High-frequency trading: Q&A with Doug Cifu of Virtu Financial

Virtu Financial, the high-speed trader, this year bought rival KCG Holdings for $1.4bn. Virtu’s chief executive Doug Cifu talks about the thinking behind the deal and the future of the sector.

Financial Times: You agreed a transformative acquisition this year buying KCG. What is the logic behind the deal?
Doug Cifu: The slowdown in volumes and volatility in financial markets has affected all of us. Virtu was built for a feast, but also a famine. One of the hallmarks of the firm is efficiency. At legacy Virtu, our quotes were distributed to exchanges, dark pools and banks and brokers. We will continue to do that. But now we have direct relationships with retail brokers, the Schwabs, the TD Ameritrades and a Who’s Who of institutional buyside firms that need to route orders from customers to places where trades can be executed. Rather than having an intermediary do that, we can provide that service now directly to end users.

FT: What does a deal like this say about market dynamics at this time?
DC: With less volume, there is less opportunity to make money from trading. When volatility is muted, as it has been for the past two years, the spread or difference between the bid and offer prices a market maker can collect on a trade — its profit margin — tends to be tighter.

A couple of quarters of net losses at KCG gave us an opportunity to convince its board to do the deal.

FT: Would you do more acquisitions?
DC: One of the reasons we went public in 2015 was to have a currency — our shares — that would enable us to make acquisitions. There are lots of other financial services companies out there that are attractive and, frankly given the environment, probably struggling. Our strengths could be useful.

FT: Which areas look interesting to invest in, both organically and through M&A?
DC: I am very excited about the growth of exchange traded funds, and so we want to be the premier destination for electronic and block execution of ETFs. There is a lot more we can do in non-equity asset classes to provide liquidity either directly or through intermediaries.

FT: Volatility, or the lack thereof, has been one of the biggest themes in 2017. How is this affecting high-speed traders like Virtu?
DC: You have seen it in our results. We have definitely had more challenges in 2017 than in 2016, and in 2016 we had more than in 2015, when there were pockets of real volatility. We run a tight ship so we will be a survivor in periods of high and low volatility. We have seen firms like KCG sell themselves and Teza shut down and other [proprietary trading] firms suffering because there is less opportunity and it has become more competitive.

FT: Is there an end in sight? Or is this secular change in the market?
DC: It is a result of the shift to passive investing strategies, like index funds and ETFs, accommodative monetary policy around the world, et cetera. My view is that low volatility is not permanent and that is why we made a significant acquisition. We are doubling our efforts to be ready for the wave of volatility in whatever form it comes.

FT: High-frequency trading has now been around about 10 years. How has the industry changed?
DC: We have gotten way past the hysteria of Flash Boys [the 2015 Michael Lewis book that argued the market was rigged to the benefit of HFTs] into a more mature business that people, whether grudgingly or not, accept as a very important part of the ecosystem.

That is gratifying. It wasn’t a lot of fun in 2014 with regulators and other people pointing fingers and saying you are doing something wrong.

But the opportunities have become more challenging. We see more consolidation either in the form of M&A or firms throwing in the towel. It has been a tough six or seven quarters in a row.