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Virtu Financial Inc  (NASDAQ:VIRT)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good Morning. My name is Jacqueline, and I will be your conference operator today. At this time, I would like to welcome everyone to the Virtu Financial 2018 Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Andrew Smith, Investor Relations of Virtu Financial, you may begin your conference.

Andrew Smith -- Senior Vice President, Head of Investor Relations and Corporate Strategy

Thanks, Jacqueline. Good morning, everyone. As you know, our fourth quarter results were released this morning and are available on our website. Speaking and answering your questions today are Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Chief Financial Officer. They will begin with prepared remarks and then take your questions.

Today's call may include forward-looking statements, which represent Virtu's current belief regarding future events including the announced transaction and are therefore subject to risks, assumptions and uncertainties, which may be outside the Company's control, and our actual results and financial condition may differ materially from what is indicated in these forward-looking statements. We refer you to cautionary notes regarding forward-looking statements in our press releases and encourage you to review the description of risk factors contained in our Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

It is important to note that any forward-looking statements made on this call are based on information presently available to the Company, and we do not undertake to update or revise any forward-looking statements as new information becomes available. In addition to GAAP results, we may refer to certain non-GAAP measures, and you will find a reconciliation of these non-GAAP measures to GAAP terms included in the earnings materials.

Now I would like to turn the call over to Douglas Cifu, our Chief Executive Officer.

Douglas Cifu -- Chief Executive Officer

Thank you, Andrew, and good morning, everybody. 2018 was a record year for Virtu as we marked several milestones in our Company's history, including record revenue and profitability. We recorded over $1 billion in adjusted net trading income for the first time ever. Our adjusted EBITDA was $620 million, another record. Our normalized adjusted EPS for 2018 was $1.96 and our normalized adjusted fourth quarter EPS was $0.67 reflecting strong performance across the firm in a positive environment. We completed the first full calendar year of the acquisition of KCG and have substantially completed the integration on our guiding toward $338 million of cost synergies on a run rate basis heading into 2019 or 58% of the expenses of KCG prior to the acquisition.

In November, we announced the strategic acquisition of ITG for $1 billion, which will I -- which I will expand upon today. ITG is the premier execution-only institutional brokerage franchise and complements are visioned to create a premier global financial services firm that provides real liquidity across markets and client-focused solutions as a valued agent.

From a financial, strategic, competitive and operational standpoint Virtu has never had a stronger platform from which to grow our business organically. The aforementioned $1 billion in adjusted net trading income generated a 61% adjusted EBITDA margin, an incredible accomplishment in an environment and especially in the midst of a multifaceted integration of the KCG acquisition. Our total outstanding debt was $931 million at the end of the year or 1.5 times our 2018 adjusted EBITDA after we repaid $750 million of the indebtedness incurred to fund the KCG acquisition which obviously afforded us the flexibility to acquire ITG.

We also return capital to our stockholders in the form of our $0.96 annual dividend and our $100 million stock repurchase program during the course of the year fulfilling our promise to be good stewards of firm capital. Our businesses ended the year on a high note and we have demonstrated through all market conditions that the operational efficient and technologically advanced culture of Virtu could scale to grow a client facing business. Our market making businesses achieved $924 million of adjusted net trading income in 2018 while we do not break down the non-customer facing market making operations of legacy Virtu from the customer market making operations of legacy KCG, I wanted to offer some highlights.

The non-customer facing market makes -- market making business of Virtu has continued to demonstrate that it is a growing franchise. In fact, our non-customer facing market making business was up over 30% in 2018. I highlight these accomplishments to point out that the core Virtu Financial technology and operating efficiency around market making and post-trade settlement declaring are the engine that drives the firm in global markets in multi-asset classes, and our legacy business is stronger than ever and growing.

In addition, our customer facing market making businesses had a record year reflecting the high quality of the people and the quantitative strategies embedded in that franchise. As a reminder, the customer market making business has long-term relationships. In many instances relationships that stretch over two decades with firms that provide retail investors, RIAs and others with execution capabilities. Virtu competes for this order flow by providing price improvement to retail investors, real customer service and value as a market center.

When we acquired KCG, we committed to investing and in growing this business globally by integrating it with Virtu's financial technology and continuing to provide superior execution quality and services as we have taken great strides to do so. 2018 was a record year as our Virtu customer market making businesses were up over 50%. Overall, we believe we have strength in this business segment, improved profitability and offer superior service to our growing list of counterparties.

Our execution services business generated $96 million of net revenues in 2018. We spent a good part of 2018, analyzing and thinking about how this business fit into Virtu's future. The business we acquired from KCG required a significant technological and strategic overhaul and we have streamlined the business, converted to an optimal product offering in a single common technology platform and we believe -- and we believe that we are well positioned to grow in 2019.

