2018
Annual Report
20
18
1
About
Virtu
PG6
3
Client
Solutions
PG12
5
Executive
Summary
PG22
2
Global
Reach
PG10
4
Market
Making
PG18
6
Form
10-K
PG25
6 // 27
1 About
Virtu
Virtu Financial 2018 Annual Report 7 // 27
Transparent trading solutions
meet advanced technology
Virtu is a leading financial firm that
leverages cutting-edge technology to
deliver liquidity to the global markets
and innovative, transparent trading
solutions to our clients.
Virtu Financial 2018 Annual Report 8 // 27
25,000+
securities
235+
venues
38
countries
Virtu Financial 2018 Annual Report 9 // 27
At our core, we are
market-making experts
As a leading global market maker, Virtu provides
deep liquidity that helps to create more efficient
markets worldwide.
We leverage our market structure expertise and
scaled, multi-asset technology infrastructure
to provide a complete suite of client solutions,
including transparent agency execution and
broker-neutral offerings.
Virtu Financial 2018 Annual Report 10 // 27
60+
accessible global markets
9
trading locations
7
support and development locations
US
Austin
Boston
Chicago
Los Angeles
New York
San Francisco
San Jose
CAN
Toronto
EMEA
Dublin
London
Madrid
Paris
Virtu Financial 2018 Annual Report
11 // 27
2
Global
Reach
Global footprint, local support
Local support teams in New York, Toronto, London
and Hong Kong. Client service and consulting
teams provide first-level support. Data processing
and product management provide second-level
support and expertise.
APAC
Hong Kong
Singapore
Melbourne
Sydney
Virtu Financial 2018 Annual Report
12 // 27
3 Client
Solutions
Reducing the end-to-end cost of
implementing investments
We offer best-in-class, customizable solutions
with superior trading technologies that empower
you to improve investment returns and effectively
mitigate risk across asset classes.
Execution Services
Workflow Technology
Trading Analytics
Liquidity Sourcing
Virtu Financial 2018 Annual Report 13 // 27
#1
Electronic trading
client service1
#1
leading European execution
management system2
75%
of the largest global institutional
asset managers rely on our TCA
$74bn
block liquidity delivered each
day in 38 countries
1 All-America Trading Team Rankings, Institutional Investor, 2018
2 The Trade EMS Survey 2017
Virtu Financial 2018 Annual Report 14 // 27
75%
of the largest global institutional
asset managers rely on our TCA
to improve their multi-asset execution
to improve their multi-asset execution
performance before, during and after trades.
performance before, during and after trades.
#1
leading European execution
management system.1
Triton EMS is a global, broker-
Triton EMS is a global, broker-
neutral, multi-asset-class platform
neutral, multi-asset-class platform
that combines Virtu’s cutting-edge
that combines Virtu’s cutting-edge
liquidity, execution, analytics and
liquidity, execution, analytics and
workflow solutions into one
workflow solutions into one
unified and customizable
unified and customizable
execution interface.
execution interface.
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Triton EMS
Virtu Financial 2018 Annual Report
Our global and anonymous block
Our global and anonymous block
indications network, POSIT Alert, delivers
indications network, POSIT Alert, delivers
$74bn
block liquidity each
block liquidity each
day in 37 countries.
day in 37 countries.
15 // 27
2,000+ global buy-side firms
#1 Electronic trading
global buy-side firms
contribute liquidity.
contribute liquidity.
Electronic trading
client service
client service
Our comprehensive suite of single stock,
Our comprehensive suite of single stock,
portfolio and pairs strategies is designed
portfolio and pairs strategies is designed
for low latency and maximum flexibility.
for low latency and maximum flexibility.
APAC CAN E
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POSIT ATS
POSIT MTF
POSIT MTF
MATCHNow ATS3
MATCHNow ATS3
MatchIt ATS
MatchIt ATS
POSIT Alert
POSIT Alert
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E T F t r a d i n g
High-touch, electronic
High-touch, electronic
and PT trading
and PT trading
Virtu Financial 2018 Annual Report
16 // 27
BROKER NEUTRAL
Workflow Technology
Trading Analytics
Transaction Cost Analytics (TCA)1
75% of the largest global institutional asset
managers rely on our multi-asset TCA to
improve their execution performance before,
during and after trades. They count on our
actionable intelligence to improve performance
and reduce the costs of investment
implementation.
Global Peer database2
Our peer transaction database is the world’s
largest, covering more than 20% of all equity
institutional trading, leveraged for performance
insights and execution quality evaluation.
Portfolio Optimizer
Our optimization tool helps create/test portfolio
constructs.
Agency Cost Estimator (ACE)
Our proprietary model estimates costs,
compares essential data and evaluates market
conditions for 50+ markets using historical
volume, volatility and spread data throughout
all touchpoints of the trade life cycle. Also
available for FX, FI, global corporate bonds and
16 currency pairs.
Trade Surveillance
Our monitoring tool for best execution outlier
management.
Triton Our market-leading EMS is a global,
broker-neutral, multi-asset-class platform
that combines Virtu’s cutting-edge liquidity,
execution, analytics and workflow solutions
into one unified and customizable execution
interface. Includes Triton OMS and Triton
Compliance.
RFQ-hub Our electronic bilateral request-for-
quote platform for listed and OTC securities
centralizes best price discovery. Detailed
metrics provide insight and audit reporting for
regulatory and compliance obligations.
ITG Net Our global broker-neutral financial
communications network provides fully
supported connectivity between buy-side and
sell-side firms for multi-asset-class order routing
and client IOI messages with compliance-driven
trade surveillance reporting.
Trade Ops
Outsource your settlement operations.
Algo Wheel Automates and randomizes broker
selection––subject to your constraints and
trading goals. It helps buy-side clients achieve
performance gains through improved execution
quality and workflow efficiency by reducing or
eliminating trader bias.
Commission Manager Our agency, broker-
neutral CSA/RPA tool helps you trade with and
pay 1,200+ research brokers and 3,000+ research
providers and market data vendors. Streamline
your processes and reduce operational risk and
meet regulatory/compliance obligations with
full-audit reporting.
Single Ticket Clearing Access the liquidity
of multiple brokers and settle with one
counterparty.
1 Multi-asset TCA covers Equities, FX and Fixed Income asset classes.
2 Our Global Peer database covers Equitites and FX asset classes.
Virtu Financial 2018 Annual Report Execution Services
Liquidity Sourcing
17 // 27
POSIT Alert
Our global and anonymous block indications
network delivers block liquidity each day to
subscribers’ desktops in 37 countries. Buy-
side traders use this solution to maximize
liquidity, minimize information leakage and
reduce market impact by matching at the
midpoint without the need for negotiation.
POSIT ATS/MTF
Our equity crossing venue operates across 36
countries and extends around the world—as
an ATS in the US, an MTF and periodic auction
facility in Europe and a dark crossing network in
Asia Pacific and Latin America.
MatchIt ATS
Our anonymous crossing venue brings together
a variety of sources of liquidity in US stocks and
ETFs, including liquidity providers, institutional
brokers, third-party brokers and Virtu’s client
market-making and proprietary businesses.
MATCHNow3
Canada’s premier broker-neutral dark book
offering better execution for institutional,
proprietary and retail order flow, with frequent
call matches and continuous execution
opportunities in a fully confidential trading
book.
High-touch, electronic, liquidity
and portfolio trading teams
Adding value at every stage of the investment
process, we use integrated liquidity, workflow,
execution and analytics solutions to determine
optimal order routing or share insights that help
you make informed execution decisions—no
matter how or what you want to trade.
Global algos
Our comprehensive suite of single stock,
portfolio and pairs strategies is designed for
deterministic and transparent execution in a low
latency environment.
Dark
Our dark pool aggregation tool provides access
to dark liquidity.
Prism
Observe our algos and smart routers at work,
in real time. Track the progress of your fills, see
the order plan and any deviations, and review
the estimated order finish time—all in one
application.
Smart order router
Our routing model employs intelligent routing
and posting logic to target multiple lit and dark
destinations.
Best Market Server
Our intelligent router evaluates inter-listed
security orders against both the US and
Canadian markets based on the current FX rate
and seeks out the best price.
Index analysis
Identify notable price and volume movement
for 45+ indices daily and quarterly in small-
and large-cap securities across emerging and
developed markets.
3 TriAct Canada Marketplace LP operates MATCHNow and does not
participate on an agency or proprietary basis in any trade.
Virtu Financial 2018 Annual Report 18 // 27
4 Market
Making
At our core we are
market-making experts
Uniquely qualified
Our global footprint combined with our deep
market-making expertise uniquely positions us
to provide institutional and retail clients with the
best pricing, liquidity and service in the industry.
Accountable partner
We combine specialized market structure
expertise with real-time data to provide clients
with unique product and trading solutions. We
also assist institutions in the ETF selection process,
including advice on suitable execution paths and
liquidity studies.
Virtu Financial 2018 Annual Report g
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Deep liquidity
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client service
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Hundreds of broker-dealers in
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the marketplace rely on Virtu’s
market-making capabilities.
market-making capabilities.
We handle
We handle
25%
of market orders
of market orders
placed by retail
placed by retail
investors in the US
investors in the US
We make markets in
25,000+
securities.
securities.
vEQ Link, our single dealer platform/systematic internaliser,
vEQ Link, our single dealer platform/systematic internaliser,
has high internalization rates that help you access liquidity in
has high internalization rates that help you access liquidity in
a thin market, anonymously and with no information leakage.
a thin market, anonymously and with no information leakage.
20 // 27
Client Market Making
Customized Liquidity
Uniquely qualified
Our global footprint combined with our deep
market-making expertise uniquely positions us
to provide institutional and retail clients with the
best pricing, liquidity and service in the industry.
Deep liquidity
Hundreds of broker-dealers in the marketplace
rely on Virtu’s market-making capabilities. We
handle 25% of market orders placed by retail
investors in the US. In small- and mid-cap
securities where liquidity is harder to find, our
leading market share helps you find the other
side of the trade.
Renowned client service
Our market makers, relationship managers and
operations specialists serve as a single point of
contact for meeting your demands and helping
determine the right strategy or service for your
needs.
Quality order execution
We provide superior order execution to clients
globally, across multiple asset classes.
Expertise in block trading
We maintain a specialized market-making desk
staffed with traders who are experts in handling
harder-to-trade orders such as oversized
blocks, specialized client order types and stocks
impacted by breaking news or events.
Indications of interest (IOIs)
Our offering includes three types of IOIs: natural,
house-natural and general interest.
ETF
We combine specialized market structure
expertise with real-time data to provide you with
unique product and trading solutions. We also
assist institutions in the ETF selection process,
including advice on suitable execution paths
and liquidity studies.
Equities Liquidity
vEQ Link is our US Single Dealer Platform (SDP)
and vFSI is our Systematic Internaliser (SI) in
Europe. In equities, we provide significant
liquidity across a range of global listed and
OTC stocks, ETPs and ADRs, including many
difficult-to-trade names. Our tailored liquidity
helps reduce market impact and maximize your
fulfillment rates and creates opportunities for
price improvement.
Virtu Fixed Income (vFI)
We provide strong fixed income liquidity in US
Treasury on-the-run and curve spreads. We
serve as a counterparty to help you transfer
risk and execute with confidence through US,
London and Asia trading hours.
FX and Metals Liquidity (vFX, vMX)
Our FX and metals liquidity is tailored to meet
specific size and spread demands as well as
customized pricing, tick updates, skewing and
fill ratios. As principal, we generate unique and
competitive prices in precious and base metals,
NDFs and spot currencies in G20 and EM pairs
and crosses.
Virtu Financial 2018 Annual Report 21 // 27
Virtu provided over $400 million in price
improvement to Retail investors in 2018
Price Improvement Provided to Retail Investors
In $ millions
$426m
$305m
$262m
$198m
$125m
400
300
200
100
0
2014
2015
2016
2017
2018
Market Share of Retail
% of Retail Orders Improved
29%
30%
28%
30%
78%
76%
26%
24%
74%
67%
57%
20%
10%
0%
75%
65%
55%
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
All figures calculated based on data publicly disclosed pursuant to SEC Rule 605.
Virtu Financial 2018 Annual Report 22 // 27
We begin 2019 focused on delivering
value to the markets and the clients we
serve, guided by our core principles of
transparency and efficiency.
Douglas A. Cifu
Chief Executive Officer
Virtu Financial 2018 Annual Report 23 // 27
5 Executive
Summary
Dear Fellow Shareholder,
2018 was an historic year for Virtu Financial, Inc.
We achieved record revenue and profitability,
substantially completed our integration with
KCG Holdings, Inc., a premier U.S. based market
making firm and client f ranchise, and announced
our acquisition of Investment Technology Group,
Inc., a leading provider of agency execution
services and broker-neutral offerings.
Virtu traces its roots to the trading pits of the New
York Mercantile Exchange in the 1980’s, where my
partner and co-founder, Vincent Viola, began his
career as “local” or a market maker. Today, nearly
35 years later, Virtu uses technology, automation
and risk management tools to provide that same,
fundamental service to the global markets by
providing two-sided prices to investors in over
25,000 financial instruments on more than 235
venues in 36 countries.
Virtu Financial 2018 Annual Report
24 // 27
As our business has evolved organically
and through acquisitions we now offer a
robust suite of end-to-end trading tools
and solutions to meet the needs of our
global client base. We firmly believe that
our market making roots and continuous
investment in financial technology will
enable us to enhance our client offerings
and bring more value and transparency to
the marketplace over time.
As a highly regulated participant and
meaningful service provider in the global
capital markets, Virtu continues to
support measures designed to promote
transparent markets where buyers and
sellers can meet to transact in a fair and
open manner. We also believe market
participants should employ rigorous and
responsible risk monitoring and controls
to foster faith in the global markets.
We believe in sound and principles-
based regulation and overall we view
the regulatory trends globally to be
sustainable and significant tailwinds for
transparency and efficiency which favors
our global business.
2018 was a tremendous year for Virtu. Our
performance reflected an environment of
elevated volumes and volatility across the
marketplace as well as our achievement
of cost and revenue synergies in relation
to the KCG acquisition. Of course, our
success in achieving our goals is made
possible by the hard work and dedication
of our extraordinary team of talented
professionals around the globe.
We begin 2019 focused on delivering
value to the markets and the clients we
serve, guided by our core principles of
transparency and efficiency. We are
particularly excited about enhancing our
end-to-end client solutions, which include
multi-asset execution services, workflow
technology, liquidity sourcing and pre
and post-trade analytics. Together with
Virtu’s legacy market making business,
we believe this suite of services provides
tremendous value to our clients and
we are focused on continuing to grow
and enhance these offerings. We have
a positive and enthusiastic view of the
future and believe firmly that Virtu’s best
days lie ahead.
Sincerely,
Douglas A. Cifu
Chief Executive Officer
Virtu Financial 2018 Annual Report 25 // 27
6 Form
10-K
Virtu Financial 2018 Annual Report UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:4339) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
(cid:4337) 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
(Address of principal executive offices)
10282
(Zip Code)
(212) 418-0100
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock, par value $0.00001 per
share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:2) No (cid:4337)
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:4337) No (cid:2)
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:2) No (cid:4337)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes (cid:2) No (cid:4337)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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:4337)
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:4339)
Accelerated filer (cid:4337)
Non-accelerated filer (cid:4337)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:4337)
Emerging growth company (cid:4337)
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. Yes(cid:4337) No (cid:4337)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4337) No (cid:4339)
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2018 was
approximately $1,770.2 million, based on the closing price of $26.55 per share as reported by NASDAQ on such date.
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
Class of Stock
Shares Outstanding as of
March 1, 2019
107,329,814
13,509,886
69,091,740
Portions of Part III of this Form 10-K are incorporated by reference from the Registrant’s definitive proxy statement (the “2019 Proxy
Statement”) for its 2019 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.
2
VIRTU FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
BUSINESS..........................................................................................................................................
RISK FACTORS .................................................................................................................................
UNRESOLVED STAFF COMMENTS ..............................................................................................
PROPERTIES .....................................................................................................................................
LEGAL PROCEEDINGS ...................................................................................................................
MINE SAFETY DISCLOSURES .......................................................................................................
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .............................................
SELECTED FINANCIAL DATA .......................................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................................................................
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .....................
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................................................
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ..............................................................................................................
CONTROLS AND PROCEDURES ...................................................................................................
OTHER INFORMATION ...................................................................................................................
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE ............................
EXECUTIVE COMPENSATION ......................................................................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ................................................................................
ITEM 13.
ITEM 14.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ..............................................................................................................................
PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................................
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ...........................................................
SIGNATURES ....................................................................................................................................
PAGE
NUMBER
5
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35
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75
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140
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.
3
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
PART I
This Annual Report on 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 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 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 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;
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 upon trading counterparties and clearing houses performing their obligations to us;
•
•
•
• dependence on continued access to sources of liquidity;
•
• obligation to comply with applicable regulatory capital requirements;
•
• proposed legislation that would impose taxes on certain financial transactions in the European Union, the U.S. and
risks associated with self-clearing and other operational elements of our business;
litigation or other legal and regulatory-based liabilities;
other jurisdictions;
• obligation to comply with laws and regulations applicable to our operations in the U.S. and abroad;
•
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;
•
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;
the risk that we may encounter significant difficulties or delays in integrating KCG 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;
the effect of the ITG Acquisition (as defined below) on existing business relationships, operating results, and
ongoing business operations generally;
the significant costs and significant indebtedness that we have incurred in connection with the ITG Transaction;
the risk that we may encounter significant difficulties or delays in integrating ITG's business with ours and that
the anticipated benefits, cost savings and synergies or capital release may not be achieved;
•
the assumption of potential liabilities and risks relating to ITG’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;
failure to protect confidential and proprietary information;
failure to protect our systems from internal or external cyber threats that could result in damage to our computer
systems, business interruption, loss of data or other consequences;
risks associated with international operations and expansion, including failed acquisitions or dispositions;
•
•
•
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•
•
•
•
•
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 Annual Report on Form 10-K.
ITEM 1. BUSINESS
Overview
BUSINESS
We are a leading financial firm that leverages cutting edge technology to deliver liquidity to the global markets and
innovative, transparent trading solutions to our clients. 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, on over
235 venues, in 36 countries worldwide. We use the best technology to deliver liquidity to global markets and innovative
trading solutions and analytics tools to our clients. We interact directly with hundreds of retail brokers, Registered Investment
Advisors, private client networks, sell-side brokers, and buy-side institutions. Our products are transparent, because we believe
transparency makes markets more efficient and helps investors make better, more informed decisions.
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 improved execution certainty that Virtu provides.
As described in “Acquisition of KCG” below, on July 20, 2017 (the “Closing Date”), we completed our all-cash
acquisition (the “Acquisition of KCG”) 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 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, we have two operating segments: Market Making and Execution Services, and
one non-operating segment: 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 are registered 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.
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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 Link ATS operated by OTC Markets
Group Inc. and the Alternative Investment Market of the London Stock Exchange (“AIM”).
We make markets in a number of different asset 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.
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.
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
defined below) 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.
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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, market coverage, payment for order flow, and client service. In
direct-to-client electronic market making in U.S. equities, execution quality is generally measured based on factors that include
speed of execution, fulfillment rates, opportunity and amounts of price improvement, using metrics defined in SEC Rule 605.
In other asset classes, metrics for execution quality are are not prescribed by applicable regulation, and in many cases, are 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
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, 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, as well as other ATSs and 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, 2018, we are
the Lead Market Maker or Designated Liquidity Provider in over 600 ETPs listed in the Americas.
Rest of World (“ROW”) Equities
Similar to our strategy in the Americas, in ROW trading 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, 2018, we are the registered Market Maker in over 500 ETPs listed abroad.
We increased our presence in APAC equities in 2016 by acquiring a minority stake in SBI Japannext Co., Ltd. (“SBI”),
a leading Proprietary Trading System in Japan.
Global FICC, Options, and Other
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.
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, 2018, 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 takes place on the CME, ICE, and Nasdaq Futures in crude oil, natural gas, heating
oil, and 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.
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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 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 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). Additionally we 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 2018 our Execution Services segment did not have any client that accounted for more
than 10% of our commissions earned.
Clients may access a broad range of products and services that includes electronic execution services in global equities
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 anonymous sources of non-displayed liquidity. We also offer clients voice access
to global markets including sales and trading for equities, ETFs and options. We handle large complex trades, accessing
liquidity from our order flow and other sources. We provide soft dollar and commission recapture programs.
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 execution quality 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.
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.
Risk Management
We are 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 confirming 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 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.
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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. Our preset risk controls are designed to limit both downside and upside
risk. Following a lockdown, the applicable trading strategy must be manually reset. 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 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:
◦ Risk Profiles
◦ Statistical Risk Measures including Value at Risk, and Equity Betas
◦ Stress and Scenario analysis
◦ Concentration measures
◦ Profit and Loss analysis
◦ 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:
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◦ Our technical operations system continuously monitors our network and the proper functioning of each of our
trading centers around the world;
◦ 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;
◦ 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;
◦ Software developed to support our market making systems performs daily profit and loss and position
reconciliations; and
◦ 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 on technology and automation to perform many functions within Virtu. Cyber threats are a risk that we are
exposed to as a result of our heavy reliance on technology. These threats could include the introduction of malicious code or
unauthorized access, and could result in data loss or destruction, business interruption, and the unavailability of service and
other risks. We have taken steps to mitigate the various cyber threats, and we devote 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 seek 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 or may not
provide any coverage.
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.
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Employees
As of February 7, 2019, we had approximately 483 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 and provide
execution services from Dublin and through our Irish subsidiary, Virtu Financial Ireland Limited, which is authorized as an
“Investment Firm” with the Central Bank of Ireland. Virtu Financial Ireland Limited maintains a branch office in London.
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 broker-dealer 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. From time to time, we are the subject of
requests for information and documents from the SEC, FINRA and other regulators. In is our practice to cooperate and comply
with the requests for information and documents. These requests could lead to administrative or court proceedings. Whether or
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not they result in adverse findings, they can require substantial expenditures of time and money and can have an adverse impact
on a firm’s reputation, customer relationship and profitability.
