Financial, Inc. and
Douglas A. Cifu.
Fourth Amended and Restated Credit Agreement, dated June 30, 2017, by and between Virtu Financial
LLC, VFH Parent LLC, the lenders party thereto and JPMorgan Chase Bank, N.A. (incorporated
herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q (File No. 001-
37352) filed on August 9, 2017).
Escrow Credit Agreement, dated as of June 30, 2017, by and between Orchestra Borrower LLC, the
lenders party thereto and JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated herein
by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37352)
filed on August 9, 2017).
Stockholders Agreement, dated as of April 15, 2015, by and among Virtu Financial, Inc. and the
stockholders named therein (incorporated herein by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29, 2015).
Exchange Agreement, dated as of April 15, 2015, by and among Virtu Financial LLC, Virtu Financial,
Inc. and the holders of Common Units and shares of Class C Common Stock or Class D Common
Stock (as each defined therein) (incorporated herein by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29, 2015).
Tax Receivable Agreement, dated as of April 15, 2015, by and among Virtu Financial, Inc., the
Founder Member, Virtu Employee Holdco, the Management Members and other pre-IPO investors
(incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q, as
amended (File No. 001-37352) filed on May 29, 2015).
Tax Receivable Agreement, dated as of April 15, 2015, by and between Virtu Financial, Inc. and the
Investor Post-IPO Stockholders (incorporated herein by reference to Exhibit 10.6 to the Company’s
Quarterly Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29, 2015).
Tax Receivable Agreement, dated as of April 15, 2015, by and among Virtu Financial, Inc. and the
Silver Lake Post-IPO Members (incorporated herein by reference to Exhibit 10.7 to the Company’s
Quarterly Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29, 2015).
132
Exhibit Number
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29*
10.30*
21.1*
23.1*
31.1*
31.2*
32.1*
Description
Third Amended and Restated Limited Liability Company Agreement of Virtu Financial LLC, dated as
of April 15, 2015 (incorporated herein by reference to Exhibit 10.8 to the Company’s Quarterly
Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29, 2015).
Amended and Restated Limited Liability Company Agreement of Virtu Employee Holdco LLC, dated
as of April 15, 2015 (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly
Report on Form 10-Q, as amended (File No. 001-37352), filed on May 29, 2015)
Class C Common Stock Subscription Agreement, dated as of April 15, 2015 (incorporated herein by
reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q, as amended (File No.
001-37352) filed on May 29, 2015).
Class D Common Stock Subscription Agreement, dated as of April 15, 2015 (incorporated herein by
reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q, as amended (File No.
001-37352) filed on May 29, 2015).
Class A Common Stock Purchase Agreement, dated as of April 15, 2015, by and between SLP III EW
Feeder I, L.P. and Virtu Financial, Inc. (incorporated herein by reference to Exhibit 10.12 to the
Company’s Quarterly Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29,
2015).
Unit Purchase Agreement, dated as of April 15, 2015, by and among Virtu Financial, Inc. and the
sellers listed therein (incorporated herein by reference to Exhibit 10.13 to the Company’s Quarterly
Report on Form 10-Q, as amended (File No. 001-37352) filed on May 29, 2015).
Voting Agreement, dated April 20, 2017, by and among Virtu Financial, Inc., Orchestra Merger Sub,
Inc. and Jefferies LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, (File No. 001-37352) filed on April 21, 2017).
Stockholders Agreement, dated April 20, 2017, by and among Virtu Financial, Inc., TJMT Holdings
LLC, Aranda Investments Pte. Ltd., Havelock Fund Investments Pte Ltd. and North Island Holdings I,
LP (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q,
(File No. 001-37352) filed on May 10, 2017).
Amended and Restated Registration Rights Agreement, dated April 20, 2017, by and among Virtu
Financial, Inc., TJMT Holdings LLC, Aranda Investments Pte. Ltd., Havelock Fund Investments Pte
Ltd., North Island Holdings I, LP and the additional holders named therein (incorporated herein by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37352) filed
on May 10, 2017).
Second Amendment, dated as of June 2, 2017, to the Third Amended and Restated Limited Liability
Company Agreement of Virtu Financial LLC, by and among Virtu Financial LLC, Virtu Financial,
Inc. and TJMT Holdings LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K (File No. 001-37352) filed on June 2, 2017).
Amended and Restated Investment Agreement, dated as of June 23, 2017, by and between Virtu
Financial, Inc. and North Island Holdings I, LP (incorporated herein by reference to Exhibit 10.8 to the
Company’s Quarterly Report on Form 10-Q (File No. 001-37352) filed on August 9, 2017).
Amendment No. 1, dated as of January 2, 2018, to the Fourth Amended and Restated Credit
Agreement, dated June 30, 2017, by and between Virtu Financial LLC, VFH Parent LLC, the lenders
party thereto and JPMorgan Chase Bank, N.A.
Third Amendment, dated as of January 5, 2018, to the Third Amended and Restated Limited Liability
Company Agreement of Virtu Financial LLC, dated as of April 15, 2015.
Subsidiaries of Virtu Financial, Inc.
Consent of Deloite & Touche LLP.
Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
133
Exhibit Number
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
Description
101.INS*
101.SCH*
101.CAL*
101.LAB*
101.PRE*
101.DEF*
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
XBRL Taxonomy Extension Definition Document
* Filed herewith.
† Management contract or compensatory plan or arrangement.
134
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
DATE: March 13, 2018
DATE: March 13, 2018
Virtu Financial, Inc.
By: /s/ Douglas A. Cifu
Douglas A. Cifu
Chief Executive Officer
By: /s/ Joseph Molluso
Joseph Molluso
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Douglas A. Cifu and Joseph Molluso, and each of them, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might
or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been signed below by
the following persons on behalf of the Registrant and in the capacities indicated on March 13, 2018.
Signature
/s/ Douglas A. Cifu
Douglas A. Cifu
/s/ Joseph Molluso
Joseph Molluso
/s/ Robert Greifeld
Robert Greifeld
/s/ Vincent Viola
Vincent Viola
/s/ John Philip Abizaid
John Philip Abizaid
/s/ William F. Cruger, Jr.
William F. Cruger, Jr.
/s/ John D. Nixon
John D. Nixon
Title
Chief Executive Officer (Principal Executive Officer) and
Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman of the Board of Directors
Chairman Emeritus and Director
Director
Director
Director
135
/s/ Christopher Quick
Christopher Quick
/s/ John F. Sandner
John F. Sandner
/s/ Joseph J. Grano, Jr.
Joseph J. Grano, Jr.
/s/ Glenn Hutchins
Glenn Hutchins
/s/ Michael T. Viola
Michael T. Viola
Director
Director
Director
Director
Director
136
Transparency.
Reliability.
Virtue.
www.virtu.com