Recall that prior to the KCG (ph) acquisition, Virtu began building out its own agency execution capabilities, driven by our ability to be efficient around technology and provide micro market structure analysis around executions. With KCG, we inherited an execution services business with 800 buy and sell side relationships in Europe and in the United States. We're learning quickly that we can provide these buy side customers, enhance executions because of our superior technology and offer them unique liquidity by inviting them to opt into our central book derived from our retail order flow from our market making business.

Disclosing on KCG in July of 2017, we have consolidated trading systems, people and processes to a single platform to provide scale align efforts and streamline communication to create a better product and facilitate future acquisitions. We combined legacy Virtu and legacy KCG's agency offering into a single agency trading environment which replaced three from the previous firms including all aspects of monitoring operational risk, regulatory reporting, user functionality and post-trade TCA analysis.

Of course, our acquisition of ITG demonstrates our continued commitment to growing our execution services business. On that note, I'd like to talk to -- take a minute to talk about 2019 and ITG specifically in terms of how the integration planning is shaping up, and our thoughts about the transaction since our announcement on November 7th. An important consideration in our decision to pursue ITG was the compatibility, attractiveness and stability of the execution services business as well as the favourable structural changes in the space from transparency and unbundling of execution and research which are increasing the addressable size of the market and creating opportunities for organic growth in this space.

We like the execution services business, because it is synergistic with our existing market making business and provides recurring subscription based and commission income that is less variable quarter-to-quarter than our market making business. For example, Triton, ITG's EMS product is critical to the operations of ITG's customers and is integrated into the customer workflow. We believe that combined with Virtu's technological capabilities, we can expand the capabilities and efficiency of Triton making it more useful to the end customer.

Specifically, we believe that many Triton customers will like a more robust offering to trade multiple asset classes through a single platform making it a truly global multi-asset class EMS. Virtu's global and multi-asset class order routing capabilities will allow us to significantly enhance Triton to offer these services. ITG's TCA analytics product is an industry standard benchmark. The scope of this product is enhanced by ITG's global reach and customer depth. We believe with Virtu's superior ability (ph) to analyze micro market structure, we will be able to enhance significantly this product offering measuring execution quality and market impact in more -- more asset classes and more geographies. Also ITG's broad product offering sits extremely well with Virtu's core capabilities and provides opportunities to grow the franchise overall by developing economies of scale and scope.

ITG is truly a global business with very attractive and well-established franchises in Asia, Canada and in Europe in addition to the United States. Combining our execution services business with ITG creates by far the market leading execution-only institutional business globally. Virtu and ITG's managements are actively communicating and on the road engaging with dozens of our mutual clients across the United States, Canada and Europe including hosting client dinners and road shows in New York, Boston, Chicago, the West Coast, Florida, Montreal, Toronto, London and Paris. The reception is very positive with recognition of the ongoing benefits that Virtu can provide to ITG's existing products and services by offering a single technology stack and offering unique customized liquidity.

We have continued to identify opportunities around the addition of fuller multi-asset class workflow solutions within Triton and analytics. The option to interact with Virtu's very liquidity offering and enhance algos and routing transparency. Buyers are excited about step function enhancements made possible by Virtu's global multi-asset class expertise. As has been reported, we have begun working with clients around processes and procedures to it. We intend to extend and (inaudible) pertaining to Triton, commission management analytics that to ensure the integrity of client information.

Together with ITG, Virtu will be the premier provider of market making execution services, workflow technology and data and analytics product to global institutions and retail brokers. Virtu will be unique among its peers for its technological capabilities, efficiency and ability to provide these services on a global basis across asset classes with the unique understanding of markets and trading, which our competitors on the agency side lack. We will be further unique and we will be the only independent market making and agency firm to have multi-asset class capabilities across multiple geographies. While we expect that our quarter-to-quarter revenues will continue to reflect the volatile nature of global markets, we look at the ITG acquisition as the source of growth and stable quarterly revenue for several reasons.

First, the client franchise at ITG is growing and stable. Second, the business is less sensitive on the downside and upside to volatility. And lastly, the elements of the ITG business have recurring revenue characteristics. In closing, I would like to note that the positive environment that persisted throughout the fourth quarter has continued thus far into January and we are continuing to benefit from realized volatility levels that are above historical averages.

We entered 2019 with a streamlined operation poised to leverage our core strengths to grow the platforms ITG will bring. Virtu's market making and agency businesses are off to a strong start in 2019 and continue to demonstrate the organic revenue growth we expected from the KCG integration.

I will now turn the call over to Joe, who will review our performance this quarter and overall in 2018. Joe?

Joseph Molluso -- Executive Vice President and Chief Financial Officer

Thank you, Doug. I will review our performance for the fourth quarter and full year 2018 by referring to the supplemental materials we released this morning with our press release for fourth quarter earnings. Beginning on page 3, we generated $299.2 million of adjusted net trading income in the fourth quarter and $1.02 billion for the full year 2018.

Our daily average adjusted net trading income for the fourth quarter was $4.75 million and $4.1 million for the full year 2018. It's worth noting that there was one less trading day in the fourth quarter of 2018 due to the national day of mourning on December 5th, for President Bush. So, there were 63 trading days in the fourth quarter and 251 for the year, instead of 252 for the year.

