The COVID-19 pandemic triggered unprecedented volatility in the financial markets, attracting hordes of first-time retail investors looking to ride the wave. Market-making firm Virtu Financial (VIRT 2.88%) was perfectly positioned to benefit, as it provides liquidity and execution services for over 25,000 financial securities, including those high-risk derivatives favored by the newcomers. 

Virtu is a truly global business, offering its services in 36 countries that contributed to over $1.1 billion in full-year 2020 earnings. The company recently announced a major increase in its share buyback program, on top of an already generous dividend -- capping off a record first quarter, which saw its highest-ever quarterly revenue result.

Stock chart overlayed with a digital quoteboard

Image source: Getty Images.

Prime position

Virtu Financial is reaping the rewards of a market that is generating record levels of investor interest. After 2020 delivered the highest-ever average daily trading volumes, the early part of 2021 delivered even bigger numbers.

Metric

2019

2020

2021 (January)

Average daily volume

7 billion

10.9 billion

14.7 billion

Data source: Piper Sandler.

The company has over 30% market share for retail investor order flow -- and it pays a lot of money for the privilege. Market makers pay brokers to route their clients' orders to them, so the market maker can earn a profit on the bid/ask spread -- the difference between the buy and sell price -- when executing the trade. In 2020 alone, Virtu paid over $750 million for order flow, almost double the 2019 figure -- no doubt attributable to the extra volume driven by the surge in retail investors. This arrangement allows brokers like Robinhood to offer commission-free trading to its clients. 

As market volatility settles down, it can be expected that Virtu could see a decline in its business. However, the pandemic triggered a trend among retail investor participation that's probably here to stay. New technologies have made it more convenient -- and cheaper than ever -- to access the financial markets. It's likely that a portion of the clients who invested for the first time in 2020 will stick around for the long term. This showed up in the first quarter, as payment for order flow (which was lumped in with brokerage, exchange, and clearance fees) topped $250 million, a 49% year-over-year increase. Virtu could have an even bigger year in 2021, if that early number is any indication.

Outstanding operating performance

Virtu's 2020 revenue totaled $3.24 billion, 113% more than the 2019 result. The momentum carried through to Q1 2021 with a record $1.1 billion, placing the company on track to deliver an even higher full-year number this year. 

With $900 million in cash, the company has elected to return a portion to shareholders. The board of directors initially authorized $170 million from November 2020 onwards, but at the end of Q1 this year, it bumped the number up to $470 million. Virtu has a market capitalization of $5.5 billion, so the buyback program is equivalent to about 8.5% of the company, and is expected to be completed by May 2022. 

It also provides a $0.96 trailing-12-month dividend -- a return of 3.3% based on the May 14 closing price. 

With a recent stock price around $29, the stock trades at five times trailing-12-month earnings. In an economic environment starved of fixed-income yields, Virtu Financial could be a great value play for investors. As long as the company continues to grow revenue and earnings, the current valuation presents an opportunity for some capital growth, too. However, it's important to monitor quarterly results for clues of a slowdown if markets go through a quiet period. The current earnings multiple might remain put if investors get any hint that this strong growth phase for the company is over.