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, future legislative or regulatory 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. Regulators may propose 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 and rebate structures.
The SEC and other Regulatory Bodies have enacted and are actively considering rules that may affect our operations
and profitability. Among these are changes the SEC has made to Reg NMS Rule 606, changes the SEC is considering to Rule
605 which are intended to provide additional information on order routing and execution quality. Regulation ATS-N recently
became effective and requires operators of alternative trading systems to provide additional information regarding the ATS and
other business of the operator that may pose conflicts. Broker-dealers will be subject to the reporting requirements under the
Reg NMS Plan providing for a Consolidated Audit Trail of equities and options data effective November 15, 2019. The SEC
has adopted NMS Rule 610T to conduct a transaction fee pilot (the “Pilot”) designed to generate data that will help the SEC
analyze the effects of exchange transaction fee and rebate pricing models on order routing behavior, execution quality, and
market quality generally. Data from the Pilot will be used to facilitate an empirical evaluation of whether the exchange
transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any
potential regulatory action in this area. The Pilot is expected to start in late 2019. These changes and others impose additional
technological, operational and compliance costs on us and creates uncertainty with regard to their effects.
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 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.
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 Internaliser 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
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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, par value $0.00001 per share (the "Class A
Common Stock") began trading on NASDAQ under the ticker symbol “VIRT.”
Prior to our IPO, we completed a series of reorganization transactions (the “Reorganization Transactions”) pursuant to
which, among other things, we acquired equity interests in Virtu Financial as a result of certain mergers involving wholly
owned subsidiaries of ours, an affiliate of Silver Lake Partners and Temasek Holdings (Private) Limited ("Temasek"), and an
affiliate of Temasek (the “Temasek Pre-IPO Member”) (the “Mergers”), and in exchange we issued to an affiliate of Silver
Lake Partners (such affiliate, the “Silver Lake Post-IPO Stockholder”) and an affiliate of Temasek (such affiliate, the “Temasek
Post-IPO Stockholder”, and together with the Silver Lake Post-IPO Stockholder, the “Investor Post-IPO Stockholders”), shares
of our Class A Common Stock and rights to receive payments under a tax receivable agreement described below, 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 Common Stock, Class B Common Stock (as defined below), Class C
Common Stock (as defined below) and Class D Common Stock (as defined below), and the holders of Virtu Financial Units
other than us subscribed for shares of Class C common stock, par value $0.00001 per share (the "Class C Common Stock) or
Class D common stock, par value $0.00001 per share (the "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.
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, par value $0.00001 per share (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. In connection with the Acquisition of
KCG, the Company issued 8,012,821 shares of the Company’s Class A stock to Aranda Investments Pte. Ltd. ("Aranda”), 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 North Island Holdings I, LP (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 (the "Securities Act"), pursuant to Section 4(a)(2) of the
Securities Act, (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 Units for shares
of the Company’s Class A Common Stock, the Company holds an approximately 56.7% interest in Virtu Financial at
December 31, 2018. The remaining issued and outstanding Virtu Financial Units are held by an affiliate of Mr. Vincent 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 84.1% of the combined voting power of our outstanding
common stock as of December 31, 2018. 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,
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as amended (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.
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.
From time to time, we use our website, public conference calls, and social media channels, including our Twitter
account (twitter.com/virtufinancial) and our LinkedIn account (linkedin.com/company/virtu-financial), as additional means of
disclosing public information to investors, the media and others interested in us. It is possible that certain information we post
on our website and on social media could be deemed to be material information, and we encourage investors, the media and
others interested in us to review the business and financial information we post on our website and on the social media channels
identified above. The information on our website and our social media channels is not incorporated by reference into this
Annual Report on Form 10-K.
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 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.
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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, risk management processes, 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 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
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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 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.
A majority of our market making revenue for 2018 was 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.
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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.
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, 2018, we had an aggregate of $931.9 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 $10.0 million of borrowings outstanding as of December 31, 2018. 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,
2018. 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 $566.0 million under which we had $184.6 million in borrowings
outstanding at December 31, 2018.
The fourth amended and restated credit agreement entered into on June 30, 2017 by and between Virtu Financial and
VFH Parent LLC (“VFH”) (as amended on January 2, 2018 and September 19, 2018, the "Fourth Amended and Restated Credit
Agreement") and the indenture pursuant to which we have issued the Notes (as defined below) 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;
•
•
•
•
•
• designate our subsidiaries as unrestricted subsidiaries.
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
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
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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.
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.
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
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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. In December 2018, the SEC approved a Transaction Fee Pilot for NMS Securities which will create three groups of
securities that will be subject to restrictions on access fees and rebates. 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 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 Exchanges 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
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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). Recently, the incremental charge was annulled and we expect to pay the €3.0 million fine in
2019. 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 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.
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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, 2018 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, in late 2018 and early
2019 U.S. legislators, including U.S. Senators Kirsten Gillibrand and Brian Schatz, have announced proposals or plans that
include 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 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.
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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, including human error, 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. Furthermore, we may have
little or no oversight with respect to security measures employed by third-party service providers, which may ultimately prove
to be ineffective at countering threats. 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 or may not
cover any losses. Breaches of our cybersecurity measures or those of our third-party service providers 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.
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
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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 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
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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.
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, UK voters approved a referendum to withdraw the UK's membership from the EU, which is commonly
referred to as "Brexit". In March 2017, the UK government initiated the exit process under Article 50 of the Treaty of the
European Union, commencing a period of up to two years for the UK and the other EU member states to negotiate the terms of
the withdrawal, such period ending on March 29, 2019 unless extended. There has been limited progress so far in the
negotiations and continued uncertainty in the UK government and Parliament, which increases the possibility of the UK exiting
the EU on March 29, 2019 without a formal withdrawal agreement in place and of significant market and economic disruption.
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., including with respect to volatility in exchange rates and interest rates and potential material changes
to the regulatory regime applicable to our activities in the U.K. or the potential impact of interacting with U.K. based market
participants. Brexit could adversely affect European or worldwide political, fiscal, regulatory, economic or market conditions
and could contribute to instability in global political institutions, regulatory agencies and financial markets. For example,
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depending on the terms of Brexit, the UK could also lose access to the single EU market and to the global trade deals
negotiated by the EU on behalf of its members. Disruptions and uncertainty caused by Brexit may also cause our clients to
closely monitor their costs and reduce their spending budget on our services. Any of these effects of Brexit, and others we
cannot anticipate or that may evolve over time, could adversely affect our business, results of operations and financial
condition.
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 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, Douglas Cifu, our Chief
Executive Officer and Joseph 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
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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 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.
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 56.7% 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 56.7% of the Virtu Financial
Units as of December 31, 2018. 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 the Notes (as defined below). 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:
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•
the SEC Uniform 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 “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 84.1% 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
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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.
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 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.
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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.
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, no longer holds any equity interest
in us) and 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 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
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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 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
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shareholders. In addition, we could be required to make 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, 2018, we had 106,776,277 shares of Class A Common Stock outstanding, excluding 9,807,852
shares of Class A Common Stock issuable pursuant to the 2015 Management Incentive Plan (as defined below) and 82,841,626
shares of Class A Common Stock issuable upon potential exchanges and/or conversions. Of these shares, the 49,831,671 shares
sold in the IPO and the Secondary Offerings are freely tradable without further restriction under the Securities Act. The
remaining 141,165,154 shares of Class A Common Stock outstanding as of December 31, 2018 (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 141,165,154 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 Amended and Restated 2015 Management Incentive Plan (as defined below), 9,807,852
of which are issuable, and we entered into the Registration Rights Agreement (as defined below) 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. Effective December 31, 2018, we are no longer an "emerging
growth company", and therefore under applicable SEC rules we must maintain 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 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. 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 increase the risk of liability arising from
litigation based on securities law.
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
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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
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
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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.
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.
Risks Related to the ITG Transactions
Significant costs and significant indebtedness will be incurred in connection with the consummation of the ITG
Transactions, including the ITG Acquisition, and the integration of ITG 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 ITG into
our business, in addition to costs related directly to completing the ITG Transactions. 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 ITG Acquisition.
33
The costs related to the ITG Transactions could be higher than currently estimated, depending on how difficult it will
be to integrate our business with that of ITG, 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 ITG with
ours, which cannot be estimated accurately at this time. While we expect to incur a significant amount of transaction fees and
other costs related to the consummation of the ITG Transactions, 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 ITG, that may offset incremental transaction and transaction-related
costs over time, may not be achieved as projected, or at all.
In addition, we expect to incur up to $1.5 billion of indebtedness in connection with the ITG Transactions, the
proceeds of which will be used to refinance existing indebtedness in the amount of approximately $400 million, and the
remainder of which will fund the ITG Acquisition and related fees and expenses. The incremental debt we incur in connection
with the ITG Transactions 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 ITG’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 ITG Transactions involve the integration of two companies that have previously operated independently. The
success of the ITG Transactions 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 ITG’s business into ours, and there
can be no assurance regarding when or the extent to which we will be able 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 ITG’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;
• difficulties in 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 structure;
• 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 ITG Acquisition.
The benefits that we expect to achieve as a result of the ITG Acquisition 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 ITG. Even if we are able to integrate the
businesses and operations of the Company and ITG 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
34
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 ITG’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 ITG Acquisition may be offset by costs or delays incurred in integrating the businesses. The projected net cost
reductions and synergies described in our press release and supplemental materials announcing the ITG Transactions are based
on a number of assumptions relating to our business and ITG’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.
In connection with the ITG Acquisition, the Company will be subject to business uncertainties that could materially and
adversely affect our business.
Uncertainty about the effect of the ITG Acquisition on employees, customers and suppliers may have both a material
and adverse effect on both the Company and ITG. These uncertainties may impair both companies’ ability to attract, retain and
motivate key personnel for a period of time after the ITG Acquisition is completed, and could cause customers, suppliers and
others who deal with the Company and ITG to seek to 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 after the ITG Transactions are
completed, or if customers, suppliers or others seek to change their dealings with us as a result of the ITG Acquisition, our
business could be materially and adversely impacted.
In connection with the ITG Acquisition, we assumed potential liabilities relating to ITG’s business.
In connection with the ITG Acquisition, we assumed potential liabilities and other risks relating to ITG’s business,
including but not limited to those liabilities and risks arising from or related to pending, threatened or potential litigation or
regulatory matters. To the extent we have not identified such liabilities or miscalculated their potential financial or business
impact, these liabilities could have a material adverse effect on our business, prospects, results of operations, financial
condition and/or cash flows.
As a clearing member firm in certain jurisdictions we are subject to significant default risk.
In connection with our operation of ITG’s business, we will be required to finance our clients’ unsettled positions from
time to time and we could be held responsible for the defaults of our clients. Default by our clients may also give rise to our
incurring penalties imposed by execution venues, regulatory authorities and clearing and settlement organizations. Although we
regularly review our credit exposure, default risk may arise from events or circumstances that may be difficult to detect or
foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or
defaults by other institutions that could in turn adversely affect us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is set forth in the “Litigation” section in Note 15 "Commitments, Contingencies
and Guarantees" to the Company’s Consolidated Financial Statements included in Part II, Item 8 herein.
ITEM 4. MINE SAFETY DISCLOSURES
None.
35
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Class A Common Stock trade on NASDAQ under the ticker symbol "VIRT". There is no established public
trading market for Class C Common Stock or Class D Common Stock.
Holders
Based on information made available to us by the transfer agent, as of March 1, 2019, 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, zero
stockholders of record of our Class B Common Stock, eight stockholders of record of our Class C Common Stock and one
stockholder of record of our Class D Common Stock. 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 board of directors declared and we paid quarterly cash dividends of $0.24 during the years ended December 31,
2018 and 2017. The Company intends to continue paying regular quarterly dividends to holders of our Class A Common Stock
and Class B Common Stock and to holders of RSUs (as defined below), 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”.
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 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.
36
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, 2018, 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.
Index
Virtu Financial Inc.
S&P 500
NYSE Arca Securities
Broker/Dealer
4/16/2015
100.00
100.00
6/30/2015
123.53
12/31/2015 6/30/2016
99.79
121.75
99.32
98.52
102.3
Period Ending
12/31/2016 6/30/2017
103.00
120.6
91.53
110.3
12/31/2017 6/30/2018
154.89
108.95
12/31/2018
153.26
134.38
137.94
128.49
100.00
104.33
93.33
78.82
107.58
118.13
139.00
142.77
124.38
Stock and Common Units Repurchases
Pursuant to the exchange agreement (the "Exchange Agreement") entered into on April 15, 2015 by and among the
Company, Virtu Financial and holders of 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.
On February 8, 2018, the Company’s board of directors authorized a share repurchase program of up to $50.0 million in
Class A Common Stock and Virtu Financial Units, which was expanded to $100.0 million on July 27, 2018. The program lasts
through September 30, 2019. The Company may repurchase shares from time to time in open market transactions, privately
37
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. Since the inception of the program, the
Company has repurchased approximately 2.6 million shares of Class A Common Stock and Virtu Financial Units for
approximately $65.9 million. The Company now has approximately $34.1 million remaining capacity for future purchases of
shares of Class A Common Stock and Virtu Financial Units under the program. The following table contains information about
the Company’s purchases of its Class A Common Stock and Class C Common Stock during the year ended December 31, 2018:
Period
February 1, 2018 - February 28, 2018
Class A Common Stock repurchases
May 1, 2018 - May 31, 2018
Class A Common Stock repurchases
Class C Common Stock/ Virtu Financial Unit repurchases
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
375,000 $
29.27
375,000
307,391
696,373
29.34
29.44
307,391
696,373
August 1, 2018 - August 31, 2018
Class A Common Stock repurchases
480,360
21.33
480,360
September 1, 2018 - September 30, 2018
Class A Common Stock repurchases
Class C Common Stock/ Virtu Financial Unit repurchases
184,090
330,136
21.70
21.59
184,090
330,136
October 1, 2018 - October 31, 2018
Class A Common Stock repurchases
182,780
21.85
182,780
Total Common Stock / Virtu Financial Unit repurchases
2,556,130 $
25.76
2,556,130 $
34,138,832
During the year ended December 31, 2018, pursuant to the Exchange Agreement, certain current and former
employees elected to exchange 4,089,598 units in Virtu Financial held directly or on their behalf by Virtu Employee Holdco
LLC (“Employee Holdco”) on a one-for-one basis for shares of 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.
38
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, 2018:
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Plan Category
Amended and Restated 2015
Management Incentive Plan
None
ITEM 6. SELECTED FINANCIAL DATA
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
(excluding securities
reflected in first
column)
4,835,072
—
4,835,072 $
19.36
—
19.36
4,885,354
—
4,885,354
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data for the periods beginning on and after
January 1, 2014. 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 of KCG 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, 2018, 2017 and 2016 and
the consolidated statements of financial condition data as of December 31, 2018 and 2017 have been derived from our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
39
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 Annual Report on Form 10-K.
(In thousands, except share and per share data)
2018
2017
2016
2015
2014
Year Ended December 31,
Consolidated Statements of Comprehensive
Income Data:
Revenues:
Trading income, net
Interest and dividends income
Commissions, net and technology services(1)
Other, net(2)
Total revenues
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
Termination of office leases
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
$ 1,266,682 $
87,508
184,339
340,189
1,878,718
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
685,150
27,923
9,980
—
723,053
301,779
176,120
215,556
74,645
141,814
64,749
61,154
26,123
23,357
—
11,727
—
11,487
2,020
256,926
131,506
177,489
27,727
91,993
61,466
47,327
15,447
3,671
—
10,460
—
25,270
657
221,214
71,001
85,295
—
56,557
23,358
29,703
211
(319 )
—
5,579
—
—
—
232,469
68,647
88,026
—
52,423
23,262
33,629
211
2,729
—
—
—
—
5,440
230,965
68,847
84,531
—
47,083
21,923
30,441
211
2,639
—
8,961
3,000
—
24
772
1,755
44,194
—
71,800
1,182,355
696,363
64,107
914,818
113,164
28,327
522,681
179,591
29,254
580,284
215,929
30,894
529,495
193,558
Provision for income taxes(9)
76,171
94,266
21,251
18,439
3,501
Net income
Noncontrolling interest
Net income available for common stockholders
$
620,192
(330,751 )
289,441 $
18,898
(15,959 )
2,939 $
158,340
(125,360 )
32,980 $
197,490 $
(176,603 )
20,887
190,057
40
Earnings per share
2018
2017
2016
2015
2014
Basic
Diluted
2.82
2.78
0.03
0.03
0.83
0.83
0.60
0.59
Year Ended December 31,
Weighted average common shares
outstanding
Basic
Diluted
100,875,793
102,089,139
62,579,147
62,579,147
38,539,091
38,539,091
34,964,312
35,339,585
Cash dividends declared per share
0.96
0.96
0.96
0.72
Consolidated Statements of Financial
Condition Data (in thousands):
Cash and cash equivalents
$
Total assets
Senior secured credit facility
Total liabilities
Class A-1 redeemable interest(10)
Total Virtu Financial Inc. stockholders'
equity
Noncontrolling interest
Total equity
As of December 31,
2018
2017
2016
2015
2014
736,047 $
7,380,978
907,037
5,886,279
—
532,887 $
7,320,006
1,388,548
6,168,428
—
1,051,896
442,803
1,494,699 $
830,569
321,009
1,151,578 $
$
181,415 $
3,692,390
564,957
3,157,978
—
145,673
388,739
534,412 $
163,235 $
3,391,930
493,589
2,834,060
—
130,708
427,162
557,870 $
75,864
3,319,458
495,724
2,812,760
294,433
212,265
—
506,698
(1) In connection with the Acquisition of KCG, we recognized significant revenue increase in commissions, net and
technology services for the years ended December 31, 2017 and 2018. Commissions and fees are primarily affected by
changes in our equities, fixed income and futures transaction volumes with institutional clients; 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 Act (as defined below), 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 6, “Tax Receivable Agreements” in
Part II Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. In January 2018, we
completed the sale of BondPoint to ICE for total gross proceeds of $400.2 million in cash, and recognized a gain on sale
net of transaction fees of $329.0 million. See Note 4 "Sale of BondPoint" in Item 8 "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K.
(3) Payments for order flow are a result of the Acquisition of KGC since the Closing Date in 2017. They primarily represent
payments to broker dealer clients, in the normal course of business, for directing their order flow to us.
(4) In 2017, in connection with the Acquisition of KCG, Virtu Financial entered into the Fourth Amended and Restated Credit
Agreement providing for a $1,150.0 million first lien secured term loan facility, 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. For the years ended December 31, 2018 and 2017,
Virtu Financial made $500.0 million and $250.0 million, respectively, principal payments on the credit facility, which
resulted in accelerations in the recognition of a portion of certain financing costs that were scheduled to be amortized over
the term of the loan. See Note 10 "Borrowings" in Item 8 "Financial Statements and Supplement Data" of this Annual
Report on Form 10-K.
(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.
41
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 (i) the acquisition in a series of
transactions, prior to the Reorganization Transactions, by Temasek, acting through two indirectly wholly owned
subsidiaries, of direct or indirect ownership of 10,535,891 Class A-1 redeemable interests and 1,828,755 Class A-2 capital
interests in Virtu Financial, which acquisition was consummated on December 31, 2014, and (ii) the Acquisition of KCG,
which was consummated on July 20, 2017.
(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), which has been subsequently annulled in 2019.
(8) Represents non-cash compensation expenses in respect of the outstanding time vested Class B interests of Virtu Financial
(the "VFI Class B Interests") and Class B interests of Virtu East MIP LLC (the "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
through the first quarter of 2018.
(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. See Note 14, “Income Taxes” in Item 8 “Financial Statements and Supplementary Data”
of this Annual Report on 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 16, “Capital Structure” in Item 8
"Financial Statements and Supplement Data" of this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following management’s discussion and analysis covers the years ended December 31, 2018, 2017 and 2016 and should be
read in conjunction with the audited consolidated financial statements of Virtu Financial, Inc. (the "Company") for the years
ended December 31, 2018, 2017 and 2016. This management's discussion and analysis 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 forward-looking 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
42
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 on Form 10-K, 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;
• obligations 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;
• obligations to comply with laws and regulations applicable to our operations in the U.S. and abroad;
• 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;
• 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 KCG business with ours and that
the anticipated benefits, cost savings and synergies or capital release may not be achieved;
• the assumption of potential liabilities relating to KCG’s business;
• the effect of the ITG Acquisition on existing business relationships, operating results, and ongoing business
operations generally,
• the significant costs and significant indebtedness that we have incurred in connection with the ITG Acquisition,
and the integration of ITG into our business;
• the risk that we may encounter significant difficulties or delays in integrating the ITG business with ours and that
the anticipated benefits, cost savings and synergies or capital release may not be achieved;
• the assumption of potential liabilities and risks relating to ITG'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;
• failure to protect confidential and proprietary information;
• failure to protect our systems from internal or external cyber threats that could result in damage to our computer
systems, business interruption, loss of data or other consequences;
43
• 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 access, 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 Annual Report on Form 10-K. 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 consolidated financial statements for the years ended December 31, 2018 and 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" of Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, we have
accounted 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
values of our existing assets and liabilities. Our reported financial condition, results of operations and cash flows for the periods
following the Acquisition of KCG 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 and the results of KCG from the Closing Date through
December 31, 2017. All periods prior to the Closing Date comprise solely our results.
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 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 execution services
activities in an efficient manner and enable us to scale our 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 and execution services providers 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, we completed the Acquisition of KCG on the Closing Date. 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.
Prior to the Acquisition of KCG, Virtu operated as a single operating business segment. As a result of the Acquisition
of KCG, beginning in the third quarter of 2017, Virtu has two operating segments: Market Making and Execution Services, and
44
one non-operating segment: Corporate. Our management allocates resources, assesses performance and manages our business
according to these segments.
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. We are a leading financial firm that leverages
cutting edge technology to deliver liquidity to the global markets and innovative, transparent trading solutions to our clients.