Adjusted EPS was $0.67 for the fourth quarter and $1.96 for the full year of 2018, while adjusted EBITDA was $195.1 million for the fourth quarter and $620 million for the full year. Reflecting our expense management and successful integration of KCG, our full-year adjusted EBITDA margin was 61% consistent with best-in-class peers in the exchange and financial technology peer group. Our adjusted EBITDA margins in 2018 ranged from 50% to 66%, owing to our philosophy of maintaining a lean fixed cost platform to ensure superior returns even in market environments that are less than favorable.

Our operating expenses were generally in line with our overall guidance for the second half of 2018 and beat guidance for the full year. We will go into detail on that in the following pages. We are maintaining our previously provided full year 2019 guidance for cash operating expenses, which will result in $338 million of total synergies resulting from the KCG acquisition. Separately, we have disclosed publicly details around anticipated ITG synergies and reiterate today, a plan to achieve $123 million of net expense synergies.

In terms of leverage and overall debt, we ended the year at a debt to EBITDA ratio of 1.5 times. Obviously, the strong performance and $620 million of EBITDA helped this ratio as well as the repayment of $750 million of our term loan. 1.5 times debt to EBITDA ratio exceeded our stated goal at the time of the KCG acquisition and allowed us the financing flexibility to pursue ITG. When we announced the ITG acquisition, we stated our intention to pursue a refinancing of our existing term loan and raise an amount that would allow us to complete the acquisition. We have now successfully completed the marketing related to this refinancing and funding in anticipated terms of LIBOR plus 3.50% at 99.50 (ph) subject to the completion of definitive documents.

Turning to page 4, you can see that sequentially our market making and execution services businesses were up meaningfully in the quarter, with market making up 73% and execution services, up 28%. Some thoughts on the market metrics in the bottom of this page, you could see realized volatility of 24, up three times on average from the second quarter. Along with consolidated equity volumes being up 33%, these metrics drove that performance this quarter. Average realized volatility for January remained strong at 18.9.

Turning to page 5, you can see our market making performance broken out in more detail between Americas equities, rest of world equities and global FICC plus options, and the dramatic increase in both Americas equities and rest of world equities between Q3 and Q4.

Page 6 has the detail on our core operating expenses. A few things to note here. Our communications and data processing expenses, which represent the global connectivity plant as well as our market data finished the year at $169 million. This amount was approximately $219 million when you look at separate Virtu plus KCG spend pre-merger and you could see the trend continues down as a benefit of the continued integration of our technology and market data plan. Similarly, depreciation expenses trended down in Q4 and were $61 million for the year.

With regard to cash compensation, overhead and occupancy category, the biggest driver of this is cash compensation. You can see in the analysis on page 6, our compensation to net revenue ratio range between 17.5% to 23.7% throughout the year. This is consistent with Virtu historical guidance since we went public in 2015. Our comp to net revenue ratio would be in the upper teens to low '20s.

This year, we finished the year at 19.5%. You will recall, we have been providing detailed expense guidance and did so at the beginning of 2018. Overall versus the second half of 2018 guidance we came in around the high end of the guidance, for the first half we finished well below the low end. Overall, the midpoint of the core expense guidance we provided for all of 2018 was $486 million and we came in overall at $461 million, beating the midpoint of the guidance by $25 million. You will also note here, we are not changing overall expense guidance for 2019. Naturally, when we close the ITG transaction, these numbers will be incorporated together with ITG expenses.

Page 7 has a summary of our debt capitalization, again we are very happy with the preliminary outcome of our term loan marketing in a challenging credit market, we priced our $1.5 billion term loan at LIBOR plus 3.50%. We were able to achieve this outcome owing to the strong track record Virtu has in the credit markets and history of quickly delevering, as we generate excess cash flows. Post the ITG acquisition, we anticipate our leverage will go back up to the mid-2 (ph) levels, and we anticipate deleveraging back down for our long-term target of 2 (ph) to 2.25 (ph) as we realized capital and expense synergies.

Page 8, we have refreshed our cumulative payout analysis. Given the strong performance in Q4, if you look at the historical payout of dividends and share buybacks, we have returned close to 90% of our earnings to shareholders since our IPO. All the more impressive when you consider, at the same time we return $750 million in cash to retire debt over the same period.

With that, I will turn the call back to the operator for your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Your first question comes from Rich Repetto from Sandler O'Neill. Your line is open.

Richard Repetto -- Sandler O'Neill -- Analyst

Yeah. Good morning, Doug. Good morning, Joe. And -- first, congrats on a strong quarter, even better than the pre-announced results. So I've already got an email saying that, it sounds like that you're more bullish on the ITG acquisition, and I guess the question is, we've talked to clients, we know you've been out as you said in the prepared remarks out talking to clients and just some feedback and why, the feedback we've gotten had been incrementally positive. And like how are you getting people over -- or getting to that more positive view a couple of people that we talk to certainly more positive after they talk with you, could expound on that?

