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Virtu's revenues fall after 'significant' drop in mom-and-pop trading, CEO says

Mom-and-pop investors shied away from the U.S. stock market late in the second quarter, hamstringing revenue growth for Virtu Financial Inc.

The proprietary trading company saw retail participation "down meaningfully" in the second quarter compared with the past two periods, Virtu CEO Douglas Cifu said July 27 on an earnings conference call with analysts.

The dip in retail activity, on top of low market volatility, largely impacted the company's Americas equities business, which recorded $122.4 million in adjusted net trading income for the period.

By comparison, Virtu's Americas equities business posted adjusted net trading incomes of $215.7 million and $141.1 million for the first quarter of 2018 and the fourth quarter of 2017, respectively. The company's Americas equities division results a year ago are not comparable to the recent quarter because they exclude revenue tied to the company's now-completed deal to acquire KCG Holdings Inc.

"The retail segment is an important and large part of what we do," Cifu said on the call. "We really do think there was a significant decline in retail participation."

Virtu's 2017 acquisition of KCG marked the company's venture into the retail business. Market makers act as middle men, providing liquidity for investors' buy and sell orders. As a result, these companies tend to favor more volatile market conditions, which typically coincides with a bump in trading activity. Since January, Virtu has expanded its market share in the U.S. retail business by about 4.5%, Cifu said.

The company posted total adjusted net trading income of $176.7 million, which was about $45 million lower than Jefferies analyst Dan Fannon's $221 million estimate.

"While not surprising to be down from the record levels of [the first quarter], the declines versus [the fourth quarter] are a bit more puzzling," Fannon wrote in a research report.

The company's stock plunged once the market opened July 27, the day Virtu released its second-quarter results. As of 10:39 a.m. ET, Virtu's stock had fallen 14.72% to $21.88.

Part of the larger downfall in retail trading activity in the U.S. comes from the growth of highly priced stocks, Cifu said. Big-name companies like Amazon.com Inc., Netflix Inc. and Facebook Inc. have seen their stock prices spike over the last decade amid rising prominence and investor interest. But those higher prices can discourage retail participation, he said.

On the other hand, retail investors have gained easier access to those types of companies through exchange-traded funds, Cifu said. ETFs, which have seen booming popularity among investors in recent years, act as a basket of stocks that collectively trade on an exchange as one security.

"Every day in the United States, three new ETFs pop up," Cifu said. "That has increased volume and share count as well, which is generally a positive because we're in that business as well."