P4Capital debates Virtu Financial and its IPO

Virtu Financial is in the midst of an interesting situation with its IPO and technologies. P4Capital explores and perhaps even disagrees with what is going on.

Stay tuned to find out who is right and who is humbled.

Amanda: What is going on with Virtu Financial? It seems to be having an on again off again relationship with its IPO. This, and how it’s adjusting its marketing technologies in the digital revolution are what is going to be discussed in this week’ s P4Capital Round table discussion.

Jim: Today’s topic is regarding Virtu Technologies. We’re going to discuss A why they delayed their IPO, B why they’re reissuing the IPO, and probably more importantly how they’ve readjusted their technology advantage in today’s market.

Shaheerah: Virtu Financial is one of the largest high frequency trading firms based in New York. It provides quotations and trades equities, commodities, currencies options, fixed income and other securities on rates exchanges, markets and Dark Pools. So what is high frequency trading? It’s basically high-speed trading which relies on algorithms. These are very fast paced algorithms which allow traders to conduct transactions in just a mere fraction of a second, and it’s a really controversial topic.

Archana: In April of this year, April 2014, Virtu was actually planning to come out with an IPO but it later had to shelve its plans, partly because the timing of the IPO was coinciding with the release of Michael Lewis’ latest book Flash Boys, and how he pointed out of  the fact that US markets are completely rigged. And the company essentially thought that it might not be a favourable time to come out with their IPO since they wouldn’t be able to achieve the evaluation that they were hoping to achieve.

Jeremy: I’m kind of interested as to why they’re issuing an IPO in the first place. The CEO of the company owns the Florida Panthers. The guy doesn’t need money. I think this is an admission that they’ve done all they can do, I mean this is the time frame to cash out. There’s so much competition, there’s increased regulation coming in on the spotlight after Michael Lewis’ book. I mean do they really have the advantage they used to that can sustain the trading wins that they’ve had for so long? I don’t think so.

Jim: Their trading wins were based on low latency. They were infamous for having the fastest fibre at the shortest distance to the exchange. That technology advantage has now been nullified.  Jeremy’s point is, why the IPO in the first place? While normally you IPO just to raise capital, but with the company’s ownership package already cashing in, he’s saying the technology advantage that Virtu has is no longer enough to create the wealth that it has in the decade that has gone by. I may have an opposite view Jeremy, and I may say they may still have that technology advantage, and maybe some of the capital that they are going to be using, raising will be used for more of the technical advantage. That’s kind of my take on it.

Jeremy: I’m not sure that Virtu actually had the shortest, or the fastest times to the market there Jim. It was the better  alternative trading system, that positioned themselves on the other side of the Holland tunnel, closest to the orders coming directly from New York on their way to New Jersey. Also known as BATS, B.A.T.S. (Better Alternative Trading System)

Shaheerah: Virtu also has a risk management system which can actually detect if a trading strategy is generating too much revenue outside of their pre-set limits. And then the system will automatically shut down that strategy and alert management. They also have a continuous trade reconciliation system, and also a super low-cost model where they can just constantly keep updating quotes and marketing on a real-time basis.

Archana: High frequency trading in general has gained a lot of negative press over the years, mainly to do with people who argue that there’s been an extreme loss of investor confidence. And there are yay-sayers as well who argue in favour of it, saying it creates cheaper pricing. In all competition is healthy,  high frequency trading has actually spawned the growth of newer venues which are trying to stifle competition. IEX group is one of the US-based alternative trading system firms, and our client Aequitas Innovations is a Canadian start up which is trying to do the same. Just trying to create a level playing field for the trading community.

Jim: And therefore Jeremy, thanks to both Shaheerah and Archana, my point is made. Their technology is better than the competition’s out there. On a number of factors, starting with A getting the information faster than anyone else, B their algorithm being extremely efficient, and C is then they’re able to package that within their software, to provide their end clients with value.

Jeremy: Jim when you say algorithm do you mean the way they front run trades?

Jim: Yes

Laughter

Jeremy: Even though there’s a huge spotlight on this right topic now, I don’t really think it affects the individual investor all that much. If you’re a buy and hold kind of person you might lose pennies on each stock that you buy but, if you’re holding for 20 years it’s just a drop in the bucket. Price to do business.

Amanda: That was the P4Capital executive team discussing Virtu Financial and its interesting relationship with its IPO and marketing technologies. P4Capital, helping you reach velocity quickly. Want to know more? Check out our website at http://www.planet4it.com Thanks and see you next time.


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