Douglas Cifu -- Chief Executive Officer

Sure. Yes, thank you and good morning, Rich. Yeah, I think it's really two elements to that. The first is, you're right, we've been out there, we've talked to dozens and dozens of ITG customers, both here in Canada and in Europe and I think there's obviously the initial concern around we're adding an additional conflict because ITG historically has been an agency business and where we get that we're very sensitive to that and we're very direct and transparent about that.

I think they like the transparency and the directness of Virtu, we have no other way of conducting business. There's no gray area at Virtu, it's all black and white, hence we've been very upfront about how we will physically and virtually separate the businesses to ensure that we are good stewards of customer information, and all the things that you would expect that we do and I think customers are encouraged to hear those words. I think, to flip it on, it's head though, I think there's a lot of excitement from the customer segment and indeed from the ITG folks with regard to the capabilities that Virtu has -- as effectively an execution firm that is multi-asset class and multi-geography.

There's really a clamoring out there in the marketplace for expertise that ITG has in global equities, but also in FX in fixed income and in commodity products right, because everybody has needs in those areas or lot of these firms have needs in those areas and historically ITG has tried to provide some of those services through Triton and through analytics. And they've done a terrific job with the tools that they have, but now partnered with a firm that makes its living, today, 90% of its living, being a market maker in those markets, it's just an incremental amount of expertise. Think about the investments that Virtu has made historically in financial technology.

You see our P&L, you see what we spend on technology and on personnel, at somewhere in the area of about $200 million to $250 million a year, ensuring that we are the most robust and the most state-of-the-art, if you will, in financial technology around the world. ITG didn't have the capability or the resources frankly to keep up with that. They've done a great job with what they have, it's a fabulous global franchise, but I think clients are now seeing the flip side of combining with a first rate market making and a lot of incremental benefits.

The reason I'm even more excited is, Rich, as I've gotten out there and talk to customers and understand the power of a Triton, the power of analytics products and how important they are to the day-to-day work workflow and users and these are tier 1 buy side institutions around the world. They -- these guys really do have a first rate customer list. I've looked at what clients want, a multi-asset class execution management system. Well, that's Virtu, that's really what we've built up the last 12 years.

Sure, that the tools will look somewhat different, the front end is different, ITG does a much better job in making the products more user friendly, they're much better at productizing things. But when the folks from ITG come to Virtu and say, hey, do you have this? And as we say, of course, we do. Do you have a streaming of their product? Of course we do, because we couldn't trade ETFs, if we didn't have a streaming of their product. Well, there is a desire on the buy side for something that looks like that.

So there's a lot of products and a lot of expertise in Virtu. And as I said, when we initially made the acquisition, ITG has something that we don't have. It has trust, it has distribution with literally thousands of customers around the globe that we want to have access to. So strategically I am much more excited about this acquisition than I was, and I was at level 10, beforehand, and I guess I'm in a 11, in terms of combining the companies.

Richard Repetto -- Sandler O'Neill -- Analyst

Thanks. That's it. That's very helpful. I guess, and then the follow-up question would be. I was surprised to see continued headcount reductions another 6% down on headcount. And I guess, can you just sort of elaborate on where you continue to be able to reduce employees in the combined, and is any of that, do you expect to duplicate? I guess, I guess you can do the same, provide the same roadmap or program to ITG in some sort, as well?

Douglas Cifu -- Chief Executive Officer

Yeah, I think, look -- I mean, obviously, when we announced the KCG transaction, we made it very clear that we've thought that we could apply our operating efficiency and views around automating processes to a business that candidly was in direct need of that. And as we have continued the integration Rich, we found other areas where we could automate and unfortunately that has meant headcount reductions and whatnot, and particularly like, we're both market making firms or the post-trade, middle and back office post-trade processes. I don't think people truly recognize and give us credit for the power of our home-grown technology around middle and back office solutions, right.

And looking at ITG, I think a lot of the issues that they've had around headcount has to do with the fact that they have wonderful franchises. But they're very siloed technologically. They may have started as kind of twins, but they've evolved over the last 15 to 20 years to be like 13th cousin that don't really speak very well to each other anymore, right. At Virtu, that's just not -- not a state or a condition that we tolerate. Because everything, as you -- and you've been here and you've seen it, everything is multi-asset class, multi-geographic, and that's from the front end, all the way through the post-trade processing.

All right. So when you have a catalyst of technology that can do that, it's going to mean by definition you're going to need a lot less folks in operations and reconciliation and whatnot. That doesn't mean that we pick solely Virtu people over Knight people or Virtu/Knight people over ITG people, we're going to pick the right and the best personnel regardless of where they came from, but I do think, one of the themes that we've tried to expose maybe not particularly well is that we are bringing -- that we bring a lot of efficiency to the financial services market, and we have the catalyst that enables us to do this, not just the front-end and the trading.