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, on over 235 venues, in 36 countries worldwide. We use the
best technology to deliver liquidity to global markets and innovative trading solutions and analytics tools to our clients. We
interact directly with hundreds of retail brokers, Registered Investment Advisors, private client networks, sell-side brokers, and
buy-side institutions. Our products are transparent, because we believe transparency makes markets more efficient and helps
investors make better, more informed decisions.
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, 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 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 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 “KCG Merger”), with KCG surviving the
KCG Merger as a wholly owned subsidiary of the Company.
In connection with the financing of the Acquisition of KCG, on the Closing Date, the Company issued to (i) Aranda
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 Stockholder 39,725,979 shares of 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 Class A Common
Stock to Aranda and the North Island Stockholder respectively, for an aggregate additional purchase price of approximately
$26.0 million and $5.2 million, respectively. In connection with these transactions, the Company incurred approximately $7.8
million in fees which were recorded as a reduction to additional paid-in capital.
Also in connection with the financing of the Acquisition of KCG, on June 16, 2017, Orchestra Borrower LLC (the
"Escrow Issuer") a wholly owned subsidiary of Virtu Financial LLC (“Virtu Financial”) 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”) as more fully described under Liquidity and Capital Resources - Senior Secured Second Lien Notes. On July
20, 2017, VFH assumed all of the obligations of the Escrow Issuer under the Notes and the indenture governing the Notes.
On June 30, 2017, Virtu Financial and 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
45
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. We have made payments in total of $750.0 million to the credit facility as of
December 31, 2018.
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.
Acquisition of Investment Technology Group, Inc.
On March 1, 2019 (the “ITG Closing Date”), the Company announced the completion of its previously announced
acquisition of Investment Technology Group, Inc. (“ITG”) in a cash transaction valued at $30.30 per ITG share, or a total of
approximately $1.0 billion (the “ITG Acquisition”). In connection with the ITG Acquisition, Virtu Financial, VFH and Impala
Borrower LLC (the “Acquisition Borrower”), a subsidiary of the Company, entered into a Credit Agreement (the “New Credit
Agreement”), with the lenders party thereto, Jefferies Finance LLC, as administrative agent and Jefferies Finance LLC and
RBC Capital Markets, as joint lead arrangers and joint bookrunners. The New Credit Agreement provides (i) a senior secured
first lien term loan in an aggregate principal amount of $1.5 billion, drawn in its entirety on the ITG Closing Date, with
approximately $404.5 million being borrowed by VFH to repay all amounts outstanding under its existing term loan facility
and the remaining approximately $1,095 million being borrowed by the Acquisition Borrower to finance the consideration and
fees and expenses to be paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien revolving
facility to VFH, with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the closing of ITG
Acquisition, VFH will assume the obligations of the Acquisition Borrower in respect of the acquisition term loans.
Additionally, on the ITG Closing Date, the Fourth Amended and Restated Credit Agreement was terminated.
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 Company's initial public offering in April 2015 (the "IPO") (the "2015 Management
Incentive Plan"). The 2015 Management Incentive Plan, which 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 the grant date and expires not
later than 10 years from the grant date. Subsequent to the IPO and through December 31, 2018, options to purchase 1,528,750
shares in the aggregate were forfeited and 4,049,058 options were exercised. The fair value of the stock option grants was
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, 1,677,318 shares of immediately vested Class A Common Stock
and 2,620,051 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 will be recognized
on a straight line basis over the vesting period.
Parent Company Financial Information
There are no material differences between our consolidated financial statements and the financial statements of Virtu
Financial LLC (“Virtu Financial”) except as follows: (i) cash and cash equivalents reflected on our Consolidated Statement of
Financial Condition in the amount of $3.8 million; (ii) deferred tax assets reflected on our Consolidated Statement of Financial
Condition in the amount of $189.6 million and tax receivable agreement obligation in the amount of $214.4 million, in each
case as described in greater detail in Note 6 "Tax Receivable Agreements" of Item 8 "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K; (iii) a portion of the member's equity of Virtu Financial is represented as non-
controlling interest on our Consolidated Statement of Financial Condition; and (iv) provision for corporate income tax in the
amount of $63.4 million reflected on our Consolidated Statements of Comprehensive Income for the year ended December 31,
2018.
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Components of Our Results of Operations
The following table shows the i) Total revenue, ii) Total operating expenses, and iii) Income before income taxes and
noncontrolling interest by segment for the years ended December 31, 2018, 2017 and 2016:
(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 before income taxes and noncontrolling interest
Consolidated
Total revenue
Total operating expenses
Income before income taxes and noncontrolling interest
Years Ended December 31,
2018
$ 1,384,475 $
961,827
422,648
2017
836,707 $
762,074
74,633
2016
691,884
515,739
176,145
496,333
171,290
325,043
99,135
111,654
(12,519 )
(2,090 )
49,238
(51,328 )
92,140
41,090
51,050
10,352
5,949
4,403
36
993
(957 )
1,878,718
1,182,355
696,363 $
1,027,982
914,818
113,164 $
702,272
522,681
179,591
$
47
(in thousands)
Revenues:
Trading income, net
Interest and dividends income
Commissions, net and technology services
Other, net
Total revenue
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
Termination of office leases
Debt issue cost related to debt refinancing and prepayment
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
$
Years Ended December 31,
2018
2017
2016
$
1,266,682 $
87,508
184,339
340,189
1,878,718
766,027 $
50,407
116,503
95,045
1,027,982
665,465
26,419
10,352
36
702,272
221,214
71,001
85,295
—
56,557
23,358
29,703
211
(319 )
5,579
—
—
1,755
28,327
522,681
179,591
21,251
158,340
301,779
176,120
215,556
74,645
141,814
64,749
61,154
26,123
23,357
11,727
11,487
2,020
24
71,800
1,182,355
696,363
76,171
620,192 $
256,926
131,506
177,489
27,727
91,993
61,466
47,327
15,447
3,671
10,460
25,270
657
772
64,107
914,818
113,164
94,266
18,898 $
Total Revenues
The majority of our revenue is generated through market making activities, which is recorded as trading income, net. In
addition, we generate revenues from interest and dividends income, agency execution services to select third parties, and
technology services that use our proprietary technology to provide technology infrastructure to third parties. Following the
Acquisition of KCG, we also earn commissions and commission equivalents, as well as, in certain cases, contingent fees based
on client revenues, which represents variable consideration. The services offered under these contracts have the same pattern of
transfer; accordingly, they are being measured and recognized as a single performance obligation. The performance obligation is
satisfied over time, and accordingly, revenue is recognized as time passes. Variable consideration has not been included in the
transaction price as the amount of consideration is contingent on factors outside the Company’s control and thus it is
not probable that a significant reversal of cumulative revenue recognized will not occur. Recurring fees, which exclude variable
consideration, are billed and collected on a monthly basis.
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 67%, 75%, and 95% of our
total revenues for the years ended December 31, 2018, 2017 and 2016, respectively.
48
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. Revenues on transactions for which we charge explicit commissions or
commission equivalents, which include the majority of our institutional client orders. Commissions and fees are primarily
affected by changes in our equities, fixed income and futures transaction volumes with institutional clients, which depends on
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. 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, which is the point at which the performance obligation to the customer is satisfied, based on the trade volume executed.
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.
Other, net. We have interests in multiple 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. In addition, we also recorded gains or losses on certain one-time
transactions, including the sale of our BondPoint business ("BondPoint") in 2018, within other, net (see Note 4 "Sale of
BondPoint" of Item 8 "Financial Statements and Supplementary Data” of this Annual Report on Form 10-K).
In July 2016, we made a minority investment in SBI Japannext Co., Ltd. (“SBI”) (the "SBI Investment"), a proprietary
trading system based in Tokyo. In connection with the investment, we issued bonds to certain affiliates of SBI and used the
proceeds 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.
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 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 marketplaces are netted against brokerage, exchange and clearance fees.
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 to us primarily in U.S. equities. Payments for order flow will fluctuate as we modify our
rates and as the portion of our clients that do not 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 customers.
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.
Communications expense consists primarily of the cost of voice and data telecommunication lines supporting our business,
including connectivity to data centers, exchanges, markets and liquidity pools around the world, and data processing expense
consists primarily of market data subscription 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 related costs. Employee
compensation and payroll taxes also 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 Amended and Restated 2015 Management
Incentive Plan.
49
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 finite lived intangible assets acquired in connection with the
acquisitions of certain assets from Nyenburgh Holding B.V., Teza Technologies (the "Teza Acquisition") and KCG, respectively.
These assets are amortized over their useful lives, ranging from 1 to 15 years, except for certain assets which were categorized as
having indefinite useful lives.
Termination of office leases. Termination of office leases represents the one-time expense write-off on the present
value of the future lease obligations on the office space we abandoned in connection with the Acquisition of KCG. The
aggregated write-off amount includes legal fees, broker fees, dilapidation fees and other miscellaneous expense associated with
the abandonment.
Debt issue costs related to debt refinancing. As a result of the refinancing or early termination of our long-term
borrowings, we accelerate the capitalized debt issue costs and the discount on term loan that would otherwise to be amortized or
accreted over the life of the term 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 and with the sale of BondPoint in 2018.
Reserve for Legal Matters. Reserve for legal matters represents the potential legal settlements 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 years ended
December 31, 2018, we recognized non-cash compensation expenses in respect of the outstanding time-vested VFI Class B
Interests 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 defined and discussed in Note 17 "Share-based
Compensation" of Item 8, “Financial Statements and Supplementary Data” of this Annual Report on 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 the consummation of the 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 jurisdictions to which they relate, changes in how we do business, acquisitions 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
50
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 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law
on December 22, 2017 and 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 recorded a 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 from 35% to 21%. During 2018, we did not
make any adjustments due to the 2017 Tax Act, and we have completed our determination of the accounting implications of the
2017 Tax Act on our tax balances as of December 31, 2018.
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 14 "Income Taxes" of Item 8 "Financial
Statements and Supplementary Data” of this Annual Report on 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 in the United States (“U.S. GAAP”), we use the following non-U.S. GAAP ("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, connectivity early termination, trading related settlement income, gain on sale of businesses,
other, net, write-down of assets, share based compensation, charges related to share based compensation at IPO,
Amended and Restated 2015 Management Incentive Plan, and charges related to share based compensation at
IPO.
• “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 23% for 2018, and 35.5% to 37% for 2017 and 2016.
Total 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 Adjusted Net Trading Income 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
51
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
• 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, Normalized Adjusted Net
Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes and Normalized
Adjusted EPS 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, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes,
Normalized provision for income taxes and Normalized Adjusted EPS 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 U.S. GAAP measure.
The following tables reconcile the consolidated statements of comprehensive income to arrive at Adjusted Net Trading
Income, EBITDA, Adjusted EBITDA, and selected Operating Margins for the years ended December 31, 2018, 2017 and 2016.
52
(in thousands)
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
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
Connectivity early termination
Trading related settlement income
Gain on sale of business
Other, net
Write-down of assets
Share based compensation
Charges related to share based compensation at IPO, Amended and Restated
2015 Management Incentive Plan
Charges related to share based compensation awards at IPO
Adjusted EBITDA
Selected Operating Margins
Net Income Margin (1)
EBITDA Margin (2)
Adjusted EBITDA Margin (3)
(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.
For the Years Ended December 31,
2018
2017
2016
$
$
$
$
$ 1,266,682
87,508
184,339
(301,779 )
(74,645 )
(141,814 )
$ 1,020,291
$
$
620,192
71,800
11,727
61,154
26,123
76,171
867,167
10,974
2,020
11,487
23,357
—
7,062
—
(335,210 )
(4,979 )
3,239
29,065
5,781
24
619,987
$
$
766,027
50,407
116,503
(256,926 )
(27,727 )
(91,993 )
556,291
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
60.8 %
85.0 %
60.8 %
3.4 %
45.0 %
45.2 %
37.3%
57.3 %
63.2 %
53
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
Reserve for legal matters
Severance
Transaction advisory fees and expenses
Termination of office leases
Connectivity early termination
Gain on sale of business
Write-down of assets
Acquisition related retention bonus
Trading related settlement income
Other, net
Share based compensation
For the Years Ended December 31,
2018
2017
2016
$
620,192 $
76,171
696,363
18,898 $
94,266
113,164
158,340
21,251
179,591
26,123
—
11,727
2,020
10,974
11,487
23,357
7,062
(335,210 )
3,239
—
—
(4,979 )
29,065
15,447
4,626
10,460
657
14,911
25,270
3,671
—
—
2,849
23,050
(628 )
(95,045 )
21,825
211
—
5,579
—
1,252
994
(319)
—
—
428
—
(2,975)
(36)
18,222
Charges related to share based compensation at IPO, Amended and Restated
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)
Normalized Adjusted Net Income
5,781
24
487,033
112,018
375,015 $
5,225
740
146,222
54,102
92,120 $
5,606
1,755
210,308
74,659
135,649
$
Weighted Average Adjusted shares outstanding (2)
190,959,477 161,464,923 139,685,124
Normalized Adjusted EPS
$
1.96 $
0.57 $
0.97
(1) Reflects U.S. federal, state, and local income tax rate applicable to corporations of approximately 23% for 2018 and 35.5% for 2017.
(2) Assumes that (1) holders of all vested and unvested non-vesting Virtu Financial Units (together with corresponding shares of the
Company's 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 the Company's Class D
Common Stock, have exercised their right to exchange such Virtu Financial Units for shares of the Company's 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 Amended and Restated 2015 Management Incentive Plan during the years ended December 31, 2018, 2017 and 2016.
The following tables reconcile trading income, net to Adjusted Net Trading Income by segment (in thousands) for the years
ended December 31, 2018, 2017 and 2016:
54
Trading income, net
Commissions, net and technology services
Interest and dividends income
Brokerage, exchange and clearance fees, net
Payments for order flow
Interest and dividends expense
Adjusted Net Trading Income
Trading income, net
Commissions, net and technology services
Interest and dividends income
Brokerage, exchange and clearance fees, net
Payments for order flow
Interest and dividends expense
Adjusted Net Trading Income
Trading income, net
Commissions, net and technology services
Interest and dividends income
Brokerage, exchange and clearance fees, net
Interest and dividends expense
Adjusted Net Trading Income
Year Ended December 31, 2018
Market
Making
1,265,866 $
28,813
86,741
(242,847)
(74,518)
(140,120)
923,935 $
Execution
Services
Corporate
816
155,526
705
(58,932 )
(127 )
(1,694 )
96,294 $
$
62
62 $
Total
1,266,682
184,339
87,508
(301,779)
(74,645)
(141,814)
1,020,291
Year Ended December 31, 2017
Market
Making
Execution
Services
Corporate
Total
769,556 $
13,689
51,822
(224,706)
(28,038)
(92,871)
489,452 $
(5,394 ) $
102,814
619
(32,220 )
311
1,215
67,345 $
1,865 $
—
(2,034 )
—
—
(337 )
(506 ) $
766,027
116,503
50,407
(256,926)
(27,727)
(91,993)
556,291
Year Ended December 31, 2016
Market
Making
Execution
Services
Corporate
Total
665,465 $
—
26,419
(221,214)
(56,557)
414,113 $
— $
10,352
—
—
—
10,352 $
— $
—
—
—
—
— $
665,465
10,352
26,419
(221,214)
(56,557)
424,465
$
$
$
$
$
$
55
The following tables reconcile our Market Making segment trading income, net to Adjusted Net Trading Income by
category for the years ended December 31, 2018, 2017, and 2016 (in thousands):
Trading income, net
Commissions, net and technology services
Brokerage, exchange and clearance fees, net
Payments for order flow
Interest and dividends, net
Adjusted Net Trading Income
Trading income, net
Commissions, net and technology services
Brokerage, exchange and clearance fees, net
Payments for order flow
Interest and dividends, net
Adjusted Net Trading Income
Trading income, net
Brokerage, exchange and clearance fees, net
Interest and dividends, net
Adjusted Net Trading Income
Year Ended December 31, 2018
Americas
Equities
ROW
Equities
Global FICC,
Options and
Other
Unallocated
Total Market
Making
846,090 $
28,583
(120,840)
(74,518)
(31,031)
648,284 $
167,638 $
—
(61,703 )
—
(9,517 )
96,418 $
250,521 $
230
(56,633 )
—
(11,326 )
182,792 $
1,617 $
—
(3,671)
—
(1,505)
(3,559 ) $
1,265,866
28,813
(242,847)
(74,518)
(53,379)
923,935
Year Ended December 31, 2017
Americas
Equities
ROW
Equities
Global FICC,
Options and
Other
Unallocated
Total Market
Making
404,113 $
12,184
(97,832)
(27,600)
(15,151)
275,714 $
175,840 $
342
(70,180 )
—
(13,770 )
92,232 $
192,563 $
(79 )
(55,910 )
—
(8,825 )
127,749 $
(2,960 ) $
1,242
(784)
(438)
(3,303)
(6,243 ) $
769,556
13,689
(224,706)
(28,038)
(41,049)
489,452
Year Ended December 31, 2016
Americas
Equities
ROW
Equities
Global FICC,
Options and
Other
Unallocated
Total Market
Making
221,687 $
(90,151)
(7,290)
124,246 $
171,385 $
(65,330 )
(11,620 )
94,435 $
268,274 $
(64,422 )
(8,816 )
195,036 $
4,119 $
(1,311)
(2,412)
396 $
665,465
(221,214)
(30,138)
414,113
$
$
$
$
$
$
56
The following table shows our Adjusted Net Trading Income and average daily Adjusted Net Trading Income and percentage of
Adjusted Net Trading Income by asset class for the years ended December 31, 2018, 2017, and 2016 :
(in thousands, except percentage)
Adjusted Net Trading Income by
Category:
2018
2017
2016
Total
Average
Daily
%
Total
Average
Daily
%
Total
Average
Daily
%
Market Making:
Americas Equities
ROW Equities
Global FICC, Options and Other
Unallocated(1)
Total Market Making
$
$
648,284 $
96,418
182,792
(3,559 )
923,935 $
2,583
384
728
(14 )
3,681
63.5 % $ 275,714 $
9.5 %
17.9 %
(0.3 )%
90.6 % $ 489,452 $
92,232
127,749
(6,243 )
1,098
367
509
(25 )
1,949
49.6 % $ 124,246 $
94,436 $
16.6 %
195,036 $
23.0 %
395 $
(1.2)%
88.0 % $ 414,113 $
493
375
775
2
1,645
29.2 %
22.2 %
46.0 %
0.2 %
97.6 %
Execution Services
96,294
384
9.4 %
67,345
268
12.1 %
10,352
41
2.4 %
Corporate
62
— — %
(506 )
(2 )
(0.1)%
—
— — %
Adjusted Net Trading Income
$ 1,020,291
$
4,065
100.0 % $ 556,291 $
2,215
100.0 % $ 424,465
$
1,686 100.0 %
Under our methodology for recording “trading income, net” in our consolidated statements of comprehensive income from Item 8
(1)
"Financial Statements and Supplementary Data” of this Annual Report on 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 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 U.S. GAAP. We do not allocate any resulting differences based on the
timing of revenue recognition.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Total Revenues
Our total revenues increased $850.7 million, or 82.8%, to $1.9 billion for the year ended December 31, 2018,
compared to $1.0 billion for the year ended December 31, 2017. This increase was primarily attributable to an increase in
trading income, net, of $500.7 million and an increase in other, net, of $245.1 million primarily due to gain on the sale of
BondPoint of $337.6 million, offset by the one-time gain recognized in the prior year of $86.6 million on the reduction of our
tax receivable agreement obligation as a result of the decrease in the U.S corporate income tax rate to 21% in 2017.
The following table shows the total revenues by segment for the years ended December 31, 2018 and 2017.
57
(in thousands, except for percentage)
2018
2017
% Change
Years Ended December 31,
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
$
$
$
$
$
$
$
$
1,265,866 $
86,741
28,813
3,055
1,384,475 $
816 $
705
155,526
339,286
496,333 $
— $
62
—
(2,152 )
(2,090 ) $
1,266,682 $
87,508
184,339
340,189
1,878,718 $
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
64.5%
67.4%
110.5%
86.3%
65.5%
NM
13.9%
51.3%
NM
400.7%
(100.0)%
NM
NM
NM
NM
65.4%
73.6%
58.2%
257.9%
82.8%
Trading income, net. Trading income, net was primarily earned by our Market Making segment. Trading income, net,
increased $500.7 million, or 65.4%, to $1.3 billion for the year ended December 31, 2018, compared to $766.0 million for the
year ended December 31, 2017. The increase was primarily attributable to the overall market volume and volatility increases in
Americas Equities, ROW Equities, and Global FICC, Options and Other, for the year-end December 31, 2018, comparing to
the prior year. The Acquisition of KCG also contributed to the trading income, net by bringing in additional trading capital.
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 was primarily earned by our Market Making segment.
Interest and dividends income increased $37.1 million, or 73.6%, to $87.5 million for the year ended December 31, 2018,
compared to $50.4 million for the year ended December 31, 2017. This increase was primarily 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 were primarily
earned by our Execution Services segment. Commissions, net and technology services revenues increased $67.8 million, or
58.2%, to $184.3 million for the year ended December 31, 2018, compared to $116.5 million for the year ended December 31,
2017. The increase was primarily due to the Acquisition of KCG, as well as agency fee revenues arising from new customers
we on-boarded during 2018.
Other, net. Other, net increased $245.1 million, or 257.9%, to $340.2 million for the year ended December 31, 2018,
compared to $95.0 million for the year ended December 31, 2017. The increase was primarily due to the gain on sale of
BondPoint of $337.6 million, as discussed in Note 4 "Sale of BondPoint" of Item 8 "Financial Statements and Supplementary
58
Data” of this Annual Report on Form 10-K. For the year ended December 31, 2017, we recognized one-time gain of $86.6
million on the reduction of our tax receivable agreement obligation as a result of the decrease in the U.S corporate income tax
rate to 21%, we did not have such adjustment for the current year-ended December 31, 2018.
