Virtu Financial Inc. may be making another play to diversify its business model as trading conditions continue to sour for market makers.
The high-speed trading company is in talks to acquire Investment Technology Group Inc., Bloomberg News reported Oct. 4. If finalized, the possible deal would mark Virtu's second large-scale acquisition in two years, following its $1.42 billion purchase of rival electronic-trading company KCG Holdings Inc.
"Virtu is looking to grow beyond their principal trading roots into a firm with much more comprehensive service offerings," said Andy Nybo, director at TP Icap PLC-owned Burton-Taylor International Consulting, in an interview. "This would be a logical step for them to help build out that strategy."
Market makers and trading companies such as Virtu have been seeking ways to expand into new business lines in recent years amid "terrible" operating conditions, as Virtu CEO Doug Cifu described it in 2017.
Companies like Virtu tend to prosper during periods of high market uncertainty, as they collect a small slice of the spread when handling buy and sell orders. But relatively low volatility and sparse trading activity over the last several years have robbed traders of those opportunities. After a sharp spike in the first quarter, the Cboe Volatility Index, a measurement of market anxiety based on S&P 500 options, has averaged a daily closing value of 14.07 in 2018 through Oct. 9. By comparison, the index has seen an average daily close of 18.35 since 2004, according to Cboe Global Markets Inc. historical data.
Virtu branched out in 2017 with its acquisition of KCG, which thrust the company into the business of handling orders from mom-and-pop investors. Now, the company may look to build up an institutional trading business through a deal for ITG, an independent agency brokerage serving asset managers, hedge funds and other institutional investors.
"With [Virtu] having established principal trading in wholesale and exchange-listed market making, institutional brokerage could round out its platform," Sandler O'Neill analyst Rich Repetto wrote in an Oct. 5 research report.
ITG could also help Virtu accelerate its expansions in Europe and Asia, where ITG has continued to grow despite stagnation in the U.S.
In the first half of 2018, ITG's European operations generated $87.7 million in revenues, which was up 16.3% from the prior-year period. The company's Asia-Pacific business saw revenues for the same six-month period of $39.0 million, up 41.1% year over year. ITG's European and Asia-Pacific businesses respectively accounted for 33.8% and 15% of the company's total revenues for the first half of 2018.
But there are concerns among analysts that ITG's institutional customers may not be too keen on working with a Virtu-owned agency brokerage.
In 2015, ITG admitted that it had operated a secret proprietary trading desk that used confidential client information about orders and trading behaviors to trade on its own behalf. That came despite its standing as an agency-only broker and public proclamations that its own interests do not conflict with its customers. The company, which settled the SEC charges for $20.3 million, ultimately overhauled its management team as a result.
While ITG has been able to salvage many of its customer relationships since then, a handful of those clients "would likely be sensitive around an electronic market-making firm takeover," wrote Compass Point Research & Trading analyst Chris Allen in an Oct. 4 research report.
Any losses to ITG's revenues from some customers moving their business to other agency brokerages as a result of a tie-up with Virtu could be offset, though, analysts said.
Virtu would likely look for potential areas of cost savings just as it did with KCG, which has seen several of its legacy offices shuttered. Virtu has slashed the two companies' combined headcount from roughly 1,200 before the merger to 560 as of March 5.
"They want to grow organically into new products and strategies where they don't have as much a footprint," Morgan Stanley analyst Mike Cyprys said in an interview. "Even if they give up a decent portion of revenues, I think over time [an acquisition of ITG] could be significantly accretive."