I mean, really is the middle and back office, and if you talk to folks around Wall Street that struggle, that's really where they struggle the most. And so that operating efficiency has enabled us to reduce headcount and we will continually strive for that operational excellence.

Richard Repetto -- Sandler O'Neill -- Analyst

Thank you.

Douglas Cifu -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Alex Blostein from Goldman Sachs. Your line is open.

Alex Blostein -- Goldman Sachs -- Analyst

Hey guys, good morning. I should now follow-up on ITG. I guess, given your customer feedback so far. Any updated thoughts on revenue retention targets that you set out at the time of the deal. I think you talked about, about a $10 million revenue dissynergy. I don't know if that's still a reasonable place holder for now. And as you think about potential revenue synergies and additional capabilities you guys discussed, do you ultimately expect a bigger benefit in terms of incremental dollars to come from the trading side or the non-trading side. So kind of the Triton TCA product.

Douglas Cifu -- Chief Executive Officer

Yeah. That's good question. So we're not adjusting the revenue dissynergy yet, because we haven't been in the area. We haven't experienced anything yet. So in fairness, we're going to keep the target where it is, I would note in Knight, we had a much higher dissynergy number than ultimately that we realized. I mean, arguably, it was kind of zero. Because, and you know why. So until we get in there, we're going to keep the target as it is. My gut tells me that it's going to be significantly lower than that. We haven't had any Triton customers for example turn off at this -- there's been some minor hand waving around analytics, but again there are so many customers, they are in the individual numbers or kind of de minimis and immaterial. So I'm very bullish, if you will -- that we will outperform in that area.

In terms of what I get really excited about, and you can hear it in my voice and in the introductory remarks, is the strategic fit between the two companies and I do think there are significant opportunities and you hit upon one of them. I mean, Triton is sitting on countless hundreds of desktops of really significant institutions that we for years have wanted to get access to. Right. And so, it's the delivery mechanism and the execution management system and we are a firm that one, we think can make that product ended up itself better, all right, because the throughput and output of an execution management system is what Virtu is all about. Market data and orders that we're pretty good at that.

And secondly, we are pretty good at that, in understanding market structure globally, not to criticize ITG. I think they've done a wonderful job, they got some really talented folks there. The guys that run workflow solutions, I've met, I'm very impressed by. But I think they recognize that they could use some help around the architecture of the system, number one. And number two, more importantly in understanding and getting access to other marketplaces and other asset classes that historically have not been ITG's core strength, namely fixed income and FX. And as an FX and fixed income market maker, obviously, we know those marketplaces. We have connectivity to them. So we think we can make the products better.

On top of that, the point you made the FX, which is our streaming bilateral if you will, product, we'll do it disclosed or we'll do it anonymously, we can give you whatever side you want, we can customize your streams. We've always struggled because of a lack of distribution. We don't have a sales force that goes to the end user, same thing with ETF. Same thing with fixed income products. Right now, we have an embedded sales force, lot of really smart, really talented people in United States, Canada, Europe and Asia.

And those guys are getting excited, because now they have products that they can sell for the first time. So, great example, well, think about Canada, you're an Canadian institutional investor, you want access to an interlisted stock. Well ITG has got a router, right now, that does that, does a really nice job of doing that, deciding whether it's going to execute you in Canada and United States. Where you need to -- where you need to get the FX piece for that. It's got to go outside the house. Well, now internally we can make that price, right, we're one business and it's not going to be marked up, you don't have to go to a bank to get it. You got one price. That ultimately in north to the end user.

So we're going to give a better experience to the end user, and then that end user may say, you know what, why don't you just some stream -- some FX directly to me. Right, I'm a guy that needs to hedge $20 million, $30 million, $50 million, a $100 million a day, really nice user. I'm not getting the right attention from the dealers because, I'm not a big macro hedge fund, or whatever it is, but I have my hedging needs that I need to execute one, two, five times a day. We can do that through the FX in a competitive fully disclosed -- execution kind of way.

That's what gets me really jazzed up, and as well with TCA. Right. If you think about pre and post-trade analytics, market analysis, right, market impact. That's what we do at Virtu. We are market making firms. We have to understand, when we're dealing with a counter party or dealing with the universe in a club, how our liquidity is impacted or how we are impacted. Right. So whether it's 10 millisecond, 10 minutes or 10 hours, we're pretty good at understanding what the market impact is. That's really what TCA analysis is all about. And again that's multi-asset class.

All right. So here's a firm that has the TCA product in FX, Virtu, right. We just never productized it. We need it for our own trading. So the great guys at ITG, great guys and gals at ITG that have been inside Virtu, I think are very excited looking at the products that we have. And they're going to do a great job helping us productize that and getting our liquidity out there to the end user.