Adjusted Net Trading Income (non-GAAP)
Adjusted Net Trading Income increased $464.0 million, or 83.4%, to $1,020.3 million for the year ended
December 31, 2018, compared to $556.3 million for the year ended December 31, 2017. This increase was primarily
attributable to the Acquisition of KCG, which resulted in a significant increase in Americas Equities of $372.6 million, and in
Global FICC, Options and Other of $55.0 million, from the Market Making segment. The Execution Services segment also had
an increase of $28.9 million, or 43.0%, due to an increase in customer trading activity and technology service contracts, offest
by a reduction of revenue due to the sale of BondPoint. Adjusted Net Trading Income per day increased $1.8 million, or 83.4%,
to $4.1 million for the year ended December 31, 2018, compared to $2.2 million for the year ended December 31, 2017. The
number of trading days was 251 for both the years ended December 31, 2018, and 2017. Adjusted Net Trading Income is a non-
GAAP measure. For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to
trading income, net, see “Non-GAAP Financial Measures and Other Items” in this “Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations”.
Operating Expenses
Our operating expenses increased $267.5 million, or 29.2%, to $1.2 billion for the year ended December 31, 2018,
compared to $914.8 million for the year ended December 31, 2017. This increase was primarily due to increases in brokerage,
exchange, and clearance fees of $44.9 million, communications and data processing of $44.6 million, employee compensation
and payroll taxes of $38.1 million, payments for order flow of $46.9 million, interest and dividends expense of $49.8 million,
operating and administrative expenses of $3.3 million, depreciation and amortization expense of $13.8 million, amortization of
purchased intangible and acquired capitalized software of $10.7 million, termination of office leases of $19.7 million, financing
interest expense on long term borrowings of $7.7 million, and debt issue cost related to debt refinancing of $1.3 million.
Transaction advisory fees and expenses decreased by $13.8 million for the year ended December 31, 2018. The overall increase
in operating expenses was primarily attributable to the Acquisition of KCG, but was partially offset by the realization of
expense reductions on a combined basis by consolidating various services and functions including technology, occupancy,
consulting and others.
Brokerage, exchange and clearance fees, net. Brokerage exchange and clearance fees, net, increased $44.9 million,
or 17.5%, to $301.8 million for the year ended December 31, 2018, compared to $256.9 million for the year ended
December 31, 2017. This increase was primarily attributable to the increases in market volume and volatility traded in
Americas Equities instruments in which we make markets, as well 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 $44.6 million, or
33.9%, to $176.1 million for the year ended December 31, 2018, compared to $131.5 million for the year ended December 31,
2017. This increase was primarily due to the Acquisition of KCG, which brought on additional connections, co-location
connectivity, market data and other subscriptions. The increase was partially offset by the reductions in connectivity
subscriptions as a result of an on-going effort to consolidate various communication and data processing subscriptions. For the
year ended December 31, 2018, we recognized $7.1 million of expenses related to the termination of certain connectivity
subscriptions; we had no material termination of connectivity subscriptions in 2017.
Employee compensation and payroll taxes. Employee compensation and payroll taxes increased $38.1 million, or
21.4%, to $215.6 million for the year ended December 31, 2018, compared to $177.5 million for the year ended December 31,
2017. The increase in compensation levels was primarily attributable to the increase in headcount as a result of the Acquisition
of KCG. Employee compensation expense is accrued based on a number of ratios including overall profitability, such as the
Adjusted Net Trading Income for the period with certain adjustments made at management’s discretion. We have capitalized
and therefore excluded employee compensation and benefits related to software development of $24.4 million, and $15.7
million for the years ended December 31, 2018 and 2017, respectively.
Payments for order flow. Payments for order flow, which we did not incur prior to the Acquisition of KCG, increased
$46.9 million, or 169.2%, to $74.6 million for the year ended December 31, 2018, compared to $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
59
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. As indicated above, rather than analyzing payments for order flow in isolation, we generally
evaluate it in the broader context of our Adjusted Net Trading Income.
Interest and dividends expense. Interest and dividends expense increased $49.8 million, or 54.2%, to $141.8 million
for the year ended December 31, 2018, compared to $92.0 million for the year ended December 31, 2017. 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 $3.3 million, or 5.3%, to $64.7
million for the year ended December 31, 2018, compared to $61.5 million for the year ended December 31, 2017. The increase
was attributable to the Acquisition of KCG, which brought on additional operating and administrative costs such as
professional fees, consulting fees, and other miscellaneous office expenses. The increase was partially offset by the cancellation
of certain redundant services as a result of on-going effort to consolidate costs for the combined operation post the Acquisition
of KCG.
Depreciation and amortization. Depreciation and amortization increased $13.8 million, or 29.2%, to $61.2 million for
the year ended December 31, 2018, compared to $47.3 million for the year ended December 31, 2017. 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 $10.7 million, or 69.1%, to $26.1 million for the year ended December 31, 2018,
compared to $15.4 million for the year ended December 31, 2017. This increase was primarily due to additional intangible
assets recognized as part of purchase price accounting for the acquisition of certain technology assets in the Teza Acquisition
and the Acquisition of KCG in the amount of $2.0 million and $175.0 million, respectively.
Termination of office leases. Termination of office leases increased $19.7 million, or 536.3%, to $23.4 million for the
year ended December 31, 2018, compared to $3.7 million year ended December 31, 2017. This increase was primarily due to
consolidating occupancy spaces as a result of the Acquisition of KCG. We recognized a one-time expense write-off of the
present value of the future lease obligations on the office leases we abandoned in connection with the Acquisition of KCG. The
aggregated write-off amount includes legal fees, broker fees, dilapidation and other miscellaneous expense associated with the
abandonment.
Debt issue costs related to debt refinancing. Expense from debt issue costs related to debt refinancing increased $1.3
million, or 12.1%, to $11.7 million for the year ended December 31, 2018, compared to $10.5 million for the year ended
December 31, 2017. The increase reflects higher prepayments made on Fourth Amended Credit Facility during the year ended
December 31, 2018 compared to the year ended December 31, 2017. We made a prepayment of $276 million in the first quarter
of 2018, leading to higher accelerated amortization of the related debt issuance costs.
Transaction advisory fees and expenses. Transaction advisory fees and expenses decreased $13.8 million, or 54.5%,
to $11.5 million for the year ended December 31, 2018, compared to $25.3 million for the year ended December 31, 2017. The
decrease primarily represents lower non-recurring professional fees compared to those which had been incurred in 2017 related
to the Acquisition of KCG. The transaction advisory fees and expenses for the year ended December 31, 2018 were primarily
attributable to $8.6 million in professional fees and legal fees incurred in connection with the sale of BondPoint.
Reserve for legal matters. Reserve for legal matters increased $1.4 million, or 207.5%, to $2.0 million for the year
ended December 31, 2018, compared to $0.7 million for the year ended December 31, 2017. The increase was primarily due to
accruals for potential material legal settlements related to our results of operations and cash flows for the year ended December
31, 2018.
Charges related to share based compensation at IPO. Charges related to share based compensation at IPO decreased
$0.7 million, or 96.9%, to 24 thousand for the year ended December 31, 2018, compared to $0.8 million for the year ended
December 31, 2017. The decrease was primarily attributable to the completed time vesting of the VFI Class B Interests and
East MIP Class B Interests in January 2018.
Financing interest expense on long term borrowings. Financing interest expense on long-term borrowings increased
$7.7 million, or 12.0%, to $71.8 million for the year ended December 31, 2018, compared to $64.1 million for the year ended
60
December 31, 2017. This increase was due to the refinancing of the senior secured first lien term loan and higher average
outstanding borrowings during the year ended December 31, 2018, including the Notes, as discussed in Note 10 "Borrowings"
of Item 8 "Financial Statements and Supplementary Data” of this Annual Report on 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 decreased
$18.1 million, or 19.2%, to $76.2 million for the year ended December 31, 2018, compared to $94.3 million for the year ended
December 31, 2017. The year over year change in provision for income taxes resulted from both the increase in profitability for
the year ended December 31, 2018 and the decrease in provision for income taxes for 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%, of $91.0 million for
the year ended December 31, 2017.
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, $106.1 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 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 $
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
766,027 $
50,407
116,503
95,045
1,027,982 $
665,465
26,419
10,352
36
702,272
15.1%
90.8%
1,025.4%
NM
46.4%
$
$
$
$
$
$
$
$
61
Trading income, net. Trading income, net was 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 was 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 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 were 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 were 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 Item 8 “Financial Statements and Supplementary Data” of
this Annual Report on 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 years ended December 31, 2017 and 2016 were 251 and 252,
respectively. Adjusted Net Trading Income is a non-GAAP measure. For a full description of Adjusted Net Trading Income and
a reconciliation of Adjusted Net Trading Income to trading income, net, see “Non-GAAP Financial Measures and Other Items”
in this “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations”
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
62
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
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 subscriptions 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 Item 8 “Financial Statements and Supplementary Data” of this Annual Report on 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.
63
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 VFI Class B Interests 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 Item 8 “Financial Statements and
Supplementary Data” of this Annual Report on 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 14 “Income Taxes” of Item 8 “Financial Statements and Supplementary
Data” of this Annual Report on 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 was 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.
Liquidity and Capital Resources
General
As of December 31, 2018, we had $736.0 million in cash and cash equivalents. These balances are maintained
primarily to support operating activities for capital expenditures and for short-term access to liquidity, and for other general
corporate purposes. As of December 31, 2018, we had borrowings under our short-term credit facilities of approximately
$184.6 million, borrowing under broker dealer facilities of $17.0 million, and long-term debt outstanding in an aggregate
principal amount of approximately $931.9 million. As of December 31, 2018, our regulatory capital requirements for domestic
U.S. subsidiaries were $4.0 million, in aggregate.
The majority of our trading assets consists 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 "Borrowings" of
Item 8 "Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
64
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 credit worthy 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, for 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 any such cash tax savings. We expect
that future payments to certain direct or indirect equityholders of Virtu Financial described in Note 6 “Tax Receivable
Agreements” to the consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data” of
this Annual Report on Form 10-K are expected to range from approximately $4.7 million to $17.0 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. We made our first payment of $7.0 million in February 2017 and our second
payment of $12.4 million in September 2018. 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 realized cash tax savings
from the favorable tax attributes.
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. We would expect any acceleration of these payments to be funded from the realized favorable tax
attributes. However, if the payments under the tax receivable agreements are accelerated, we may be 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
became 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 Americas LLC is also subject to rules set forth by NYSE and is required to maintain a certain level of capital
in connection with the operation of its designated market maker 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
65
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 19 "Regulatory Requirement" of Item 8 "Financial Statements and Supplementary Data” of this Annual
Report on Form 10-K for a discussion of regulatory capital requirements of our regulated subsidiaries.
Borrowings
We maintain various broker-dealer facilities and short-term credit facilities as part of our daily trading operations. See
Note 10 "Borrowings" of Item 8 "Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for
details on the Company’s various credit facilities. As of December 31, 2018, the outstanding principal balance on our broker-
dealer facilities was $17.0 million, and the outstanding aggregate short-term credit facilities with various prime brokers and
other financial institutions from which the Company receives execution or clearing services was approximately $184.6 million,
which was netted within receivables from broker dealers and clearing organizations on the consolidated statement of financial
condition of Item 8 "Financial Statements and Supplementary Data” of this Annual Report on 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 that
certain Escrow Credit Agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the
"Escrow Credit Agreement"), which provided for a $610.0 million term loan (the "Escrow Term Loan"), the proceeds of which
were deposited into escrow pending the closing of the Acquisition of KCG.
Upon the closing of the Acquisition of KCG, the proceeds of the Escrow Term Loan were released to fund in part the
consideration for the Acquisition of KCG, the obligations of the Escrow Issuer in respect of the Escrow Term Loan were
automatically assumed by VFH, 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 was terminated.
Under the Fourth Amended and Restated Credit Agreement, the $1.15 billion aggregate principal amount of first lien
senior secured term loans, including the Escrow Term Loan ("the Term Loan Facility"), 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 of
KCG 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 of KCG.
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.
The term loans outstanding under the Fourth Amended and Restated Credit Agreement bear interest:
• 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 (reduced to 2.25% per annum after the repricing transaction in January 2018
and reduced to 1.75% after the repricing transaction in September 2018); 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 (reduced to 3.25%
per annum after the repricing transaction in January 2018 and reduced to 2.75% after the repricing transaction in
September 2018).
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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.
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, 2018.
As of March 1, 2019, we have made total prepayments in the amount of $750 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 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 15th and
December 15th, 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” (as such term is defined in the Indenture); (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
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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.
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 15th 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, 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,
2018.
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, 2018, 2017, and
2016.
Net cash provided by (used in):
2018
2017
2016
Years Ended December 31,
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
$
$
714,595 $
329,174
(835,482 )
(5,127 )
203,160 $
290,574 $
(838,016 )
889,797
9,117
351,472 $
239,599
(59,017)
(161,237)
(1,165)
18,180
Operating Activities
Net cash provided by operating activities was $714.6 million for the year ended December 31, 2018, compared to
$290.6 million for the year ended December 31, 2017. The increase of $424.0 million in net cash provided by operating
activities was primarily attributable to the gain recognized on Sale of BondPoint of $337.6 million, and significantly increased
our trading capital and net income as a result of the Acquisition of KCG. In addition, in April 2018, we received 56.6 million
from BATS (a subsidiary of CBOE Holdings, Inc.), as part of the shared tax benefit agreement when KCG sold KCG Hotspot,
an institutional spot foreign exchange electronic communications networks (“ECN”), to BATS.
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.
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Investing Activities
Net cash provided by investing activities was $329.2 million for the year ended December 31, 2018, compared to net
cash used of $838.0 million for the year ended December 31, 2017. The increase in cash provided of $1.2 billion was primarily
attributable to the cash provided by the proceeds of $400.2 million received from the sale of BondPoint in 2018, compared to
net cash used of $799.6 million in 2017 for the Acquisition of KCG. See Note 3 "Acquisition of KCG" and Note 4 "Sale of
BondPoint" of Item 8 "Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
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 in cash used of $779.0 million was primarily attributable to the
net cash used for the Acquisition of KCG. See Note 3 “Acquisition of KCG” of Item 8 “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.
Financing Activities
Net cash used in financing activities was $835.5 million for the year ended December 31, 2018, while net cash
provided by financing activities was $889.8 million for the year ended December 31, 2017. The decrease in cash provided of
$1.7 billion compared to the prior year was primarily attributable to the $736.0 million cash provided from issuance of common
stock as part of the Acquisition of KCG and $1.1 billion of proceeds from long term borrowings, offset by $737.5 million of
repayments of long term borrowings and KCG Notes (as defined below) during the year ended December 31, 2017, compared
to financing cash outflows during the year ended December 31, 2018, including repayments of our senior secured credit facility
of $500.0 million. In addition, cash used for purchases of treasury stock increased by $63.5 million, cash used for dividends
increased by $36.5 million, and cash used for distribution to non-controlling interest increased by $117.3 million for the year
ended December 31, 2018 as compared to the year ended December 31, 2017.
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 in cash provided of $1.1 billion
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 $1.15 billion and the issuance of 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.
Share Repurchase Program
On February 8, 2018, the Company’s board of directors authorized a share repurchase program of up to $50.0 million
in Class A Common Stock and Virtu Financial Units, which was expanded to $100.0 million on July 27, 2018. The stock and
common units repurchase program lasts through September 30, 2019. Since the inception of the program, the Company
repurchased approximately 2.6 million shares of Class A common stock and common units for approximately $65.9 million. At
December 31, 2018, the Company has approximately $34.1 million remaining capacity for future purchases of shares of Class
A Common Stock and Virtu Financial Units under the program.
Secondary Offerings
In May 2018, the Company and certain selling stockholders completed a public offering (the “May 2018 Secondary
Offering”) of 17,250,000 shares of Class A Common Stock by the Company and certain selling stockholders at a purchase price
per share of $27.16 (the offering price to the public of $28.00 per share minus the underwriters’ discount), which included the
exercise in full by the underwriters of their option to purchase additional shares in the May 2018 Secondary Offering. The
Company sold 10,518,750 shares of Class A Common Stock in the offering, the net proceeds of which were used to purchase
an equivalent number of Virtu Financial Units and corresponding shares of Class D Common Stock from TJMT Holdings LLC
pursuant to that certain Member Purchase Agreement, entered into on May 15, 2018 by and between the Company and TJMT
Holdings LLC. The selling stockholders sold 6,731,250 shares of Class A Common Stock in the May 2018 Secondary Offering,
including 2,081,250 shares of Class A Common Stock issued by the Company upon the exercise of vested stock options.
In connection with the May 2018 Secondary Offering, the Company, TJMT Holdings LLC, the North Island
Stockholder, Havelock Fund Investments Pte. Ltd. (“Havelock”) and Aranda entered into that certain Amendment No. 1 to the
Amended and Restated Registration Rights Agreement dated April 20, 2017, by and among the Company, TJMT Holdings
LLC, the North Island Stockholder, Havelock, Aranda and certain direct or indirect equityholders of the Company (the
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“Amended and Restated Registration Rights Agreement”) to add Mr. Vincent Viola and Mr. Michael Viola and to confirm that
certain other persons (including the Company’s CEO) remain parties to the Amended and Restated Registration Rights
Agreement.
Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2018. Amounts we pay in future periods
may vary from those reflected in the table.
Payments due by periods
(in thousands)
Long-term debt obligations(1)
Capital leases
Operating leases
Total contractual obligations
Total
931,908
34,917
246,737
$ 1,213,562 $
Less than 1
year
1-3 years
3-5 years
More than
5 years
—
21,983
32,755
54,738 $
431,908
12,934
56,037
500,879 $
500,000
—
44,166
544,166 $
—
—
113,779
113,779
(1) Balances Consist of principal payments under the Notes, Term Loan Facility and the SBI bonds, which do not include unamortized
discount, unamortized commitment fees or utilization fees, and interest accrued.
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, 2018, a total of $214.4 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
As of December 31, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K, that have or are reasonably likely to have current or future effects on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are
material to investors.
Inflation
We believe inflation has not had a material effect on our financial condition as of December 31, 2018, and 2017, or on
our results of operations and cash flows for the years ended December 31, 2018, 2017, and 2016.
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 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
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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 Item 8 "Financial Statements and Supplementary Data” of this Annual Report on 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, which is the point at which the performance obligation to the customer is satisfied.
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.
The Company recognizes the related revenue when the third party research services are rendered and payments are made.
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, as well as, in certain cases, contingent fees based on client revenues, which represents
variable consideration. The services offered under these contracts have the same pattern of transfer; accordingly, they are being
measured and recognized as a single performance obligation. The performance obligation is satisfied over time, and
accordingly, revenue is recognized as time passes. Variable consideration has not been included in the transaction price as the
amount of consideration is contingent on factors outside the Company’s control and thus it is not probable that
a significant reversal of cumulative revenue recognized will not occur. Recurring fees, which exclude variable consideration,
are billed and collected on a monthly basis.
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Share-Based Compensation
We account for share-based compensation transactions with employees under the provisions of the Financial
Accounting Standards Board's Accounting Standards Codification ("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 Amended and Restated 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.
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 assessed for impairment on an annual basis and between annual assessments
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is assessed at
the reporting unit level, which is defined as an operating segment or one level below the operating segment.
When assessing impairment, an entity may perform a "Step 0" assessment, under which it assesses qualitative factors
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
an entity shall assess relevant events and circumstances, including the following:
• general economic conditions;
•
•
limitations on accessing capital;
fluctuations in foreign exchange rates or other developments in equity and credit markets;
72
•
industry and market considerations such as a deterioration in the environment in which an entity operates, an
increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute
terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political
development,
•
cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings
and cash flows;
• overall financial performance such as negative or declining cash flows or a decline in actual or planned
revenue or earnings compared with actual and projected results of relevant prior periods;
• other relevant entity-specific events such as changes in management, key personnel, strategy, or customers,
contemplation of bankruptcy, or litigation.
If, after assessing the totality of such events or circumstances, an entity determines that it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment
test are unnecessary.
The goodwill impairment test is itself 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 assess goodwill for impairment on an annual basis on July 1 and on an interim basis when certain events or
circumstances exist. In the impairment assessment as of July 1, 2018, we performed a Step 0 qualitative assessment as
described in ASC 350-20-35 (as described above) for each reporting unit. No impairment of goodwill was identified.
We amortize finite-lived intangible assets over their estimated useful lives. We test finite-lived intangible assets for
impairment 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 Item 8 "Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 cost.
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 Company's Chief Risk Officer (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.
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
Receivables 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.
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,
2018 and December 31, 2017 was $2.6 billion and $2.7 billion, respectively, in long positions and $2.5 billion and $2.4 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 group carefully monitor the highest stress scenarios to help mitigate the risk of exposure to extreme events.
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.
Interest Rate Risk, Derivative Instruments
74
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 ASC 815 Derivatives and
Hedging, other than derivatives used to reduce the impact of fluctuations in foreign exchange rates on our net investment in
certain non-U.S. operations as discussed in Note 12 "Derivative Instruments" of Item 8 "Financial Statements and
Supplementary Data” of this Annual Report on 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. 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 and changes in equity. Our primary currency translation exposures
historically relate to net investments in subsidiaries having functional currencies denominated in the Euro.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
75
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
PAGE
NUMBER
77
80
81
82
84
86
76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Virtu Financial, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial condition of Virtu Financial, Inc. and its subsidiaries
(the “Company”) as of December 31, 2018, and the related consolidated statements of comprehensive income, changes in equity, and
cash flows for the year then ended, including the related notes (collectively referred to as the “consolidated financial
statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audit. 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 audit 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 consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated 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 consolidated
financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s 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 purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
77
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 may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 1, 2019
We have served as the Company’s auditor since 2018.
78
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 two 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 two 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 began serving as the Company’s auditor in 2011. In 2018, we became the predecessor auditor.
