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3 Reasons Why Virtu Financial Is Winning in 2020

By Dave Kovaleski - Mar 19, 2020 at 6:00AM

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The market maker has thrived during this period of historic volatility.

Amid all the red numbers in the stock market during this coronavirus-fueled bear market are some stocks that are outperforming. Virtu Financial (VIRT -1.22%) is one of them. Virtu Financial is not just beating the market, it's obliterating it -- up more than 18% year to date through Wednesday's close.

Here are three reasons why Virtu is winning in 2020.

Reason No. 1: It profits from market volatility

Virtu Financial is a market maker -- a firm that quotes buy and sell prices for stocks, options, commodities, currencies, fixed income, and other securities on exchanges and in markets around the world. The company earns money by making a profit on the spread (or the difference between the buy and sell price) for each trade. Virtu does this through its high-speed trading platform that uses proprietary technology to provide deep liquidity in over 25,000 securities, at over 235 venues, in 36 countries. 

The market volatility we've experienced in the past month or so has been good for high-frequency-trading firms like Virtu. When there is greater volatility, there is more demand for liquidity, and, in turn, more trading and profit opportunities.

An arrow on a computer screen pointing up.

Image source: Getty Images.

Reason No. 2: It's a major player

Virtu is not only one of the largest high-frequency-trading firms, it is the only one that's publicly traded.

As one of the biggest names in its business, Virtu handles roughly one-fifth of the trading volume each day. A month ago, the CBOE Volatility Index (VIX), which tracks stock market volatility, sat at 13. On Monday, the VIX spiked over 82 -- an all-time high, surpassing its previous record levels from November 2008 (the index adopted its current methodology more than 16 years ago). 

The volatility is not likely to abate any time soon, as the VIX -- also called the "Fear Index" -- is a forward-looking gauge, meaning the highs it's currently at is based on what investors expect over the next 30 days. It's hard to predict how long the COVID-19 pandemic will continue to threaten our health, economy, and markets, but it seems pretty clear that these are still early days.

Reason 3: It's trying to smooth out a cyclical business

When there's less trading and volatility, Virtu doesn't perform as well, because the more trading there is, the more opportunities there are for growth. Just look at the past few years. Last year, revenue decreased almost 19% to $1.5 billion, impacted by lower volatility and volumes. Net trading income dropped 28% to $912 million. Thus, the stock price was down almost 38% in a year when the S&P 500 was up 28%. In 2018, when the VIX rose to 30, revenues increased about 83% over the previous year to $1.8 billion. Net trading income jumped 65% to $1.2 billion. Consequently, the share price climbed more than 40% for the year while the S&P was down 6%.  

While most of Virtu's revenue comes from its market-making segment, the company has made an effort in recent years to diversify its income by bulking up its other business segment, execution services. This business was bolstered by the acquisition of Investment Technology Group, or ITG, in March 2019. ITG helps brokers and asset managers reduce the cost of implementing investments via technology-enabled liquidity, execution, analytics and workflow solutions. In the fourth quarter of 2019, Virtu's execution services revenue soared 240% to $134 million compared to the fourth quarter of 2018. The market-making business made $267 million in revenue in the fourth quarter.

"For the full year, our execution services segment comprised one-third of total ANTI (adjusted net trading income) as compared to 9.5% for the prior year," Alex Ioffe, executive vice president and CFO, said on the fourth-quarter earnings call. "This shift was in great part due to the acquisition of ITG, which diversified our revenues, while leveraging our core technology."

So while Virtu is definitely a cyclical business, it has been diversifying to perform well in all markets. But right now, itʻs currently in its cycle and should continue to outperform. Plus, itʻs pretty cheap, trading under $19 per share with a low forward price-to-earnings (P/E) ratio under 11.

Virtu Financial is a stock you should be looking to add to your portfolio right now. Itʻs a great way to invest in uncertain times.

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