Alex Blostein -- Goldman Sachs -- Analyst

Great. That, all makes lot of sense. My second question is, shifting gears a little bit from the quarter, obviously, there has been a -- had a lot of headlines related to MX (ph) in the beginning of January. So wanted to get a couple of -- a couple of thoughts on that front. I guess one, given that, I guess one of the key initiatives from MX against lower pricing on market data connectivity, increase for the transparency and all these things you guys kind of talked about, how do you think about the other side of the argument against that, that potentially could actually trade more complexity, you have to connect to more venues and that could actually increase at least temporarily cost for the industry. And in terms of market data specifically, IEX doesn't charge for market data and doesn't seem like that made a big difference to the way market data express the current exchanges. So why would this be different.

Douglas Cifu -- Chief Executive Officer

Yeah. That's a great question. I think, obviously it does create a 14th exchange rate. So there's going to be incremental cost associated with that. Look, I mean, the whole premise of what has happened here is that you have the industry, this is just Virtu, right. If you think of the nine firms that form MX, Citadel, the four retail firms and then the three great banks that we partner with, really represents a cross-section of the US equities market and indeed there are dozens of institutions that, when the announcement came out wanted to be part of this.

Banks, broker dealers, retail brokers and institutional investors that all want to be part of this. So as an industry, we're all saying that the monopolistic pricing power that the exchanges have had around market data and connectivity just is not fair and reasonable. And there's a statute, the Securities Exchange Act of 1934 that says that those elements of an exchange, need to be fair and reasonable. And when the SEC ruled 5 nothing against to market data increases that NASDAQ was proposing. I think that was really a catalyst for the industry to say, you know, what one, market forces should prevail here, but two, the regulators candidly have not been doing their job until this new group came in at the SEC, and said hold on a second, we're not, we're no longer going to rubber stamp these things, we're actually going to look.

And you'll notice that the exchanges to date, and they never will unless forced to. We'll never really disclose what their costs are and what their margins are for providing those products. Because my friends are at IEX had a really interesting study that showed that, we, as an industry and we at MX can provide those exact same services for a 20th of the cost. So clearly there has been some egregious pricing going on.

So, I think the combination of the industry saying this, i.e. market forces overlaid with regulators candidly finally doing their job and I give a lot of credit to Chairman Clayton at the Brett Redfearn for actually opening up the industry eyes to this. I do think there will be change. And I do think it's the right thing to do. And I do think, IEX that, have proven that you can run an exchange and charge a lot less or charge nothing frankly from market data. I don't want to get into why IEX doesn't have market share, there's a whole bunch of reasons for that.

MX really is going to be dramatically different than IEX in terms of its discipline, in terms of its market structure, in terms of what it's going to be about. But the excitement that the consortium has about this is only heightened by the reaction and the positive feedback we've gotten from the participants in the market. I know there's been some critics out there, people scratching their head, but at the end of the day, think about an industry where virtually every single customer has basically said, we don't like the way that you are conducting the business, you're charging us too much. And so therefore we're going to start a competitor, it's pretty compelling.

Alex Blostein -- Goldman Sachs -- Analyst

Got you. Great. Thanks for taking the questions.

Douglas Cifu -- Chief Executive Officer

Yeah. Thank you.

Operator

Your next question comes from Chris Allen from Compass Point. Your line is open.

Chris Allen -- Compass Point -- Analyst

Good morning, guys, nice quarter. Just wanted to ask a little bit on the, just in the quarter on the FICC, and the execution services line, so if we look at kind of the indicators there from a volume and volatility perspective, FICC would have kind of just eyeballing the numbers would have implied decent year-over-year growth. I mean decent year-over-year growth that you kind saw. But sequentially, we thought it little bit better. In execution services, the revenues were below first quarter of ' 18 and second quarter '18 levels, even though volumes and from an industry perspective, were up nicely. So just kind of -- what kind of drove the sequential move there and just how to think about those lines moving forward.

Douglas Cifu -- Chief Executive Officer

Yeah. I think the -- let me just handle execution services first. I think, look, I mean we candidly took a business that was a mess. Technologically, it was a mess and just operation and structurally, it was a mess and redid it. There were a number of services around like portfolio trading and market on close and things along those lines that candidly we just kind of shutdown for periods of time. Because they need, I was not satisfied with the risk reward of being in those marketplaces.

So we had to really almost rebuild and clean up from a risk perspective, the operations here around execution services. I think we've done a great job with that. I guess Steve Cavoli, who runs the business, a big shout out, it's enabled us to be excited about, merging with ITG, because I do think we have a solution there. But it certainly pains when you do that. You really -- we really didn't have a product to sell, while we were in this interim period where we were effectively trying to recreate a business while continuing to run it.

So that's really the key issue there. In terms of the FICC business from third to fourth quarter, I -- nothing really jumps out of me, Chris to be candid with you. I mean, I think, the only thing I can think that was probably volatility in Turkey that probably helped our FX business in the third quarter. That wasn't quite there. In the fourth quarter, I mean, year-over-year much was written by some of your colleagues about the demise of our FX business and nothing could have been further from the truth. It was up over 30% this year. So, the products are there, they have only gotten better.