79
(in thousands, except share data)
Assets
Cash and cash equivalents
Securities borrowed
Securities purchased under agreements to resell
Receivables from broker dealers and clearing organizations
Trading assets, at fair value:
Financial instruments owned
Financial instruments owned and pledged
Property, equipment and capitalized software (net of accumulated depreciation of $323,718 and $375,656 as of
December 31, 2018 and December 31, 2017, respectively)
Goodwill
Intangibles (net of accumulated amortization of $148,644 and $123,408 as of December 31, 2018 and December 31,
2017, respectively)
Deferred tax assets
Assets of business held for sale
Other assets ($48,273 and $98,364, at fair value, as of December 31, 2018 and December 31, 2017, respectively)
Total assets
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:
Financial instruments sold, not yet purchased
Tax receivable agreement obligations
Accounts payable and accrued expenses and other liabilities
Long-term borrowings
Total liabilities
Commitments and Contingencies (Note 15)
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 —
108,955,048 and 90,415,532 shares, Outstanding — 106,776,277 and 89,798,609 shares at December 31, 2018 and
December 31, 2017, 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, 2018 and December 31, 2017, respectively
Class C common stock (par value $0.00001), Authorized — 90,000,000 and 90,000,000 shares, Issued and
Outstanding — 13,749,886 and 17,880,239 shares at December 31, 2018 and December 31, 2017, respectively
Class D common stock (par value $0.00001), Authorized — 175,000,000 and 175,000,000 shares, Issued and
Outstanding — 69,091,740 and 79,610,490 shares at December 31, 2018 and December 31, 2017, respectively
Treasury stock, at cost, 2,178,771 and 616,923 shares at December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income
Total Virtu Financial Inc. stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
See accompanying notes to the Consolidated Financial Statements.
80
$
$
$
$
December 31,
2018
December 31,
2017
$
736,047 $
1,399,684
15,475
1,101,449
1,848,806
791,115
532,887
1,471,172
—
972,018
2,117,579
595,043
113,322
836,583
137,018
844,883
83,989
200,359
—
254,149
7,380,978 $
111,224
125,760
55,070
357,352
7,320,006
$
$
15,128 $
1,130,039
281,861
567,441
2,475,395
214,403
294,975
907,037
5,886,279 $
27,883
754,687
390,642
716,205
2,384,598
147,040
358,825
1,388,548
6,168,428
1
—
—
1
1
—
—
1
(55,005)
1,010,468
96,513
(82)
1,051,896 $
442,803
1,494,699 $
(11,041 )
900,746
(62,129 )
2,991
830,569
321,009
1,151,578
7,380,978 $
7,320,006
(in thousands, except share and per share data)
Revenues:
Trading income, net
Interest and dividends income
Commissions, net and technology services
Other, net
Total revenue
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
Termination of office leases
Debt issue cost related to debt refinancing and prepayment
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
For The Years Ended
December 31,
2018
2017
2016
$
1,266,682 $
87,508
184,339
340,189
1,878,718
766,027 $
50,407
116,503
95,045
1,027,982
665,465
26,419
10,352
36
702,272
301,779
176,120
215,556
74,645
141,814
64,749
61,154
26,123
23,357
11,727
11,487
2,020
24
71,800
1,182,355
696,363
76,171
620,192
(330,751 )
256,926
131,506
177,489
27,727
91,993
61,466
47,327
15,447
3,671
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
23,358
29,703
211
(319)
5,579
—
—
1,755
28,327
522,681
179,591
21,251
158,340
(125,360)
Net income available for common stockholders
$
289,441 $
2,939 $
32,980
Earnings per share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
Net income
Other comprehensive income
$
$
2.82 $
2.78 $
0.03 $
0.03 $
0.83
0.83
100,875,793
102,089,139
62,579,147
62,579,147
38,539,091
38,539,091
$
620,192 $
18,898 $
158,340
Foreign exchange translation adjustment, net of taxes
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to common stockholders
$
(5,127 )
615,065
(328,697 )
286,368 $
9,117
28,015
(21,833 )
6,182 $
(1,165)
157,175
(124,546)
32,629
See accompanying notes to the Consolidated Financial Statements.
81
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(in thousands)
Cash flows from operating activities
Net Income (loss)
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 and prepayment
Amortization of debt issuance costs and deferred financing fees
Termination of office leases
Share based compensation
Reserve for legal matters
Write-down of assets
Connectivity early termination
Tax receivable agreement obligation reduction
Deferred taxes
Gain on sale of businesses
Other
Changes in operating assets and liabilities:
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
Cash flows from investing activities
Development of capitalized software
Acquisition of property and equipment
Proceeds from sale of telecommunication assets
Proceeds from sale of BondPoint
Investment in joint ventures
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 provided by (used in) investing activities
Cash flows from financing activities
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
Stock option exercised
Short-term borrowings, net
Proceeds from long-term borrowings
Repayment of long term borrowings
Repayment of KCG Notes
Tax receivable agreement obligations
Debt issuance costs
84
Years Ended December 31,
2017
2016
2018
$
620,192 $
18,898 $
158,340
61,154
26,123
10,645
10,419
23,357
31,934
2,020
3,239
2,000
—
4,131
(335,211 )
418
71,488
(15,475 )
(129,431 )
72,701
125,272
375,352
(108,781 )
(148,764 )
90,797
(78,985 )
714,595
(21,482 )
(26,467 )
600
400,192
(23,669 )
—
—
—
—
329,174
(206,903 )
(100,329 )
—
(8,216 )
(66,218 )
76,754
(15,000 )
—
(500,000 )
—
(12,359 )
(2,261 )
47,327
15,447
10,460
5,822
3,671
26,259
657
1,216
—
(86,599)
102,973
—
(4,577)
155,277
16,894
26,145
1,210,599
44,494
366,295
(450,964)
(516,376)
(721,204)
17,860
290,574
(14,158)
(18,932)
—
—
—
—
(799,632)
(5,594)
300
(838,016)
(89,563)
(63,814)
(11,143)
—
(2,683)
—
7,000
1,115,036
(256,473)
(480,987)
(7,045)
(56,505)
29,703
211
5,579
1,690
—
22,866
—
428
—
—
13,313
—
(1,070 )
233,291
14,981
27,808
(530,668 )
772
(302,400 )
—
209,374
370,065
(14,684 )
239,599
(8,404 )
(11,859 )
—
—
—
(38,754 )
—
—
—
(59,017 )
(162,969)
(37,759 )
(2,000 )
(98 )
(4,539 )
—
(20,000)
75,753
(3,825 )
—
—
(5,094 )
Issuance of common stock, net of offering costs
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
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents beginning of period
Cash and cash equivalents, end of period
Supplementary disclosure of cash flow information
Cash paid for interest
Cash paid for taxes
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
Non-cash financing activities
Tax receivable agreement described in Note 6
Discount on issuance of senior secured credit facility
Secondary offerings described in Note 16
—
(950 )
—
(835,482 )
735,974
—
—
889,797
—
16,677
(17,383 )
(161,237)
(5,127 )
9,117
(1,165)
203,160
532,887
736,047 $
351,472
181,415
532,887 $
18,180
163,235
181,415
139,412 $
93,991
112,982 $
5,976
54,872
16,175
2,936
1,605
2,750
(991 ) $
—
—
1,534 $
1,438
—
545
1,350
—
$
$
$
See accompanying notes to the Consolidated Financial Statements.
85
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, 2018, VFI owned approximately 56.7% 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 market making 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.
On July 20, 2017 (the “Closing Date”), the Company completed the all-cash acquisition of KCG Holdings, Inc.
(“KCG”) (the “Acquisition of KCG”) . Pursuant to the terms of the Agreement and Plan of Merger, dated as of April 20, 2017,
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 “KCG Merger”), with KCG surviving
the KCG Merger as a wholly owned subsidiary of the Company. See Note 3 “Acquisition of KCG” for further details.
Virtu Financial’s principal subsidiaries include Virtu Financial BD LLC (“VFBD”), Virtu Americas LLC (“VAL”), and
Virtu Financial Capital Markets LLC (“VFCM”, collectively with VFBD and VAL, the "broker-dealers"), which are self-
clearing U.S. broker-dealers. Other principal subsidiaries include Virtu Financial Global Markets LLC, a U.S. trading entity
focused on futures and currencies; Virtu Financial Ireland Limited, formed in Ireland; Virtu Financial Asia Pty Ltd, formed in
Australia; and Virtu Financial Singapore Pte. Ltd., formed in Singapore, each of which are trading entities focused on asset
classes in their respective geographic regions.
On January 2, 2018, the Company completed the sale of its fixed income trading venue, BondPoint, to Intercontinental
Exchange (“ICE”) for total gross proceeds of $400.2 million. See Note 4 "Sale of BondPoint" for further details.
Prior to the Acquisition of KCG, the Company was managed and operated as one business, under one operating
segment. As a result of the Acquisition of KCG, beginning in the third quarter of 2017 the Company has two operating
segments: (i) Market Making and (ii) Execution Services; and one non-operating segment: Corporate. See Note 20 "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, 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 by the Financial
Accounting Standards Board (“FASB”) in the Accounting Standards Codification (“ASC” or the “Codification”), and reflect all
adjustments that, in the opinion of management, are normal and recurring, and that are necessary for a fair statement of the
results for the periods presented. 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, individually and in the aggregate, to both current and all
86
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”, the Company has accounted 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 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. The
financial results for the years ended December 31, 2017 and 2016 comprise the results of the Company for the entire applicable
periods and results of KCG from the Closing Date through December 31, 2017. All periods prior to the Closing Date comprise
solely 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.
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.
87
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 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 take 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 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
As of December 31, 2018 and 2017, receivables from and payables to broker-dealers and clearing organizations
primarily represented amounts due for unsettled trades, open equity in 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. 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. The Company presents its balances, including outstanding principal
balances on all credit facilities, on a net by counterparty basis within receivables from and payables 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.
88
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, which must be applied to an entire instrument
and is irrevocable once elected.
Derivative Instruments
Derivative instruments are used for trading purposes, including economic hedges of trading instruments, are carried at
fair value, and 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. Cash flows associated with such derivative activities are included in
cash flows from operating activities on the consolidated statements of cash flows.
Property, Equipment and Occupancy
Property and equipment are carried at cost, less accumulated depreciation, except for the assets acquired in connection
with acquisitions using the purchase accounting method, 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.
89
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 assessed for impairment on an annual basis and between annual
assessments whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill
is assessed at the reporting unit level, which is defined as an operating segment or one level below the operating segment.
The Company assesses goodwill for impairment on an annual basis on July 1 and on an interim basis when certain
events or circumstances exist. In the impairment assessment as of July 1, 2018, the Company assessed qualitative factors as
described in ASC 350-20 for each of its reporting units for any indicators that the fair values of the reporting units were less
than their carrying values.
Intangible Assets
The Company amortizes finite-lived intangible assets over their estimated useful lives. Finite-lived intangible assets
are tested for impairment 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 of
KCG 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, net 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.
90
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. The Company
recognizes the related revenue when the third party research services are rendered and payments are made. As the Company
acts as an agent in these transactions, it records such expenses on a net basis within commissions, net 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, as well as, in certain cases, contingent fees based on client revenues, which represent variable consideration. The
services offered under these contracts have the same pattern of transfer; accordingly, they are being measured and recognized as
a single performance obligation. The performance obligation is satisfied over time, and accordingly, revenue is recognized as
time passes. Variable consideration has not been included in the transaction price as the amount of consideration is contingent
on factors outside the Company’s control and thus it is not probable that a significant reversal of cumulative revenue
recognized will not occur. Recurring fees, which exclude variable consideration, are billed and collected on a quarterly basis.
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.
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
91
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.
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 subsidiaries domiciled in
Ireland, which utilize 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 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 Transactions and
the IPO pursuant to the Virtu Financial, Inc. 2015 Management Incentive Plan, adopted by the Company's Board of Directors
and stockholders effective upon consummation of the IPO (as amended, the “Amended and Restated 2015 Management
Incentive Plan”) were in the form of stock options, Class A common stock, par value $0.00001 (the "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.
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In October 2016, the Company invested in a joint venture (“JV”) with nine other parties. One of the parties was
KCG. Upon the KCG Merger, KCG was required to relinquish their ownership in the JV. As of December 31, 2018, each of
the remaining parties owns approximately 11% of the voting shares and 11% of the equity of this JV. In addition, as a result of
the Acquisition of KCG, the Company owns 50% of the voting shares and 50% of the equity of another JV. These two JVs
build and maintain microwave communication networks in the U.S., Europe, and Asia. The Company and its JV partners each
pay monthly fees for the use of the microwave communication networks in connection with their respective trading activities,
and the JVs may sell excess bandwidth that is not utilized by the JV members to third parties. The JVs meet the criteria to be
considered VIEs.
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 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 JV's
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.
The following table presents the Company’s nonconsolidated VIEs at December 31, 2018:
(in thousands)
Equity investment
Carrying Amount
Asset
Liability
Maximum
Exposure to
Loss
VIEs' assets
$
18,254 $
— $
18,254 $
49,450
The following table presents the Company’s nonconsolidated VIEs at December 31, 2017:
(in thousands)
Equity investment
Carrying Amount
Asset
Liability
Maximum
Exposure to
Loss
VIEs' assets
$
18,799 $
— $
18,799 $
41,936
Accounting Pronouncements, Recently Adopted
Revenue Recognition - In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-9, 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.
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 U.S. GAAP, and as a result, did not have a material impact on the Company’s
consolidated financial statements, which are most closely associated with financial instruments, including trading income, net,
and interest and dividends income. The new revenue standard primarily impacts revenues from technology services,
commissions and soft-dollar arrangements generated by execution services. The additional disclosures required by the new
standard have been included in Note 13 "Revenues from Contracts with Customers".
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 affects the
accounting for equity investments, financial liabilities under fair value option and presentation and disclosure requirements of
financial instruments. The 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 currently
classify any equity securities as available for sale, and it does not apply the fair value option to its own debt issuances. The
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Company has adopted this ASU as of January 1, 2018, and it did 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 reporting periods beginning after December 15, 2017. The Company adopted this ASU on January 1,
2018, and it did not have a material impact on its consolidated financial statements.
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 Company adopted this ASU on January 1,
2018, and it did not have a material impact on its consolidated financial statements.
Accounting Pronouncements, Not Yet Adopted as of December 31, 2018
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 statement of comprehensive income 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.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which modified certain
aspects of ASC Topic 842, including allowing entities to adopt the new leasing standard as of January 1, 2019, without restating
prior periods presented, and providing certain practical expedients including allowing lessors not to separate out lease and non-
lease components when certain conditions are met.
The Company adopted this ASU on January 1, 2019 using the modified retrospective method of implementation, and
it is finalizing the impact on the financial statements. The Company elected to recognize the cumulative effect adjustment to the
opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company does
not plan to recognize lease assets and lease liabilities for leases with a determined lease term of twelve months or less and
which are not expected to be renewed. Upon implementation, the Company estimated an impact of $334.0 million to $369.2
million in lease liabilities and $303.8 million to $335.7 million in right-of-use assets on its Statement of Financial Condition
related to certain occupancy, equipment, communications and data processing, and other contractual arrangements under
noncancelable operating lease agreements held under the Company's name, which currently are not reflected in its Statement of
Financial Condition as of December 31, 2018.
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 its
consolidated financial statements.
Stock Compensation - In June 2018, the FASB issued ASU 2018-07, Compensation, Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting, with the objective of conforming the accounting for share-
based awards to non-employees to the accounting for awards granted to employees. Previously, non-employee awards were
94
measured at the vesting date, rather than the grant date, which effectively required the awards to be marked to market until the
award vested. Under the new ASU, companies will be required to measure non-employee awards at the fair value of the
instruments issued at the grant date. Entities will also be able to consider the probability of the recipient satisfying any
performance conditions. The ASU is effective for periods beginning after December 15, 2018, including interim periods within
that fiscal year. The Company does not currently make share-based awards to non-employees, and does not expect the adoption
of this ASU to have a material impact on its consolidated financial statements.
Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modified the disclosure
requirements on fair value measurements in ASC Topic 820, Fair Value Measurement. Disclosure requirements were eliminated
for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of
transfers between levels, and the valuation processes for Level 3 fair value measurements. Disclosure requirements were
modified for liquidation of investments in certain entities that calculate net asset value, and for measurement uncertainty
disclosures. Disclosure requirements were added for changes in unrealized gains and losses for the period included in other
comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and
weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for
periods beginning after December 15, 2019, including interim periods within that fiscal year. The Company does not expect the
adoption of this ASU to have a material impact on its consolidated financial statements.
Consolidation - In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements
to Related Party Guidance for Variable Interest Entities, which modified how VIEs are assessed for consolidation purposes
under ASC Topic 810, Consolidation. Under the update, indirect interests held through related parties in common control
arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service
providers are variable interests. The ASU is effective for periods beginning after December 15, 2019, including interim periods
within that fiscal year. The Company does not expect the adoption of this ASU to have a material impact on its consolidated
financial statements.
Measurement of Credit Losses on Financial Instruments - In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326) -Measurement of Credit Losses on Financial Instruments. This ASU amends
several aspects of the measurement of credit losses on financial instruments, including replacing the existing incurred credit
loss model and other models with the Current Expected Credit Losses model ("CECL"). Under CECL, the allowance for losses
for financial assets that are measured at amortized cost reflects management’s estimate of credit losses over the remaining
expected life of the financial assets. Expected credit losses for newly recognized financial assets, as well as changes to expected
credit losses during the period, would be recognized in earnings, and adoption of the ASU will generally result in earlier
recognition of credit losses. Expected credit losses will be measured based on historical experience, current conditions and
forecasts that affect the collectability of the reported amount, and credit losses are generally recognized earlier than under
current GAAP. The ASU is effective for periods beginning after December 15, 2019, including interim periods within that
fiscal year.
The Company is currently in the process of identifying and developing the changes to the Company’s existing models
and processes that will be required under CECL. As of December 31, 2018, the ASU is expected to impact only those financial
instruments that are carried by the Company at amortized cost such as collateralized financing arrangements (repurchase
agreements and securities borrowing/ lending transactions) and receivables from broker dealers and clearing organizations, and
therefore the Company expects the ASU to have a limited impact on its financial condition, results of operations and cash
flows. However, the ultimate impact of adoption of this ASU on the firm’s financial condition, results of operations and cash
flows will depend on, among other things, the economic environment and the type of financial assets held by the firm on the
date of adoption.
3. Acquisition of KCG
As of the Closing Date of the Acquisition of KCG, each of KCG’s issued and outstanding shares of Class A common
stock, par value $0.01 per share was 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 of KCG, 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
95
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 of KCG, the Company issued to North
Island Holdings I, LP (the “North Island Stockholder”) 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 “North Island
Investment”). In connection with the Temasek Investment and North Island 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 (the "KCG Notes") 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. See "Fourth Amended and Restated Credit Agreement" and "Senior Secured Second Lien Notes" in Note 10
"Borrowings".
Accounting treatment of the Acquisition of KCG
The Acquisition of KCG has been 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 the
Closing Date, 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 of KCG reflect KCG’s
and the Company's balances and reflect the impact of purchase accounting adjustments.
Certain former KCG management employees were terminated upon the Acquisition of KCG, and as a result were paid
an aggregate of $6.4 million pursuant to their existing employment contracts. This amount was recognized as an expense by the
Company and was included in Employee compensation and payroll taxes in the consolidated statements of comprehensive
income for the year ending December 31, 2017. The Company also made annual incentive compensation payments in 2018 to
former KCG employees who became employees of the Company following the Acquisition of KCG, and accrued related
compensation expense of approximately $35.3 million during the year ended December 31, 2017, which was included in
Employee compensation and payroll taxes in the consolidated statements of comprehensive income for the year ended
December 31, 2017.
Purchase price and goodwill
The aggregate cash purchase price of $1.4 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 of KCG. Adjustments to the provisional values during the measurement period were
recorded in the reporting period in which the adjustment amounts were determined. No further adjustments to the provisional
values remain. The Company engaged third party specialists for the purchase price allocation.
96
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
Amortization
Years
1-6 years
13 - 17 years
10 years
2-15 years
Indefinite
Amount
67,700
94,000
1,000
5,895
6,400
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 of KCG
The Company believes that the Acquisition of KCG 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 of KCG. 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 of KCG, as described in Note 14 "Income Taxes".
4. Sale of BondPoint
In October 2017, the Company entered into an Asset Purchase Agreement with Intercontinental Exchange ("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.
As of December 31, 2017, the Company transferred the carrying value of BondPoint to assets held for sale. On
January 2, 2018, the Company completed the sale of BondPoint to ICE for total gross proceeds of $400.2 million in cash. The
Company incurred one-time transaction costs of $8.5 million, which included professional fees of $7.1 million related to the
sale and $1.4 million of compensation expense, which is recorded in Transaction advisory fees and expenses and Employee
compensation and payroll taxes, respectively, on the consolidated statement of comprehensive income. The Company
recognized a gain on sale of $337.6 million, which is recorded in Other, net on the consolidated statement of comprehensive
income for the year ended December 31, 2018.
