Virtu targets India for next step in market-making expansion

CEO says main focus will be on stocks and commodities

12 February 2020


Virtu Financial, the New York-based trading firm, plans to extend its market-making business into India, Doug Cifu, the company's CEO, disclosed on Feb. 11. The company is already active as a market-maker in several other parts of the Asia-Pacific region, and it is now in the process of establishing operations in India and connecting to the exchanges in that country.

"We continue to evaluate new markets from multiple perspectives," Cifu said during a quarterly briefing on the company's financial results. "As a result, we are shortly going to commence being a multi-asset class market maker onshore in India."

Cifu did not disclose which exchanges the company plans to join or precisely when the new business would start, but indicated Virtu's main focus will be on stocks and commodities.

Those products currently are traded on exchanges such as the National Stock Exchange of India, which is the country's leading exchange for equities, equity derivatives and currency derivatives; BSE, formerly known as the Bombay Stock Exchange, which runs its equities and derivatives markets on an advanced trading platform based on technology provided by Deutsche Börse; and the Multi Commodity Exchange of India, the primary exchange for futures and options on energy and precious metals.

"The markets in India represent significant opportunities in equities and commodities trading, and our onshore operations and registrations will be important to position Virtu for success in this important market," Cifu said on the conference call.

India's equities markets rank among the largest in the APAC region in terms of the value of shares traded, and its equity index options have extremely high volume. In fact, the Bank Nifty Options listed on NSE are the most actively traded derivatives in the world, with nearly 3 billion contracts traded in 2019.

Virtu runs one of the world's largest market-making businesses, buying and selling 25,000 stocks, options, futures, exchange-traded funds and other instruments on 235 trading venues in 36 countries. The majority of that business is in U.S. equities, but it also makes markets on several exchanges in the Asia-Pacific region including the Australian Securities Exchange, the Singapore Exchange, the Tokyo Commodity Exchange and the Tokyo Stock Exchange, as well as more than a dozen exchanges in Europe, Middle East and Africa.

Market-making firms generally have suffered from declining revenues in recent years as the volume of trading and the volatility of prices have declined in many major financial markets. Virtu was affected by the same forces—its adjusted net income from market-making in 2019 dropped 34.6% from the previous year—but Cifu said the company's investments in technology give it an edge over other firms. He explained that Virtu has built a highly automated infrastructure that can be scaled across many types of products around the world, and he warned that only a handful of global firms will be able to keep up with rising costs.

"When Vinnie and I envisioned this firm a dozen years ago, the mantra was get big and be multi-asset class and multi-geographic as quickly and as low-cost as you can, because we recognized that bid-offer spreads were going to collapse," Cifu said, referring to the company's co-founder, Vinnie Viola, the former chairman of the New York Mercantile Exchange.

"If you're only focused in a single asset class or if you're waiting for volatility or if you have a quant strategy that's working in a particular marketplace, those things are going to ebb and flow, but ultimately your costs are going to continue to increase," Cifu continued. "So if you don't have that global scale, if you're not truly multi-asset class, you're very strategically limited in what you can do. Firms like Virtu are not only going to be the survivors, but we're going to prosper, because we've built this fixed cost plant [and] we have always, always managed it for times of famine. And when there's times of feast, you will see the outsized returns that we can generate."

Another area where the firm is expanding its market-making business is in the U.S. equity options markets. In its quarterly presentation, the firm said its market share has risen from below 4% at the beginning of 2019 to above 6% by October, and the number of options symbols in which it trades has increased by 30%. In addition, Virtu has become a registered market-maker on Cboe and it has begun trading options on futures at CME Group.  

"We are still in the very early innings in our expansion into options and there is a significant amount of runway ahead," Cifu said on the quarerly earnings call. "As we develop our options capabilities, we expect we will be able to find opportunities to quickly deploy our scalable technology to address incremental markets, including some of the world's largest and most active markets."

Cifu hinted that Virtu plans to enter options markets in other parts of the world such as Korea, the home of the Kospi 200 options, one of the most actively traded equity index options in the world. The company spent the last two years building a "scalable options architecture" and it already has low-latency connectivity to key international markets, he said.

"We have the low latency connectivity around Europe, and in Asia, in the Korean market," he said. "So the incremental cost of us getting into these various options markets around the world is frankly de minimis, once we have the technological footprint."

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