I'm unconcerned about that, those quarter-to-quarter result, because I know, year-over-year, we've made substantial strides in that marketplace. I think we have now a product in VFX that is significantly more attractive to end-users and the same thing in fixed income. We have a streaming fixed income product in active treasuries, both outright and in spreads that I think people find attractive. Those are businesses that are very well poised to grow.

Chris Allen -- Compass Point -- Analyst

Thanks, guys. That was it from me.

Douglas Cifu -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Kaimon Chung from Evercore ISI. Your line is open.

Kaimon Chung -- Evercore ISI -- Analyst

Thank you. Just kind of want to just go back to the MX venture. Just wanted to get a sense of how fast you think you could scale that by acquiring more participants beyond the nine, getting regulatory approval and maybe just something about like expected time frame of pulling in with your ambitions.

Douglas Cifu -- Chief Executive Officer

Yeah. Well, obviously, in Virtu, it would be ready to trade on Monday. But that's not really practical, given the fact that we have to file a Form 1 and build the technology, right and candidly hire a CEO and all that kind of staff. So this is not like, some side projects we have, really smart people at each of the nine institutions that are actively engaged. I'm on the Board. If I'm a smart person, I guess I qualify. And it's very, very well capitalized. I will tell you, I'm not going to name names, but you know just about every bank that we do business with, all of our competitors on the broker-dealer side, the other wholesalers, some HFT identified type of firms and most excitingly and most interesting a number of institutional investor firms have reached out and expressed an interest in being investors.

So we could have had 25 firms in this initial closing and certainly we will do an incremental financing at some point, but that will be determined by the Board and our CEO. I'm just one of nine directors sitting on the Board. We didn't want to have a huge consortium to begin with, because I think it's, anything is difficult in a committee and so limiting it to nine, made a lot of sense and we have plenty of capital to get rolling, and certainly we're talking to some very, very attractive candidates at the executive and technology level that I'm very excited about. So we'll have announcements around that relatively soon. In terms of getting the filing filed, I think it will be you know sometime in the first half of the year for sure. And I think you know, the idea is to be up and running.

Late in 2019, early in 2020, that might slip a little bit depending upon whether the government is opened to handle our filing and all those kind of things. But look, the momentum is there. I could not have been happier with the response of the industry. I think the exchanges. You know, we're trying to point this as like you know, a Virtu Citadel thing, nothing could be further from the truth. There was an avalanche of support from the retail brokers, I mean you know the big four that put their names and their money behind this thing. And certainly the three sell-side banks that we have involved are the top of the heap, and they were a dozen more behind them that we're interested in doing it.

And as I said, bunch of institutional investors as well. So, for whatever reason, and I've given you the reasons, what I think, but certainly there is a lot of unhappiness, I guess, with the incumbents out there. I run a customer business. I would not be happy if 75% of my user base decided to start a broker-dealer, because they didn't think I was being fair and how I price things. But that's just me, that's how I run a Company. These changes will react, the way they do, we continue to do business with them, we communicate with them. I have no -- this isn't a personal issue, this is really just business. And at the end of the day, I think we're going to have a very successful exchange, and remember the name of the exchanges, the members exchange, right.

It's not an exclusive club. Anybody can join this club, anybody can be a member and it's going to be an exchange that's run for the benefit of its members, not for any anyone in particular, not for any particular group. Right. It's going to have a lot of transparency, in very simple order types that everybody can understand, and more importantly transparency around what its costs are and passing those costs onto its members in fair way. That's really what this is about.

Kaimon Chung -- Evercore ISI -- Analyst

Thank you. That was really helpful. And then maybe just quick follow up on, I heard your comments about the good realized volatility levels continue in January, though the spot VIX has done a lot. Just trying to get more color around how Q1 is tracking maybe just by asset class of product? Thanks.

Douglas Cifu -- Chief Executive Officer

Yeah, yeah. It's a good question. So, happily, some of the volatility that we saw in the fourth quarter, particularly in December has continued, realized volatility is off, obviously from Q4, where I think it was like a 23 average or something in that zip code.

Joseph Molluso -- Executive Vice President and Chief Financial Officer

Q4 is like 24 and January average was around 19. Right. So, whatever you want to take from that, Kaimon, I think it's January trended well. But it's not -- it's off slightly. Right. The numbers -- the realized numbers are off slightly, but still, if you look at the last 12 quarters, you know, a realized vol around 19 is well above the average of that period.

Kaimon Chung -- Evercore ISI -- Analyst

Thank you.

Operator

(Operator Instructions) Your next question comes from Zack Feierstein from Morgan Stanley. Your line is open.

Zachary Feierstein -- Morgan Stanley -- Analyst

Hey, guys. Zack Feierstein filling in for Mike. Doug, just a question on the SEC transaction fee pilot as approved, just wanted your thoughts on that and what direct or indirect impact you think that could have on your business in the industry.

Douglas Cifu -- Chief Executive Officer

Yeah. It's a great question. So look, I mean we are -- as you know, we run a non-customer, a customer market making business and a agency business. Certainly, we like further transparency. On the agency side, we've been very, very clear where we don't route orders in a fee-dependent manner. So we think this is a positive, if it reduces our costs, if you will, in terms of having to route orders.