A summary of the carrying value of BondPoint and gain on sale of BondPoint is as follows:
97
(in thousands)
Total sale proceeds received
$
400,192
Business assets and liabilities held for sale as of December 31, 2017:
Receivables from broker dealers and clearing organizations
Intangibles and other assets
Liabilities
Total carrying value of BondPoint as of December 31, 2017:
Goodwill adjustment allocated to BondPoint
Gain on sale of BondPoint
Transaction costs
Gain on sale of BondPoint, net of transaction costs
$
3,383
51,687
(728 )
54,342
8,300
337,550
8,568
328,982
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 (loss) before income taxes and noncontrolling interest
Provision for (benefit from) income taxes
Net income
Years Ended December 31,
$
2018
696,363 $
76,171
620,192
2017
2016
113,164
94,266
18,898
179,591
21,251
158,340
Noncontrolling interest
(330,751 )
(15,959 )
(125,360 )
Net income (loss) available for common stockholders
$
289,441 $
2,939 $
32,980
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 (loss) available for common stockholders
Years Ended December 31,
2018
2017
2016
$
289,441 $
2,939 $
32,980
Less: Dividends and undistributed earnings allocated to participating securities
(5,418 )
(1,326 )
(809)
Net income (loss) available for common stockholders, net of dividends and
undistributed earnings allocated to participating securities
284,023
1,613
32,171
Weighted average shares of common stock outstanding:
Class A
Basic earnings per share
100,875,793
62,579,147
38,539,091
$
2.82 $
0.03
0.83
98
(in thousands, except for share or per share data)
Diluted earnings per share:
Net income (loss) available for common stockholders, net of dividends and
undistributed earnings allocated to participating securities
Weighted average shares of common stock outstanding:
Class A
Issued and outstanding
Issuable pursuant to Amended and Restated 2015 Management Incentive
Plan (1)
Years Ended December 31,
2018
2017
2016
$
284,023
$
1,613
$
32,171
100,875,793
62,579,147
38,539,091
1,213,346
102,089,139
—
62,579,147
—
38,539,091
Diluted earnings per share
$
2.78 $
0.03 $
0.83
(1) The dilutive impact of unexercised stock options excludes from the computation of EPS 1,740,630 and 743,096 options for the years ended December 31,
2017 and 2016, 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 pre-IPO equityholders ("Virtu Members") 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, par value $0.00001 per share (the "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 Company made its first payment of $7.0 million in
February 2017 and its second payment of $12.4 million in September 2018.
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, par value $0.00001 per share (the "Class C Common
Stock")) from certain of the Virtu Members in connection with the IPO, and (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 completed in November 2015, September 2016 and May 2018 (the “Secondary Offerings”), payments to certain Virtu
Members in respect of the purchases are expected to range from approximately $4.7 million to $17.0 million per year over the
next 15 years.
In connection with the employee exchanges and May 2018 secondary offering between the Company and TJMT
Holdings LLC and employee exchanges, both as described in Note 16 "Capital Structure", the Company recorded an additional
deferred tax asset of $78.7 million and payment liability pursuant to the tax receivable agreements of $79.7 million, with the
$1.0 million difference recorded as a decrease to additional paid-in capital.
As a result of the reduction in the U.S. corporate 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,
2018 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.
The 2017 Tax 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 14 "Income Taxes". As a result, at December 31, 2017, the
Company recorded a reduction of its tax receivable agreement obligation of $86.6 million. As further described in Note 14
"Income Taxes", the Company also recorded a reduction of its deferred tax assets, including the deferred tax assets described
above. At December 31, 2018 and 2017, the Company’s remaining deferred tax assets described above were approximately
$167.1 million and $101.6 million, respectively, and the Company’s liabilities over the next 15 years pursuant to the tax
receivable agreements are approximately $214.4 million and $147.0 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
99
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 of KCG, the Company was managed and operated as one business, and accordingly, operated
under one operating segment. As a result of the Acquisition of KCG, beginning in the third quarter of 2017 the Company has
two operating segments: (i) Market Making; (ii) Execution Services; and one non-operating segment: 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.
The following table presents the details of goodwill by segment:
(in thousands)
Balance as of December 31, 2017
Goodwill adjustment allocated to BondPoint
Balance as of December 31, 2018
Market
Making
Execution
Services
Corporate
Total
$
$
755,292 $
—
755,292 $
89,591 $
(8,300 )
81,291 $
— $
—
— $
844,883
(8,300)
836,583
As of December 31, 2018 and 2017, the Company’s total amount of goodwill recorded was $836.6 million and $844.9
million, respectively. As described in Note 4 "Sale of BondPoint", the Company allocated $8.3 million of goodwill to
BondPoint as part of the sale. No goodwill impairment was recognized during the years ended December 31, 2018 and 2017.
Acquired intangible assets consisted of the following as of December 31, 2018 and 2017:
(in thousands)
Purchased technology
ETF issuer relationships
ETF buyer relationships
Technology
Customer relationships
Favorable occupancy leases
Exchange memberships
As of December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Useful Lives
(Years)
$
$
110,000 $
950
950
60,000
49,000
5,895
5,838
232,633 $
110,000 $
665
665
30,185
5,905
1,224
—
148,644 $
—
285
285
29,815
43,095
4,671
5,838
83,989
1.4
1
3
to
9
9
to
12
to
2.5
6
15
Indefinite
100
(in thousands)
Purchased technology
ETF issuer relationships
ETF buyer relationships
Leases
FCC licenses
Technology
Customer relationships
Favorable occupancy leases
Exchange memberships
As of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Useful Lives
(Years)
$
$
110,000 $
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
1.4
to
2.5
9
9
3
7
to
to
7
6
17
Indefinite
1
12
Amortization expense relating to finite-lived intangible assets was approximately $26.1 million, $15.4 million, and
$0.2 million for the years ended December 31, 2018, 2017, and 2016, respectively. This is included in amortization of
purchased intangibles and acquired capitalized software in the accompanying consolidated statements of comprehensive
income.
In the third quarter of 2018, the Company sold certain assets to one of its joint ventures, including the intangible assets
associated with leases with a net carrying value of $1.1 million at the time of sale.
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, 2018 and December 31, 2017:
(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
December 31, 2018
December 31, 2017
$
$
$
$
302,152 $
84,509
294,884
193,544
218,663
7,697
1,101,449 $
354,300 $
47,998
90,021
73,547
1,575
567,441 $
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
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 10 "Borrowings") of
approximately $184.6 million and $205.7 million as of December 31, 2018 and 2017, 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.
101
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, 2018 and December 31, 2017, substantially all of the securities
received as collateral have been repledged. The fair value of the collateralized transactions at December 31, 2018 and
December 31, 2017 are summarized as follows:
(in thousands)
Securities received as collateral:
Securities borrowed
Securities purchased under agreements to resell
December 31, 2018 December 31, 2017
$
$
1,361,635 $
15,475
1,377,110 $
1,415,793
—
1,415,793
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, 2018 and
December 31, 2017 consisted of the following:
(in thousands)
Equities
U.S. and Non-U.S. government obligations
Exchange traded notes
10. Borrowings
Broker-Dealer Credit Facilities
December 31, 2018 December 31, 2017
586,251
$
99
8,693
595,043
748,846 $
—
42,269
791,115 $
$
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 million to $500 million, which bears interest at the adjusted LIBOR or base rate plus 1.25% per annum. Two out of
the three broker-dealers have a sublimit under Borrowing Base B Loan, from $40 million to $100 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 values, net of unamortized debt
issuance costs, where applicable:
(in thousands)
Broker-dealer credit facilities:
Uncommitted facility
Revolving credit facility
Interest Rate
Financing
Available
Borrowing
Outstanding
Deferred Debt
Issuance Cost
Outstanding
Borrowings, net
At December 31, 2018
3.40%
3.75%
$
$
200,000 $
500,000
700,000 $
10,000 $
7,000
17,000 $
(832 ) $
(1,040 )
(1,872 ) $
9,168
5,960
15,128
102
(in thousands)
Broker-dealer credit facilities:
Uncommitted facility
Revolving credit facility
Interest Rate
Financing
Available
Borrowing
Outstanding
Deferred Debt
Issuance Cost
Outstanding
Borrowings, net
At December 31, 2017
2.42%
2.81%
$
$
150,000 $
500,000
650,000 $
25,000 $
7,000
32,000 $
— $
(4,117 )
(4,117 ) $
25,000
2,883
27,883
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:
Uncommitted facility
Committed facility (1)
Revolving credit facility
(1) Facility was terminated in July 2017.
Short-Term Credit Facilities
Years Ended December 31,
2018
2017
2016
$
$
1,794 $
—
306
2,100 $
1,667 $
33
19
1,719 $
1,191
41
—
1,232
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.
At December 31, 2018
Weighted Average
Interest Rate
Financing
Available
Borrowing
Outstanding
Short-Term Credit Facilities:
Short-term credit facilities (2)
5.03%
Short-Term Credit Facilities:
Short-term credit facilities (2)
Weighted Average
Interest Rate
3.86%
$
$
$
$
566,000 $
566,000 $
184,608
184,608
At December 31, 2017
Financing
Available
Borrowing
Outstanding
543,000 $
543,000 $
205,677
205,677
(2) Outstanding borrowings are included with Receivables from/ Payables to broker-dealers and clearing organizations within
the consolidated statements of financial condition.
Interest expense in relation to the facilities was approximately $7.1 million, $6.6 million, and $6.3 million for the
years ended December 31, 2018, 2017, and 2016, respectively.
Long-Term Borrowings
The following summarizes the Company’s long-term borrowings, net of unamortized discount and debt issuance costs,
where applicable:
103
(in thousands)
Long-term borrowings:
Fourth Amended and Restated Credit Agreement
Senior Secured Second Lien Notes
SBI bonds
(in thousands)
Long-term borrowings:
Maturity
Date
Interest
Rate
Outstanding
Principal
Discount
Deferred Debt
Issuance Cost
Outstanding
Borrowings, net
At December 31, 2018
December 2021
June 2022
January 2020
5.55%
$
6.75%
5.00%
$
400,000 $
500,000
31,908
931,908 $
(332) $
—
—
(332) $
(6,704) $
(17,811 )
(24 )
(24,539) $
392,964
482,189
31,884
907,037
Maturity
Date
Interest
Rate
Outstanding
Principal
Discount
Deferred Debt
Issuance Cost
Outstanding
Borrowings, net
At December 31, 2017
Fourth Amended and Restated Credit Agreement
Senior secured Second Lien Notes
SBI bonds
December 2021
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
Fourth Amended and Restated Credit Agreement
To finance the Acquisition of KCG, on June 30, 2017, Virtu Financial and VFH Parent LLC (“VFH”) entered into a
fourth amended and restated credit agreement (as amended on January 2, 2018 and September 19, 2018, the “Fourth Amended
and Restated Credit Agreement”) 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, and upon the closing of
the Acquisition of KCG, provided for an aggregate $1.15 billion of first lien secured term loans (the “Term Loan Facility”).
For the year ended December 31, 2018, $500.0 million of prepayments were made under the Fourth Amended and
Restated Credit Agreement, for an aggregate total of $750.0 million of principal prepayments under the Term Loan Facility
since its closing. As a result of these prepayments, the aggregate principal outstanding under the senior secured credit facility is
$400.0 million. VFH also entered into a repricing transaction on January 2, 2018 to reprice the first lien secured term loans
under the Fourth Amended and Restated Credit Agreement at LIBOR plus 3.25%, and another repricing transaction on
September 19, 2018 to reprice such first lien secured term loans at LIBOR plus 2.75%. In connection with the debt refinancing
and the debt prepayment, the Company accelerated approximately $10.6 million for 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 covenants 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
To finance the Acquisition of KCG, 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 Association, 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 the Notes, covenant defaults,
final maturity default or cross-acceleration with respect to material indebtedness and certain bankruptcy events. The gross
104
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 of KCG, and to repay certain
indebtedness of the Company and KCG. (See Note 3 “Acquisition of KCG” 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 ($31.9 million) as of December 31,
2018 and ¥3.5 billion ($31.1 million) as of December 31, 2017. The Company recorded a gain of $0.8 million, 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, 2018, 2017 and
2016, respectively.
Aggregate future required minimum principal payments based on the terms of the long-term borrowings were as
follows:
(in thousands)
2019
2020
2021
2022 and thereafter
Total principal of long-term borrowings
11. Financial Assets and Liabilities
Financial Instruments Measured at Fair Value
December 31, 2018
—
31,908
400,000
500,000
931,908
$
$
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 other financial instruments, 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 a number of banks
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.
There were no transfers of financial instruments between levels during the years ended December 31, 2018 and 2017.
Fair value measurements for those items measured on a recurring basis are summarized below as of December 31,
2018:
105
(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
Exchange traded notes
Other Assets
Equity investment
Exchange stock
Liabilities
December 31, 2018
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
$
$
$
587,680 $
91,466
—
3,396
—
11,899
694,441
389,810 $
6,968
396,778
— $
2,417
2,417
1,022,221 $
14,547
87,500
27,966
2,792,373
—
3,944,607
359,036 $
35,301
394,337
— $
—
—
—
—
—
—
— $
—
—
— $
—
—
45,856 $
—
45,856
— $
—
—
—
(2,790,242 )
—
(2,790,242 )
1,609,901
106,013
87,500
31,362
2,131
11,899
1,848,806
— $
—
—
— $
—
—
748,846
42,269
791,115
45,856
2,417
48,273
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
$
931,992 $
112,058
—
371
—
11,051
1,055,472 $
1,336,338 $
3,054
40,123
39,613
2,720,749
—
4,139,877 $
— $
—
—
—
—
—
— $
— $
—
—
—
(2,719,954 )
—
(2,719,954) $
2,268,330
115,112
40,123
39,984
795
11,051
2,475,395
Fair value measurements for those items measured on a recurring basis are summarized below as of December 31,
2017:
106
December 31, 2017
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
$
$
$
$
$
$
758,596 $
5,968
—
13,576
—
7,045
785,185 $
410,670 $
99
82
410,851 $
— $
1,952
—
1,952 $
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 $
— $
—
—
—
—
—
— $
— $
—
—
— $
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
(in thousands)
Assets
Financial instruments owned, at fair value:
Equity securities
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)
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
874,109 $
(1) Other primarily consists of a $55.8 million receivable from BATS related to the sale of KCG Hotspot (see Receivable from Bats
— $
—
—
—
(2,024,991 )
—
1,355,616 $
12,481
81,118
54,248
2,032,017
—
— $
—
—
—
—
—
— $
2,203,432
31,421
81,118
55,762
7,026
5,839
2,384,598
3,535,480 $
(2,024,991) $
$
Global Markets, Inc. ("BATS") below).
SBI Investment
As of December 31, 2018, the fair value of the Company's 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 12.6x average price/earnings multiples of comparable companies to corroborate the income
approach. The fair value of the SBI Investment at December 31, 2018 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
measurement. Changes in the fair value of the SBI Investment are reflected in other, net in the consolidated statements of
comprehensive income.
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 comprised a $50.0 million payment and an annual payment of up to $6.6 million, both of which were paid to the
Company in April 2018.
Financial Instruments Not Measured at Fair Value
107
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 based on quoted prices from the market for similar instruments, and is
categorized as Level 2 in the fair value hierarchy.
The table below summarizes financial assets and liabilities not carried at fair value on a recurring basis as of
December 31, 2018:
December 31, 2018
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(in thousands)
Assets
Cash and cash equivalents
Securities borrowed
Securities purchased under agreements to resell
Receivables from broker dealers and clearing organizations
Total Assets
Liabilities
Short-term borrowings
Long-term borrowings
Securities loaned
Securities sold under agreements to repurchase
Payables to broker dealer and clearing organizations
Total Liabilities
$
$
$
$
Carrying
Value
Fair Value
(Level 1)
(Level 2)
(Level 3)
736,047 $
1,399,684
15,475
1,101,449
3,252,655 $
736,047 $
1,399,684
15,475
1,101,449
3,252,655 $
736,047 $
—
—
71,288
807,335 $
— $
1,399,684
15,475
1,030,161
2,445,320 $
15,128 $
907,037
1,130,039
281,861
567,441
2,901,506 $
15,128 $
916,465
1,130,039
281,861
567,441
2,910,934 $
— $
—
—
—
1,031
1,031 $
15,128 $
916,465
1,130,039
281,861
566,410
2,909,903 $
—
—
—
—
—
—
—
—
—
—
—
The table below summarizes financial assets and liabilities not carried at fair value on a recurring basis as of
December 31, 2017:
December 31, 2017
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(in thousands)
Assets
Cash and cash equivalents
Securities borrowed
Receivables from broker dealers and clearing organizations
Total Assets
Liabilities
Short-term borrowings
Long-term borrowings
Securities loaned
Securities sold under agreements to repurchase
Payables to broker dealer and clearing organizations
Total Liabilities
$
$
$
$
Carrying
Value
Fair Value
(Level 1)
(Level 2)
(Level 3)
532,887 $
1,471,172
972,018
2,976,077 $
532,887 $
1,471,172
972,018
2,976,077 $
532,887 $
—
36,513
569,400 $
— $
1,471,172
935,505
2,406,677 $
27,883 $
1,388,548
754,687
390,642
716,205
3,277,965 $
27,883 $
1,465,489
754,687
390,642
716,205
3,354,906 $
— $
—
—
—
2,925
2,925 $
27,883 $
1,465,489
754,687
390,642
713,280
3,351,981 $
—
—
—
—
—
—
—
—
—
—
The following presents the changes in Level 3 financial instruments measured at fair value on a recurring basis:
108
Year Ended December 31, 2018
Balance at
December 31,
2017
Purchases
Total Realized
and
Unrealized
Gains /
(Losses)
Net Transfers
into (out of)
Level 3
Settlement
Balance at
December 31,
2018
Change in Net
Unrealized
Gains /
(Losses) on
Investments
still held at
December 31,
2018
$
$
40,588 $
40,588 $
— $
— $
5,268 $
5,268 $
— $
— $
— $
— $
45,856 $
45,856 $
5,268
5,268
Year Ended December 31, 2017
Balance at
December 31,
2016
Purchases
Total Realized
and
Unrealized
Gains /
(Losses)
Net Transfers
into (out of)
Level 3
Settlement
Balance at
December 31,
2017
Change in Net
Unrealized
Gains /
(Losses) on
Investments
still held at
December 31,
2017
$
$
36,031 $
—
36,031 $
— $
3,000
3,000 $
4,557 $
—
4,557 $
— $
—
— $
— $
(3,000)
(3,000 ) $
40,588 $
—
40,588 $
4,557
—
4,557
(in thousands)
Assets
Other assets:
Equity investment
Total
(in thousands)
Assets
Other assets:
Equity investment
Other
Total
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, 2018 and December 31, 2017:
December 31, 2018
(in thousands)
Offsetting of Financial Assets:
Securities borrowed
Securities purchased under
agreements to resell
Trading assets, at fair value:
Currency forwards
Options
Total
$
Gross Amounts
of Recognized
Assets
$
1,399,684 $
15,475
2,792,373
11,899
4,219,431 $
Gross Amounts
Offset in the
Consolidated
Statement of
Financial
Condition
Net Amounts of
Assets Presented
in the
Consolidated
Statement of
Financial
Condition
Gross Amounts Not Offset In the
Consolidated Statement of
Financial Condition
Financial
Instruments
Cash
Collateral
Received
Net Amount
— $
—
1,399,684 $
(1,361,635 ) $
(8,822) $
29,227
15,475
(15,475 )
—
—
(2,790,242 )
—
(2,790,242) $
2,131
11,899
1,429,189 $
—
(11,899 )
(1,389,009 ) $
—
—
(8,822 ) $
2,131
—
31,358
109
(in thousands)
Offsetting of Financial Liabilities:
Securities loaned
Securities sold under agreements
to repurchase
Trading liabilities, at fair value:
Currency forwards
Options
Total
$
Gross Amounts
of Recognized
Liabilities
$
1,130,039 $
281,861
2,720,749
11,051
4,143,700 $
(in thousands)
Offsetting of Financial Assets:
Securities borrowed
Trading assets, at fair value:
Currency forwards
Options
Total
(in thousands)
Offsetting of Financial Liabilities:
Securities loaned
Securities sold under agreements
to repurchase
Trading liabilities, at fair value:
Currency forwards
Options
Total
$
Gross Amounts
of Recognized
Assets
$
$
1,471,172 $
2,045,487
7,045
3,523,704 $
Gross Amounts
of Recognized
Liabilities
$
754,687 $
390,642
2,032,017
5,839
3,183,185 $
Gross Amounts
Offset in the
Consolidated
Statement of
Financial
Condition
Net Amounts of
Assets Presented
in the
Consolidated
Statement of
Financial
Condition
Gross Amounts Not Offset In the
Consolidated Statement of
Financial Condition
Financial
Instruments
Cash
Collateral
Pledged
Net Amount
— $
—
$
1,130,039 $
(1,108,461 ) $
(8,822) $
12,756
281,861
(281,861 )
—
—
(2,719,954 )
—
(2,719,954) $
795
11,051
1,423,746 $
—
(11,051 )
(1,401,373 ) $
(792)
—
(9,614) $
3
—
12,759
December 31, 2017
Gross Amounts
Offset in the
Consolidated
Statement of
Financial
Condition
Net Amounts of
Assets Presented
in the
Consolidated
Statement of
Financial
Condition
Gross Amounts Not Offset In the
Statement of Financial Condition
Financial
Instruments
Cash
Collateral
Received
Net Amount
— $
1,471,172 $
(1,418,672 ) $
(13,318 ) $
(2,027,697 )
—
(2,027,697) $
17,790
7,045
1,496,007 $
—
(45 )
(1,418,717 ) $
—
—
(13,318 ) $
39,182
17,790
7,000
63,972
Gross Amounts
Offset in the
Consolidated
Statement of
Financial
Condition
Net Amounts of
Assets Presented
in the
Consolidated
Statement of
Financial
Condition
Gross Amounts Not Offset In the
Statement of Financial Condition
Financial
Instruments
Cash
Collateral
Pledged
Net Amount
— $
—
754,687 $
(737,731 ) $
(10,776) $
390,642
(390,642 )
—
(2,024,991 )
—
(2,024,991) $
7,026
5,839
1,158,194 $
—
(56 )
(1,128,429 ) $
—
—
(10,776 ) $
6,180
—
7,026
5,783
18,989
The following table presents gross obligations for securities sold under agreements to repurchase and for securities
lending transactions by remaining contractual maturity and the class of collateral pledged:
110
(in thousands)
Overnight and
Continuous
Less than 30
days
30 - 60
days
61 - 90
Days
Total
December 31, 2018
Remaining Contractual Maturity
Securities sold under agreements to repurchase:
Equity securities
U.S. and Non-U.S. government obligations
Total
Securities loaned:
Equity securities
Total
(in thousands)
Securities sold under agreements to repurchase:
Equity securities
U.S. and Non-U.S. government obligations
Total
Securities loaned:
Equity securities
Total
12. Derivative Instruments
$
$
$
$
— $
11,861
11,861
45,000 $
—
45,000
65,000 $
—
65,000
160,000 $
—
160,000
270,000
11,861
281,861
1,130,039
1,130,039 $
—
— $
—
— $
—
— $
1,130,039
1,130,039
December 31, 2017
Remaining Contractual Maturity
Overnight and
Continuous
Less than 30
days
30 - 60
days
61 - 90
Days
Total
— $
642
642
100,000 $
—
100,000
90,000 $
—
90,000
200,000 $
—
200,000
390,000
642
390,642
754,687
754,687 $
—
— $
—
— $
—
— $
754,687
754,687
The fair value of the Company’s derivative instruments on a gross basis consisted of the following at December 31,
2018 and December 31, 2017:
(in thousands)
Derivatives Assets
Derivative instruments not
designated as hedging
instruments:
Equities futures
Commodity futures
Currency futures
Fixed income futures
Options
Currency forwards
Financial Statements Location
Fair Value
Notional
Fair Value
Notional
December 31, 2018
December 31, 2017
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
Financial instruments owned
Financial instruments owned
$
(15,382 ) $
2,891,606
$
(505) $
1,985,770
69,235
11,595,215
971
21,231,001
(9,432 )
3,756,914
26,548
3,994,412
(28 )
11,899
2,792,373
18,694
659,101
171,288,432
73
7,045
2,045,487
44,395
682,369
124,000,221
Derivatives Liabilities
Financial Statements Location
Fair Value
Notional
Fair Value
Notional
Derivative instruments not
designated as hedging
instruments:
Equities futures
Commodity futures
Currency futures
Payables to broker dealers and clearing
organizations
Payables to broker dealers and clearing
organizations
Payables to broker dealers and clearing
organizations
$
468
$
106,487
$
(575) $
142,658
(375 )
54,782
(1,602)
130,042
(30,643 )
6,239,725
(13,947)
7,756,958
111
Fixed income futures
Options
Currency forwards
Payables to broker dealers and clearing
organizations
Financial instruments sold, not yet purchased
Financial instruments sold, not yet purchased
93
11,051
2,720,749
8,591
608,756
171,252,224
(1)
5,839
2,032,017
2,584
681,147
123,993,234
Derivative instruments
designated as hedging
instruments:
Currency forwards
Financial instruments sold, not yet purchased
(792 )
13,501
(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, 2018, 2017, and 2016.
