November 8, 2018

Breakingviews: High-frequency trader finds Virtu-ous M&A circle

by Breakingviews.

One of Wall Street’s best-known high-frequency trading shops has found a Virtu-ous M&A circle. Doug Cifu’s outfit is embracing diversity by acquiring agency-brokerage and analytics shop ITG. The deal also offers Virtu Financial practically free insurance against a market downturn: Cost cuts are likely to cover most of the $1 bln price tag.

Cifu is developing a knack for buying his way out of a tight spot. As becalmed markets slowed Virtu’s core trading business, he beefed up the books last year by snaring rival KCG, which had rebuffed him five years earlier. Migrating KCG’s business onto Virtu’s trading technology and consolidating office space has allowed him to cut some $340 million of costs, over 50 percent greater than targeted.

That should give his investors confidence that he can wring a planned $123 million of expenses out of ITG. Taxed at a 21 percent rate and capitalized, those are currently worth some $970 million, just shy of the all-cash deal on offer to ITG’s shareholders.

Owning ITG has other benefits. Its agency brokerage, dark pools and trading analytics are relatively stable fee-generating businesses. That’s a useful complement to Virtu’s portfolio, which has significant fixed costs and relies on market volume to fatten the bottom line.

The merger will boost commissions and fees to just over a third of trading income from 10 percent currently, and reduce the group’s reliance on volatile market-making. Cifu also hopes to generate more revenue by applying ITG’s transaction-cost analysis to Virtu’s broader asset classes, including foreign exchange – but sensibly isn’t baking any of that into Wednesday’s numbers.

Those attractions explain why investors pushed up Virtu’s share price by more than 4 percent in afternoon trading, to $25.62. A fitter firm is a better player.


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