That's a good thing ultimately for the firm. We've been big supporters of 606 reform, which came out where you know, we think institutional brokers, should tell their client real time if they want, and that's how we are capable of doing it, why in order got routed where it got routed, and be very deterministic about why we execute on behalf of a client, because I think that's the best execution requires, and very simply.

So that's what we do and we think, if it gives the buy side more comfort around order routing and transparency. I think that's a strong positive for the industry and we are all in favor of it. As a market maker putting aside, putting on my market making hat for a second, again for the 100th time, we're not a rebate trading firm. So this won't have an impact on our net, what we pay the exchanges net. If it reduces the overall access fees in general, the difference between rebate versus cost, I'm all in favor, but that's a good thing from our perspective. Certainly, our capacity as a retail market maker when we're posting non-marketable limit orders, all right, we have to -- that could be a good thing from our perspective, depending upon kind of what our end users, how they behave and whether they send more orders to us or less orders to us, those kinds of things.

So we're kind of all over the place. At the end of the day, these transaction fees or just friction in the marketplace. So we are big believers in reducing that friction. Do I think a rebate is inherently evil. No, I don't, I've said that very clearly. I think it's an enhancement for someone to display liquidity. That's a good thing.

In the marketplace, I never understood why people were so critical about a rebate. I get the whole conflict issue, but it's a market maker or market participant. If you're willing to display an order, you're effectively adding something to the marketplace, you're showing your hand. And so to be incentivized to do that to me is not inherently evil or conflict. I think unfortunately when that book came out, it conflicted those two issues between order routing which is one you're acting as an agent on behalf of a principal, you should act in that principals' best interest and liquidity provisioning or displaying your hand where you're being incentivized, nothing wrong with that.

So, at the end of the day, I think I'm hopeful that the access fee pilot will conclude in the way that my brain that these things are separate and apart. And one, you need disclosure and the other is not inherently evil. So I think ultimately the SEC and again I complement Chairman Clayton and trading end markets. I think the pilot was well thought out and hopefully it will -- it will provide enough data that we can reach sensible conclusion.

Zachary Feierstein -- Morgan Stanley -- Analyst

Appreciate that. And just wanted to get you up to thoughts kind of in the 19 on any KCG revenue synergies from here and maybe where that could come from or kind of what you're seeing there?

Douglas Cifu -- Chief Executive Officer

Yeah. Yeah, great question. So look, I mean, I said, our integration is largely done. We've completed it, if you were on the institutional side and certainly on the old get go non-customer market making side, it's done. I say these things like in the hand waving fashion. It's -- I have to compliment the folks that work at Virtu today, because they've gone through an enormous amount of pain and time in terms of replatforming just probably millions of lines of code and the effort that was undertaken was really gigantic.

Particularly some of the old get go folks in Chicago, really had to take everything they've done over the last, however, many years and replatform the Virtu. That was not a lot of fun for them. Now that it's over, I think there is a significant opportunity for them to begin iterating again and to use the Virtu technology in a way that grows their -- grows their trading revenue. The same thing more importantly or just as importantly on the retail side where that replatforming effort is still in process, because we didn't want to screw up any retail customers and so I think there's a lot of incremental benefit there.

And then secondly, we are no stretch of the imagination done, and I've talked about this in a number of quarters in taking the KCG quantitative strategies around the world. We've done some of it in Japan, little bit in Canada and a little bit in Europe, and in Europe not as much, because we didn't have enough data from it too. So, I think there's a lot of runway left still in how we think about approaching those markets in a more quantitative fashion using the great assets that we acquired and the great people that are now part of our tool that came from KCG.

And then the last thing is KCG had a great ETF business here in the United States, obviously because of the retail relationship. We really didn't have distributions outside of the United States. I think again with the ITG transaction, think of that KCG/Virtu product being able to put on a block ETF, either as an agent or a principal, it's just being enhanced through the ITG acquisition. So I'm excited about that. I really think we can compete with some of the firms out there that have had this broader, at a global block ETF business if you will.

Operator, I think that's all we have in the queue.

Operator

There are no further questions, I'll turn the call back over to the presenters for final remarks.

Douglas Cifu -- Chief Executive Officer

Excellent. Well, thank you, everybody. Obviously a very, very successful and exciting year for Virtu with the KCG acquisition. We thank you for your support and we will continue to update you on the exciting developments around our combination with ITG. Thank you. Everybody have a great day.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 50 minutes

Call participants:

Andrew Smith -- Senior Vice President, Head of Investor Relations and Corporate Strategy

Douglas Cifu -- Chief Executive Officer

Joseph Molluso -- Executive Vice President and Chief Financial Officer

Richard Repetto -- Sandler O'Neill -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Chris Allen -- Compass Point -- Analyst

Kaimon Chung -- Evercore ISI -- Analyst

Zachary Feierstein -- Morgan Stanley -- Analyst

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