(in thousands)
Financial Statements Location
Derivative instruments not designated as
hedging instruments:
Futures
Currency forwards
Options
Others
Trading income, net
Trading income, net
Trading income, net
Trading income, net
Years Ended December 31,
2018
2017
2016
$ (309,598) $ 290,609 $ 559,626
1,915
(410)
(6)
$ (141,449) $ 286,046 $ 561,125
174,310
(6,161 )
—
2,603
(7,166 )
—
Derivative instruments designated as hedging
instruments:
Foreign exchange - forward contract
Accumulated other comprehensive income
$
63 $
(642 )
—
13. Revenues from Contracts with Customers
Revenue Recognition
The Company adopted ASC Topic 606, Revenue from Contracts with Customers as of January 1, 2018 in the
consolidated financial statements by applying the modified retrospective method. The Company’s revenue recognition methods
for its contracts with customers prior to the adoption of Topic 606 are consistent with its methods after the adoption of Topic
606. Accordingly, the adoption of the new standard did not result in a transition adjustment to opening retained earnings, and as
a result, revenues for contracts with customers would not have been adjusted in prior periods and are not presented herein on an
adjusted basis.
The new revenue guidance does not apply to revenue associated with financial instruments, including loans and
securities that are accounted for under other U.S. GAAP, and as a result, did not have an impact on the elements of the
Company’s consolidated statement of comprehensive income most closely associated with financial instruments, including
trading income, net and interest and dividend income. The new standard primarily impacts the presentation of the following
revenue streams:
• Commissions, net. The Company earns commission revenue by acting as an agent on behalf of customers. The
Company’s performance obligations consist of trade execution and clearing services and are satisfied on the trade date;
accordingly, commission revenues are recorded on the trade date. Commission revenues are paid on settlement date;
therefore, a receivable is recognized as of the trade date. 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. The Company’s 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
112
risk management and trading infrastructure technology and the provision of associated management and hosting
services. These fees include both upfront and annual recurring fees as well as, in certain cases, contingent fees based
on customer revenues, which represent variable consideration. The services offered under these contracts are delivered
as an integrated package and are interdependent and have the same pattern of transfer to the customer; accordingly, the
Company measures and recognizes them as a single performance obligation. The performance obligation is satisfied
over time, and, therefore, revenue is recognized as time passes. Variable consideration has not been included in the
transaction price as the amount of consideration is contingent on factors outside the Company’s control and thus it is
not probable that a significant reversal of cumulative revenue recognized will not occur. Recurring fees, which
exclude variable consideration, are billed and collected on a quarterly basis and are included within Receivables from
broker dealers and clearing organizations.
Disaggregation of Revenues
The following table presents the Company’s revenue from contracts with customers disaggregated by the services
described above, by timing of revenue recognition, reconciled to the Company’s segments, for the year ended December 31,
2018:
(in thousands)
Revenues from Contracts with Customers:
Commissions, net
Technology services
Total revenue from contracts with customers
Other sources of revenue
Total revenues
Timing of revenue recognition:
Services transferred at a point in time
Services transferred over time
Total revenues
Year Ended December 31, 2018
Market Making
Execution
Services
Corporate
Total
$
$
28,813 $
—
28,813
150,206 $
5,320
155,526
— $
—
—
179,019
5,320
184,339
1,355,662
340,807
(2,090 )
1,694,379
1,384,475
496,333
(2,090 )
1,878,718
1,384,475
—
1,384,475 $
491,013
5,320
496,333 $
(2,090 )
—
(2,090 ) $
1,873,398
5,320
1,878,718
Information on Remaining Performance Obligations and Revenue Recognized
As of December 31, 2018, the aggregate amount of the transaction price allocated to the performance obligations
relating to Technology Services revenues that are unsatisfied (or partially unsatisfied) was not material.
Contract Assets and Contract Liabilities
The timing of the revenue recognition may differ from the timing of payment from customers. The Company records a
receivable when revenue is recognized prior to payment, and when the Company has an unconditional right to payment. The
Company records a contract liability when payment is received prior to the time at which the satisfaction of the service
obligation occurs. Receivables related to revenues from contracts with customers amounted to $1.7 million and $7.1 million as
of December 31, 2018 and December 31, 2017, respectively.
14. Income Taxes
Income before income taxes and noncontrolling interest is as follows for the years ended December 31, 2018, 2017,
and 2016:
113
(in thousands)
U.S. operations
Non-U.S. operations
For the Year Ended December 31,
2018
2017
2016
$
$
659,937 $
36,426
696,363 $
70,484 $
42,680
113,164 $
138,950
40,641
179,591
The provision for income taxes consists of the following for the years ended December 31, 2018, 2017, and 2016:
(in thousands)
Current provision (benefit)
Federal
State and Local
Foreign
Deferred provision (benefit)
Federal
State and Local
Foreign
Provision for income taxes
For the Year Ended December 31,
2018
2017
2016
$
$
49,047 $
18,697
4,276
4,986
(1,599 )
764
76,171 $
(9,991) $
65
1,219
106,415
(3,380 )
(62 )
94,266 $
2,690
38
5,210
13,547
194
(428 )
21,251
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, 2018, 2017, and 2016:
(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
Effective tax rate
For the Year Ended December 31,
2018
2017
2016
21.0 %
(10.2 )
1.9
—
—
(0.3 )
(1.5 )
10.9 %
35.0 %
(19.1 )
(1.9 )
80.1
(12.9 )
1.9
0.2
83.3 %
35.0%
(24.4)
1.3
—
—
—
—
11.9%
The components of the deferred tax assets and liabilities as of December 31, 2018, and 2017 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
Total deferred income tax liabilities
December 31,
2018
2017
$
$
$
167,117 $
9,419
12,738
21,088
44,972
(44,947 )
210,387 $
10,028
10,028 $
101,594
5,213
14,547
13,425
50,867
(43,544)
142,102
16,342
16,342
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, 2018, 2017 and 2016, 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
114
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, 2018 and
December 31, 2017 are current income tax receivables of $41.1 million and $115.2 million, respectively. The balance at
December 31, 2018 primarily comprises income taxes due to the Company from federal, state and local, and foreign tax
jurisdictions based on income before taxes, and 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 are eligible to be carried back by the
Company. Included in Accounts payable and accrued expenses and other liabilities on the consolidated statements of financial
condition at December 31, 2018 and December 31, 2017 are current tax liabilities of $10.3 million and $7.6 million,
respectively. The balances primarily comprise income taxes owed to federal, state and local, and foreign tax jurisdictions based
on income before taxes.
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 the Acquisition of KCG (Note 3 "Acquisition of KCG"), differences in the
valuation of financial assets and liabilities, and other temporary differences arising from the deductibility of compensation,
depreciation, and other 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 refunded over a period of years or
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 at December 31, 2018 and December 31, 2017 of $239.3 million and $231.8 million, respectively, and has
recorded a related deferred tax asset of $44.9 million and $43.5 million, respectively. A full valuation allowance was also
recorded against this deferred tax asset at December 31, 2018 and 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, 2018 and December 31, 2017 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, 2018, the
Company’s tax years for 2013 through 2017 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 2017. In addition, the Company is subject to state and local income tax examinations in various
jurisdictions for the tax years 2013 through 2017. 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, 2018, 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, 2018.
(in thousands)
Balance at December 31, 2017
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, 2018
115
December 31,
2018
$
$
7,300
—
(840 )
868
7,333
The 2017 Tax Act was signed into law on December 22, 2017 and 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. As of
December 31, 2017, the Company recorded a reduction of its deferred tax assets for the impact of the 2017 Tax Act of
approximately $90.6 million, which was 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 from 35% to 21%. During the year ended December 31,
2018, the Company did not make any further adjustments due to the 2017 Tax Act. The Company has completed its
determination of the accounting implications of the 2017 Tax act on its tax balances.
15. Commitments, Contingencies and Guarantees
At December 31, 2018, minimum rental commitments under non-cancellable leases are approximately as follows:
Year Ending December 31
Capital
Operating
Subleases
Minimum Rental Commitments
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
21,983 $
11,283
1,651
—
—
—
34,917 $
32,755
30,473
25,564
22,710
21,456
113,779
246,737 $
Net Rental
Commitments
45,759
32,432
18,371
14,158
12,761
77,467
200,948
(8,979 )
(9,324 )
(8,844 )
(8,552 )
(8,695 )
(36,312 )
(80,706) $
Total operating lease expense, net of amortization expense related to landlord incentives, for the years ended
December 31, 2018, 2017, and 2016, was approximately $12.7 million, $13.1 million, and $2.4 million, respectively.
Occupancy lease expense for the years ended December 31, 2018, 2017, and 2016 of $12.5 million, $12.9 million, and $1.3
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, 2018, 2017, and 2016 of
$0.2 million, $0.2 million, and $1.1 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 legal proceedings 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. 2017-421-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
the Company and Jefferies LLC for allegedly aiding and abetting the KCG board members’ alleged breaches of fiduciary duty
and a claim against the Company and Jefferies LLC for alleged civil conspiracy. The amended complaint was again amended
on July 16, 2018 with the filing of the Verified Second Amended Class Action Complaint (the “Second Amended Complaint”)
to include additional factual allegations. No amount of damages is stated in the Second Amended Complaint, against which
Virtu intends to defend vigorously.
116
On January 29, 2019, the Company was named as a defendant in Ford v. ProShares Trust II, et al., No. 19-cv-886. The
complaint was filed in federal district court in New York on behalf of a putative class, and asserts claims against the Company
and numerous other financial institutions under Section 11 of the Securities Act of 1933 in connection with trading in a
ProShares inverse-volatility ETF. The complaint does not specify the amount of alleged damages. The Company believes that
the claims are without merit and intends to defend the lawsuit vigorously. Additionally, on February 27, 2019, the Company
was named as a defendant in Bittner v. ProShares Trust, et al., No. 19-cv-1840. The complaint was filed in federal district court
in New York on behalf of a putative class, and asserts substantially similar allegations to those in the Ford complaint. The
complaint does not specify the amount of alleged damages. The Company believes that the claims are without merit and
intends to defend the lawsuit 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. From time to time, the Company is the subject of
requests for information and documents from the SEC, FINRA and other regulators. It is the Company's practice to cooperate
and comply with the requests for information and documents.
The Company is currently the subject of various regulatory reviews and investigations by federal 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 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) and recently
was reduced to €3.0 million. The Company has fully reserved for the monetary penalty as of December 31, 2018 and
anticipates paying the fine during the year ended December 31, 2019.
Representations and Warranties; Indemnification Arrangements
In the normal course of its operations, the Company enters into contracts that contain a variety of representations and
warranties in addition to indemnification obligations. The Company's maximum exposure under these arrangements is currently
unknown, as any such exposure could relate to claims not yet brought or events which have not yet occurred. For example, in
November 2013, KCG sold Urban Financial of America, LLC ("Urban"), the reverse mortgage origination and securitization
business previously owned by Knight Capital Group, Inc., to an investor group now known as Finance of America Reverse,
LLC ("FAR"). Pursuant to the terms of the Stock Purchase Agreement between KCG and FAR, Virtu has certain continuing
obligations related to KCG's prior ownership of Urban and has been and, in the future may be, advised by FAR of potential
claims thereunder.
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, legal fees, 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.
16. 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, par value $0.00001 per share (the
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"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.
During the period prior to the Reorganization Transactions and IPO, Class A-2 profits interests and Class B interests in
Virtu Financial were issued to Employee Holdco (as defined below) on behalf of certain key employees and stakeholders. In
connection with the Reorganization Transactions, all Class A-2 profits interests and Class B interests were reclassified into non-
voting common interest units (the "Virtu Financial Units"). As of December 31, 2018 and December 31, 2017, respectively,
there were 8,760,755 and 12,301,067 Virtu Financial Units outstanding, respectively, and 3,540,312, 1,930,468, and 1,162,891
Virtu Financial Units and corresponding Class C Common Stock were exchanged into Class A Common Stock, forfeited or
repurchased during the years ended December 31, 2018, 2017, and 2016, respectively.
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.
Acquisition of KCG
On the Closing Date and in connection with the financing of the Acquisition of KCG, the Company issued 6,346,155
shares of Class A Common Stock to Aranda for an aggregate purchase price of approximately $99.0 million and 39,725,979
shares of Class A Common Stock to the North Island Shareholder for an aggregate purchase price of approximately $613.5
million. On August 10, 2017, the Company issued an additional 1,666,666 shares of Class A Common Stock for an aggregate
purchase price of $26.0 million and an additional 338,124 shares of Class A Common Stock for an aggregate purchase price of
$5.2 million. See Note 3 "Acquisition of KCG" for further details.
Share Repurchase Program
In February 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 Virtu Financial 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.
On July 27, 2018, the Company's board of directors authorized the expansion of the Company's share repurchase
program, increasing the total authorized amount by $50.0 million to $100.0 million and extending the duration of the program
through September 30, 2019. Since the inception of the program in February 2018, the Company has repurchased
approximately 2.6 million shares of Class A Common Stock and Virtu Financial Units for approximately $65.9 million. The
Company now has approximately $34.1 million remaining capacity for future purchases of shares of Class A Common Stock
and Virtu Financial Units under the program.
Secondary Offerings
In May 2018, the Company and certain selling stockholders completed a public offering (the “May 2018 Secondary
Offering”) of 17,250,000 shares of Class A Common Stock by the Company and certain selling stockholders at a purchase price
per share of $27.16 (the offering price to the public of $28.00 per share minus the underwriters’ discount), which included the
exercise in full by the underwriters of their option to purchase additional shares in the May 2018 Secondary Offering. The
Company sold 10,518,750 shares of Class A Common Stock in the offering, the net proceeds of which were used to purchase
an equivalent number of Virtu Financial Units and corresponding shares of Class D Common Stock from TJMT Holdings LLC
pursuant to that certain Member Purchase Agreement, entered into on May 15, 2018 by and between the Company and TJMT
Holdings LLC. The selling stockholders sold 6,731,250 shares of Class A Common Stock in the May 2018 Secondary Offering,
including 2,081,250 shares of Class A Common Stock issued by the Company upon the exercise of vested stock options.
In connection with the May 2018 Secondary Offering, the Company, TJMT Holdings LLC, the North Island
Stockholder, Havelock Fund Investments Pte. Ltd. (“Havelock”) and Aranda entered into that certain Amendment No. 1 to the
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Amended and Restated Registration Rights Agreement dated April 20, 2017, by and among the Company, TJMT Holdings
LLC, the North Island Stockholder, Havelock, Aranda and certain direct or indirect equityholders of the Company (the
“Amended and Restated Registration Rights Agreement”) to add Mr. Vincent Viola and Mr. Michael Viola and to confirm that
certain other persons (including the Company’s CEO) remain parties to the Amended and Restated Registration Rights
Agreement.
Employee Exchanges
During the years ended December 31, 2018 and 2017, pursuant to the exchange agreement by and among the
Company, Virtu Financial and holders of Virtu Financial Units, certain current and former employees elected to exchange
3,919,462 and 1,355,763 units, respectively in Virtu Financial held directly or on their behalf by Virtu 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
exchanges, and the share issuance in connection with the Acquisition of KCG, the Company holds approximately 56.7%
interest in Virtu Financial at December 31, 2018.
17. Share-based Compensation
Pursuant to the Amended and Restated 2015 Management Incentive Plan as described in Note 16 "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, 2018 and 2017:
Options Outstanding
Options Exercisable
At December 31, 2016
Granted
Exercised
Forfeited or expired
At December 31, 2017
Granted
Exercised
Forfeited or expired
At December 31, 2018
Weighted Average
Exercise Price Per
Share
Weighted Average
Exercise Price
Per Share
Number of
Options
8,234,000 $
—
—
(496,000 )
7,738,000 $
—
(4,168,100 )
(83,750 )
3,486,150 $
Weighted Average
Remaining
Contractual Life
8.29
—
—
—
7.29
—
—
—
6.30
19.00
—
—
—
19.00
—
19.00
—
19.00
Number of
Options
2,058,500 $
—
—
—
3,869,000 $
—
—
—
1,660,400 $
19.00
—
—
—
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 $5.8 million, $5.2 million, and $5.6 million for the years ended December 31, 2018, 2017,
and 2016, respectively, of compensation expense in relation to the stock options issued and outstanding. As of December 31,
2018 and December 31, 2017, total unrecognized share-based compensation expense related to unvested stock options was $1.6
million and $7.5 million, respectively, and these amounts are to be recognized over a weighted average period of 0.3 and 1.3
years, respectively.
Class A Common Stock and Restricted Stock Units
Pursuant to the Amended and Restated 2015 Management Incentive Plan as described in Note 16 "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, 2018, 2017, and 2016, respectively, there were 594,536, 19,719, and 656,019 shares of immediately vested Class
A Common Stock granted as part of year-end compensation. In addition, the Company accrued compensation expense of $11.2
119
million and $11.0 million for the years ended December 31, 2018 and 2017, respectively, related to immediately vested Class A
Common Stock expected to be awarded as part of year-end incentive compensation, which was 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, 2016
Granted
Forfeited
Vested
At December 31, 2017
Granted
Forfeited
Vested
At December 31, 2018
Number of
Shares
Weighted
Average Fair
Value
1,573,441
64,402
(258,250 )
(526,546 )
853,047
1,265,899
(127,493 )
(612,531 )
1,378,922 $
18.28
18.09
18.4
18.75
17.94
20.89
18.30
18.76
20.03
The Company recognized $17.9 million, $9.9 million, and $6.3 million for the years ended December 31, 2018, 2017,
and 2016, respectively, of compensation expense in relation to the restricted stock units. As of December 31, 2018 and
December 31, 2017, total unrecognized share-based compensation expense related to unvested RSUs was $21.3 million and
$14.3 million, respectively, and this amount is to be recognized over a weighted average period of 1.7 and 1.5 years,
respectively.
18. Property, Equipment and Capitalized Software
Property, equipment and capitalized software consisted of the following at December 31, 2018 and 2017:
(in thousands)
Capitalized software costs
Leasehold improvements
Furniture and equipment
Total
Less: Accumulated depreciation and amortization
Total property, equipment and capitalized software, net
2018
108,220 $
67,995
260,825
437,040
(323,718)
113,322 $
2017
94,915
93,624
324,135
512,674
(375,656 )
137,018
$
$
Depreciation expense for property and equipment for the years ended December 31, 2018, 2017, and 2016 was
approximately $48.4 million, $36.8 million, and $19.6 million, respectively, and is included within depreciation and
amortization expense in the 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 $24.4 million, $15.7 million, and $11.1 million for the years ended December 31,
2018, 2017, and 2016, respectively. The related amortization expense was approximately $20.4 million, $10.1 million, and
$10.1 million for the years ended December 31, 2018, 2017, and 2016, respectively, and is included within depreciation and
amortization expense in the 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, the Company continuously capitalized the vesting of the interest units through December
31, 2017 as the non-voting interest units were fully vested. The Company capitalized approximately $0.04 million and $0.09
million for the years ended December 31, 2017 and 2016, respectively. The amortization costs related to these capitalized
compensation charges and previously capitalized compensation charges related to the Class B Interests of Virtu East MIP LLC
and the Company's Class B interests were approximately $0.02 million, $0.07 million, and $0.7 million for the years ended
December 31, 2018, 2017, and 2016, respectively.
