Virtu IPO blocked by high-frequency trading cloud

April 2, 2014

By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s a good thing Virtu Financial doesn’t really need to go public. The “technology-enabled market maker” is delaying its initial public offering, according to news reports. While Virtu may be different, too much of what it does sounds similar to the high-frequency trading that’s suddenly in the spotlight.

It’s reasonable to ask why a highly profitable private trading firm aspires to be publicly traded at all. It doesn’t need capital. Virtu disclosed profit of $182 million on total revenue of $665 million last year. And between 2011 and 2013 it paid out nearly $700 million in distributions to its owners, thanks to both business cash flow and the proceeds of borrowing.

Nor does founder Vincent Viola, formerly chairman of the New York Mercantile Exchange, seem to have much inclination to share control, with four classes of shares – part of a complex corporate structure – helping to concentrate voting power in his hands.

The answer may be that private equity firm Silver Lake Partners, which invested about $250 million in Virtu in 2011, wanted a profitable exit route and IPO investors seemed gung-ho enough to invest on Viola’s coattails at a high enough price. Valued at the ballpark 20 times earnings multiple that attaches to flourishing U.S. exchanges, Virtu could be worth more than $3.5 billion.

Fate has intervened with the publication of Michael Lewis’ new book with its claim that U.S. stock markets are “rigged” by high-frequency traders operating at light speed. Virtu distances itself from the momentum and order signal-based trading that Lewis highlights as particularly troubling. Instead, Viola’s firm exploits variability in the gap between bid and offer prices for securities, minimizing risk to the extent that it has lost money on only one day since 2009.

Yet massive volumes, pennies-per-trade profit and electronic activity in at least 10,000 securities and other instruments, 210 trading venues and 30 countries make Virtu seem like any high-frequency trader, a business which isn’t widely understood anyway. KCG, the combination of Getco and the former Knight Capital – which suffered a big loss in 2012 as the result of a technological glitch before the merger last year – boasts a trailing price-to-earnings ratio below 10 times. Holding off on the IPO could prevent Virtu’s valuation sliding in that direction, especially as there’s no rush.

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