19. Regulatory Requirement
120
As of December 31, 2018 and December 31, 2017, 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-dealers. Pursuant to NYSE rules, VAL was also required to maintain $1.0 million of capital in connection with the
operation of its designated market maker (“DMM”) business as of December 31, 2018. The required amount is determined
under the exchange rules as the greater of (i) $1 million or (ii) $75,000 for every 0.1% of NYSE transaction dollar volume in
each of the securities for which the Company is registered as the DMM. The DMM business was transferred from VFCM to
VAL during the second quarter of 2018. VFCM was required to maintain $4.1 million in connection with the operation of its
DMM business as of December 31, 2017.
The regulatory capital and regulatory capital requirements of these subsidiaries as of December 31, 2018 were as
follows:
(in thousands)
Virtu Americas LLC
Virtu Financial BD LLC
Virtu Financial Capital Markets LLC
Regulatory Capital
$
381,211 $
133,850
9,457
Regulatory Capital
Requirement
Excess Regulatory
Capital
2,035 $
1,000
1,000
379,176
132,850
8,457
The regulatory capital and regulatory capital requirements of these subsidiaries as of December 31, 2017 were as
follows:
(in thousands)
Virtu Americas LLC
Virtu Financial BD LLC
Virtu Financial Capital Markets LLC
Regulatory Capital
$
379,875 $
40,683
8,308
Regulatory Capital
Requirement
Excess Regulatory
Capital
1,000 $
1,000
5,114
378,875
39,683
3,194
20. 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, 2018, 2017, and 2016:
(in thousands)
Revenues:
United States
Ireland
United Kingdom
Singapore
Others
Total revenues
Years Ended December 31,
2018
2017
2016
$
$
1,644,641 $
81,531
15,681
136,161
704
1,878,718 $
791,044 $
97,637
21,143
113,891
4,267
1,027,982 $
455,418
139,642
—
106,813
399
702,272
Prior to the Acquisition of KCG, 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
two operating segments: (i) Market Making and (ii) Execution Services; and one non-operating segment: 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
121
making, the cash trading business handles specialized orders and also transacts on the OTC Link ATS operated by 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; and (iii) 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 for the years ended December 31,
2018, 2017, and 2016 are summarized in the following table:
(in thousands)
2018
Total revenue
Income before income taxes and noncontrolling interest
2017
Total revenue
Income (loss) before income taxes and noncontrolling interest
2016
Market
Making
Execution
Services
Corporate
(1)
Consolidated
Total
$ 1,384,475 $
422,648
496,333 $
325,043
(2,090) $ 1,878,718
696,363
(51,328 )
836,707
74,633
99,135
(12,519 )
92,140
51,050
1,027,982
113,164
Total revenue
Income (loss) before income taxes and noncontrolling interest
179,591
(1) Amounts shown in the Corporate segment include eliminations of income statement and balance sheet items included in the Company's other segments.
176,145
4,403
691,884
10,352
702,272
36
(957 )
21. Related Party Transactions
The Company incurs expenses and maintains balances with its affiliates in the ordinary course of business. As of
December 31, 2018, and December 31, 2017 the Company had a payable of $3.0 million to and a receivable of $0.1 million
from its affiliates, respectively.
The Company purchases network connections services from affiliates of Level 3 Communications (“Level 3”). An
affiliate has a significant ownership interest in Level 3. The Company paid $1.5 million, $2.5 million, and $2.4 million for the
years ended December 31, 2018, 2017, and 2016, respectively, to Level 3 for these services.
The Company purchases and leases computer equipment and maintenance and support from affiliates of Dell Inc.
(“Dell”). An affiliate has a significant ownership interest in Dell. The Company paid $0.8 million, $2.5 million, and $2.7
million for the years ended December 31, 2018, 2017, and 2016, respectively, to Dell for these purchases and leases.
The Company purchases market data and software licenses from affiliates of Markit Group Holdings Limited
(“MarkIt”). An affiliate has a significant ownership interest in MarkIt. For the year ended December 31, 2018, the amount paid
to MarkIt for these services was $0.4 million. The amounts paid to MarkIt were immaterial for the years ended December 31,
2017 and 2016.
122
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
$9.5 million, $6.0 million, and $2.2 million for the years ended December 31, 2018, 2017, and 2016, respectively, to SBI for
these trading activities.
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 $20.0 million, $8.3 million, and $0.6 million for the years ended December 31, 2018, 2017, and 2016,
respectively. Additionally, in the third quarter of 2018, the Company sold certain assets to one of its joint ventures, including
the intangible assets associated with leases with a net carrying value of $1.1 million at the time of sale, for $0.6 million.
22. 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 the Notes (see 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 the 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.
123
Virtu Financial, Inc.
(Parent Company Only)
Condensed Statements of Financial Condition
(In thousands except interest data)
Assets
Cash
Deferred tax asset
Investment in subsidiary
Other assets
Total assets
Liabilities, redeemable membership interest and equity
Liabilities
Payable to affiliate
Accounts payable and accrued expenses and other liabilities
Tax receivable agreement obligations
Total liabilities
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
Total liabilities and stockholders' equity
As of December 31,
2018
2017
3,841 $
189,627
1,730,867
35,998
1,960,333 $
60,193
124,631
1,549,162
10,731
1,744,717
694,028 $
6
214,403
908,437 $
767,101
7
147,040
914,148
—
—
1
—
—
1
(55,005 )
1,010,468
96,513
(82 )
1,051,896 $
—
—
1
—
—
1
(11,041)
900,746
(62,129)
2,991
830,569
1,960,333 $
1,744,717
$
$
$
$
$
$
124
Virtu Financial, Inc.
(Parent Company Only)
Condensed Statements of Comprehensive Income
(in thousands)
Revenues:
Other Income
Operating Expenses:
Operations and administrative
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):
Foreign currency translation adjustment, net of taxes
Comprehensive income
For the Years Ended
December 31,
2018
2017
2016
—
—
1
(1 )
620,193
620,192 $
620,192
(3,073 )
617,119 $
$
$
86,599
86,599
181
86,418
(83,479 )
2,939 $
2,939
3,243
6,182 $
—
—
198
(198)
33,178
32,980
32,980
(351)
32,629
125
Virtu Financial, Inc.
(Parent Company Only)
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net income
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
Cash flows from investing activities
Acquisition of KCG, net of cash acquired, described in Note 3
Investments in subsidiaries, equity basis
Net cash provided by (used in) investing activities
Cash flows from financing activities
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
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
Net increase (decrease) in Cash
Cash, beginning of period
Cash, end of period
Supplemental disclosure of cash flow information:
Taxes paid
Non-cash financing activities
Tax receivable agreement described in Note 6
Secondary offerings described in Note 16
23. Subsequent Events
For the Years Ended
December 31,
2018
2017
2016
$
620,192 $
2,939 $
32,980
(305,936 )
79,722
(64,996 )
—
(25,268 )
303,714
—
34,909
34,909
(206,903 )
(100,329 )
—
(8,216 )
(66,218 )
(12,359 )
—
(950 )
(513,601 )
(86,599 )
102,973
(8,500 )
(8,832 )
(511,620 )
(23,908 )
16,846
(7,062 )
(89,563 )
(63,814 )
(11,143 )
—
(2,683 )
(7,045 )
735,974
—
—
(394,975 ) $
—
561,726 $
(56,352 ) $
60,193
3,841 $
43,044 $
17,149
60,193 $
157,975
—
13,197
—
(4,012)
200,140
—
24,893
24,893
(162,969)
(37,759)
(2,000)
(98)
(4,539)
—
—
16,677
(17,383)
(208,071)
16,962
187
17,149
— $
133 $
8,813
—
—
1,534
—
—
1,350
$
$
$
$
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 February 7, 2019, 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 14, 2019 to holders of record as of
February 28, 2019.
126
On March 1, 2019 (the “ITG Closing Date”), the Company announced the completion of its previously announced
acquisition of Investment Technology Group, Inc. (“ITG”) in a cash transaction valued at $30.30 per ITG share, or a total of
approximately $1.0 billion (the “ITG Acquisition”). In connection with the ITG Acquisition, Virtu Financial, VFH and Impala
Borrower LLC (the “Acquisition Borrower”), a subsidiary of the Company, entered into a Credit Agreement (the “New Credit
Agreement”), with the lenders party thereto, Jefferies Finance LLC, as administrative agent and Jefferies Finance LLC and
RBC Capital Markets, as joint lead arrangers and joint bookrunners. The New Credit Agreement provides (i) a senior secured
first lien term loan in an aggregate principal amount of $1.5 billion, drawn in its entirety on the ITG Closing Date, with
approximately $404.5 million being borrowed by VFH to repay all amounts outstanding under its existing term loan facility
and the remaining approximately $1,095 million being borrowed by the Acquisition Borrower to finance the consideration and
fees and expenses to be paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien revolving
facility to VFH, with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the closing of ITG
Acquisition, VFH will assume the obligations of the Acquisition Borrower in respect of the acquisition term loans.
Additionally, on the ITG Closing Date, the Fourth Amended and Restated Credit Agreement was terminated.
127
SUPPLEMENTAL FINANCIAL INFORMATION
Consolidated Quarterly Results of Operations (Unaudited)
(in thousands, except share and per share data)
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
For the Three Months Ended
Total revenue
Total operating expenses
Operating income
Net income
Less: net income attributable to noncontrolling
interests
Net income attributable to Virtu Financial, Inc.
Net income per share of common stock:
Basic
Diluted
(in thousands, except share and per share data)
Total revenue
Total operating expenses
Operating income (loss)
Net income (loss)
$
$
$
$
$
$
$
Less: net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Virtu Financial, Inc. $
Net income per share of common stock:
815,053 $
346,517
468,536 $
410,022
235,271
174,751 $
328,126 $
278,504
49,622 $
46,622
21,413
25,209 $
1.89 $
1.86 $
0.25 $
0.24 $
295,123 $
265,698
29,425 $
15,610
6,998
8,612 $
0.08 $
0.08 $
440,416
291,636
148,780
147,938
67,069
80,869
0.75
0.74
For the Three Months Ended
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
147,287 $
123,405
23,882 $
21,074
16,494
4,580 $
144,888 $
139,696
5,192 $
4,413
3,512
901 $
0.01 $
0.01 $
271,286 $
317,781
(46,495 ) $
(39,990)
(26,472)
(13,518 ) $
(0.17 ) $
(0.17 ) $
464,521
333,936
130,585
33,401
22,425
10,976
0.12
0.12
Basic
Diluted
$
$
0.10 $
0.10 $
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, as amended (the “Exchange Act”)) as of December 31,
2018. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,
2018, 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
128
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
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 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, 2018. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework (2013).
Based on this assessment, management determined that as of December 31, 2018, internal control over financial
reporting is effective.
PricewaterhouseCoopers LLP has audited our internal control over financial reporting as of December 31, 2018; their
report is included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
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 quarter ended December 31, 2018 that has or is reasonably likely to materially affect, our internal control
over financial reporting.
129
ITEM 9B. OTHER INFORMATION
None.
130
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information with respect to this Item will be set forth in our 2019 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2018. For the limited purpose of providing the
information necessary to comply with this Item 10, the 2019 Proxy Statement is incorporated herein by this reference. All
references to the 2019 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 2019 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2018. For the limited purpose of providing the
information necessary to comply with this Item 11, the 2019 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 2019 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2018. For the limited purpose of providing the
information necessary to comply with this Item 12, the 2019 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 2019 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2018. For the limited purpose of providing the
information necessary to comply with this Item 13, the 2019 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 2019 Proxy Statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2018. For the limited purpose of providing the
information necessary to comply with this Item 14, the 2019 Proxy Statement is incorporated herein by this reference.
131
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial statements
PART IV
The consolidated financial statement required to be filed in the Annual Report on Form 10-K are listed in Part II, Item
8 hereof.
2. Financial Statement Schedule
See “Index to Consolidated Financial Statements” in this Annual Report on Form 10-K listed in Part II, Item 8 hereof.
3.
Exhibits
Exhibit Number
3.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
4.1
4.2
4.3†
4.4†
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
th
10
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).
erein (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form
-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).
Agreement and Plan of Merger, dated November 6, 2018, by and among Virtu Financial, Inc., Impala
Merger Sub, Inc. and Investment Technology Group, 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 November 8, 2018).
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).
Virtu Financial, Inc. Amended and Restated 2015 Management Incentive Plan (incorporated herein by
reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 (File No. 333-219110)
filed on June 30, 2017).
Form of Restricted Stock Unit and Common Stock Award Agreement (incorporated herein by reference
to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No. 333-219110) filed on
June 30, 2017).
132
10.1†
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
10.18
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).
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)
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).
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.
urth Amended and Restated Credit Agreement, dated June 30, 2017, by and between Virtu Financial
Fo
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., TJMT
Holdings LLC, 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).
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).
133
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27†
10.28†
10.29†
10.30†
10.31
10.32
10.33
10.34
10.35
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).
Voting Agreement, dated April 20, 2017, by and among Virtu Financial, Inc., Orchestra Merger Sub,
In
c. 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.
Employment Agreement, dated as of June 24, 2015, by and between Stephen Cavoli and Virtu Financial
Operating LLC (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form
10
-Q (File No. 001-37352), filed on May 7, 2018).
Virtu Financial, Inc. 2015 Management Incentive Plan Employee Restricted Stock Unit Award
Agreement, dated as of August 24, 2015, by and between Virtu Financial, Inc. and Stephen Cavoli
(incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q (File No.
001
-37352), filed on May 7, 2018).
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
Stephen Cavoli (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form
10
-Q (File No. 001-37352), filed on May 7, 2018).
Virtu Financial, Inc. Amended and Restated 2015 Management Incentive Plan Employee Restricted
Stock Unit Agreement, dated as of March 21, 2018, by and between Virtu Financial, Inc. and Joseph
Molluso (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-
(File No. 001-37352), filed on May 7, 2018).
Q
Underwriting Agreement, dated May 10, 2018, by and among Virtu Financial, Inc., Virtu Financial
LLC, the selling stockholders and the Underwriters party thereto (incorporated herein by reference to
Exhibit 1.1 to the Company’s Current Report on Form 8-K (File No. 001-37352), filed on May 15,
2018).
Amendment No. 1 to the Amended and Restated Registration Rights Agreement, dated May 10, 2018,
by and among Virtu Financial, Inc., TJMT Holdings LLC, North Island Holdings I, LP, Havelock Fund
Investments Pte Ltd and Aranda Investments Pte. Ltd (incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K (File No. 001-37352), filed on May 15, 2018).
Amendment No. 1 to Amended and Restated Lock-up Waivers Agreement, dated May 10, 2018, by and
among Virtu Financial, Inc., TJMT Holdings LLC, Mr. Vincent Viola, Havelock Fund Investments Pte
Ltd, Aranda Investments Pte. Ltd., North Island Holdings I, LP and the stockholders named therein
(incorporated herein by reference to Exhibit 99.8 to the Report on Schedule 13D of Vincent Viola (File
No. 005-89306), filed on May 15, 2018).
Purchase Agreement, dated May 10, 2018, by and among Virtu Financial, Inc. and TJMT Holdings LLC
(incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File
No. 001-37352), filed on May 15, 2018).
Lock-up Agreement, dated May 10, 2018, entered into by Vincent Viola (incorporated herein by
reference to Exhibit 99.2 to the Report on Schedule 13D of Vincent Viola (File No. 005-89306), filed
on May 15, 2018).
134
10.36
10.37
10.38
10.39
12.1
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*
32.2*
101.INS*
101.SCH*
101.CAL*
101.LAB*
101.PRE*
101.DEF*
Lock-up Agreement, dated May 10, 2018, entered into by Michael T. Viola (incorporated herein by
reference to Exhibit 99.3 to the Report on Schedule 13D of Vincent Viola (File No. 005-89306), filed
on May 15, 2018).
Lock-up Agreement, dated May 10, 2018, entered into by TJMT Holdings LLC (incorporated herein by
reference to Exhibit 99.4 to the Report on Schedule 13D of Vincent Viola (File No. 005-89306), filed
on May 15, 2018).
-up Agreement, dated May 10, 2018, entered into by Virtu Employee Holdco LLC (incorporated
Lock
herein by reference to Exhibit 99.5 to the Report on Schedule 13D of Vincent Viola (File No. 005-
89306), filed on May 15, 2018).
Amendment No. 2, dated as of September 19, 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. (incorporated herein by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q (File No. 001-37352) filed on November 8, 2018).
Statement of Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends (incorporated herein by reference to Exhibit 12.1 to the
Company’s Current Report on Form 8-K (File No. 001-37352), filed on May 15, 2018).
Subsidiaries of Virtu Financial, Inc.
Consent of Deloitte & Touche LLP.
Consent of PricewaterhouseCoopers 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.
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.
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.
135
Exhibit Number
3.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
4.1
4.2
4.3†
4.4†
10.1†
10.2†
10.3†*
EXHIBIT INDEX
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).
Agreement and Plan of Merger, dated November 6, 2018, by and among Virtu Financial, Inc., Impala
Merger Sub, Inc. and Investment Technology Group, 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 November 8, 2018).
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).
Virtu Financial, Inc. Amended and Restated 2015 Management Incentive Plan (incorporated herein by
reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 (File No. 333-219110)
filed on June 30, 2017).
Form of Restricted Stock Unit and Common Stock Award Agreement (incorporated herein by reference
to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No. 333-219110) filed on
June 30, 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).
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)
Amended and Restated Employment Agreement, dated as of November 15, 2017, by and between Virtu
Financial, Inc. and Mr. Douglas A. Cifu.
136
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
10.18
10.19
10.20
10.21
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).
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., TJMT
Holdings LLC, 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).
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).
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).
137
10.22
10.23
10.24
10.25
10.26
10.27†
10.28†
10.29†
10.30†
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
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.
Employment Agreement, dated as of June 24, 2015, by and between Stephen Cavoli and Virtu Financial
Operating LLC (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form
10-Q (File No. 001-37352), filed on May 7, 2018).
Virtu Financial, Inc. 2015 Management Incentive Plan Employee Restricted Stock Unit Award
Agreement, dated as of August 24, 2015, by and between Virtu Financial, Inc. and Stephen Cavoli
(incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q (File No.
001-37352), filed on May 7, 2018).
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
Stephen Cavoli (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form
10-Q (File No. 001-37352), filed on May 7, 2018).
Virtu Financial, Inc. Amended and Restated 2015 Management Incentive Plan Employee Restricted
Stock Unit Agreement, dated as of March 21, 2018, by and between Virtu Financial, Inc. and Joseph
Molluso (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q
(File No. 001-37352), filed on May 7, 2018).
Underwriting Agreement, dated May 10, 2018, by and among Virtu Financial, Inc., Virtu Financial
LLC, the selling stockholders and the Underwriters party thereto (incorporated herein by reference to
Exhibit 1.1 to the Company’s Current Report on Form 8-K (File No. 001-37352), filed on May 15,
2018).
Amendment No. 1 to the Amended and Restated Registration Rights Agreement, dated May 10, 2018,
by and among Virtu Financial, Inc., TJMT Holdings LLC, North Island Holdings I, LP, Havelock Fund
Investments Pte Ltd and Aranda Investments Pte. Ltd (incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K (File No. 001-37352), filed on May 15, 2018).
Amendment No. 1 to Amended and Restated Lock-up Waivers Agreement, dated May 10, 2018, by and
among Virtu Financial, Inc., TJMT Holdings LLC, Mr. Vincent Viola, Havelock Fund Investments Pte
Ltd, Aranda Investments Pte. Ltd., North Island Holdings I, LP and the stockholders named therein
(incorporated herein by reference to Exhibit 99.8 to the Report on Schedule 13D of Vincent Viola (File
No. 005-89306), filed on May 15, 2018).
Purchase Agreement, dated May 10, 2018, by and among Virtu Financial, Inc. and TJMT Holdings LLC
(incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File
No. 001-37352), filed on May 15, 2018).
Lock-up Agreement, dated May 10, 2018, entered into by Vincent Viola (incorporated herein by
reference to Exhibit 99.2 to the Report on Schedule 13D of Vincent Viola (File No. 005-89306), filed
on May 15, 2018).
Lock-up Agreement, dated May 10, 2018, entered into by Michael T. Viola (incorporated herein by
reference to Exhibit 99.3 to the Report on Schedule 13D of Vincent Viola (File No. 005-89306), filed
on May 15, 2018).
Lock-up Agreement, dated May 10, 2018, entered into by TJMT Holdings LLC (incorporated herein by
reference to Exhibit 99.4 to the Report on Schedule 13D of Vincent Viola (File No. 005-89306), filed
on May 15, 2018).
Lock-up Agreement, dated May 10, 2018, entered into by Virtu Employee Holdco LLC (incorporated
herein by reference to Exhibit 99.5 to the Report on Schedule 13D of Vincent Viola (File No. 005-
89306), filed on May 15, 2018).
138
10.39
12.1
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*
32.2*
101.INS*
101.SCH*
101.CAL*
101.LAB*
101.PRE*
101.DEF*
Amendment No. 2, dated as of September 19, 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. (incorporated herein by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q (File No. 001-37352) filed on November 8, 2018).
Statement of Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends (incorporated herein by reference to Exhibit 12.1 to the
Company’s Current Report on Form 8-K (File No. 001-37352), filed on May 15, 2018).
Subsidiaries of Virtu Financial, Inc.
Consent of Deloitte & Touche LLP.
Consent of PricewaterhouseCoopers 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).
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).
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.
139
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Virtu Financial, Inc.
DATE:
March 1, 2019
By:
/s/ Douglas A. Cifu
Douglas A. Cifu
Chief Executive Officer
DATE:
March 1, 2019
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.
140
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on March 1, 2019.
Signature
/s/ Douglas A. Cifu
Douglas A. Cifu
/s/ Joseph Molluso
Joseph Molluso
/s/ Robert Greifeld
Robert Greifeld
/s/ Vincent Viola
Vincent Viola
/s/ William F. Cruger, Jr.
William F. Cruger, Jr.
/s/ John D. Nixon
John D. Nixon
/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
/s/ David Urban
David Urban
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
Director
Director
Director
Director
Director
141
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Virtu Financial 2018 Annual Report
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