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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-07 · 225 added, 91 removed, 613 unchanged (34% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis covers the three months ended March 31, 2021 and 2020 and should be read in conjunction with the consolidated financial statements of Virtu Financial, Inc.

(the “Company”) for the period ended March 31, 2021, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and accompanying notes and MD&A for the year ended December 31, 2020, which are included in Items 8 and 7, respectively, of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

The following management’s discussion and analysis covers the three and six months ended June 30, 2021 and 2020 and should be read in conjunction with the consolidated financial statements of Virtu Financial, Inc.

(the “Company”) for the period ended June 30, 2021, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and accompanying notes and MD&A for the year ended December 31, 2020, which are included in Items 8 and 7, respectively, of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

This management's discussion and analysis contains forward-looking statements that involve risks and uncertainties.

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We also earn revenues (a) by providing our proprietary technology and infrastructure to select third parties for a service fee, (b) through workflow technology and our integrated, broker-neutral trading tools delivered across the globe, including order and execution management systems and order management software applications and network connectivity and (c) through trading analytics, including (1) tools enabling portfolio managers and traders to improve pre-trade, real-time and post-trade execution performance, (2) portfolio construction and optimization decisions and (3) securities valuation.

The segment also includes the results of our capital markets business, in which we act as an agent for issuers in connection with at-the-market offerings and buyback programs.

Our Corporate segment contains investments principally in strategic financial services-oriented opportunities and maintains corporate overhead expenses and all other income and expenses that are not attributable to our other segments.

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Additionally, on the ITG Closing Date, the Company’s fourth amended and restated credit agreement, dated as of June 30, 2017 (as amended on January 2, 2018 and September 19, 2018, the “Fourth Amended and Restated Credit Agreement”) was terminated.

As described below, the Credit Agreement was amended on October 9, 2019, on which date VFH borrowed and additional $525.0 million of incremental first lien term loans, the proceeds of which were used together with cash on hand to redeem the Notes (as defined below).

As described below, the Credit Agreement was amended on October 9, 2019, on which date VFH borrowed an additional $525.0 million of incremental first lien term loans, the proceeds of which were used together with cash on hand to redeem the Notes (as defined below).

The Indenture (as defined below) was fully terminated following such redemption.

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In connection with the IPO, non-qualified stock options to purchase 9,228,000 shares were granted at the IPO per share price, each of which vests in equal annual installments over a period of four years from the grant date and expires not later than 10 years from the grant date.

Subsequent to the IPO and through March 31, 2021, options to purchase 1,628,750 shares in the aggregate were forfeited and 5,429,470 options were exercised.

Subsequent to the IPO and through June 30, 2021, options to purchase 1,628,750 shares in the aggregate were forfeited and 5,683,095 options were exercised.

The fair value of the stock option grants was determined through the application of the Black-Scholes-Merton model and was recognized on a straight-line basis over the vesting period.

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There are no material differences between our condensed consolidated financial statements and the financial statements of Virtu Financial except as follows:

(i) cash and cash equivalents reflected on our Condensed Consolidated Statements of Financial Condition as of March 31, 2021 in the amount of $163.0 million;

(ii) deferred tax assets reflected on our Condensed Consolidated Statements of Financial Condition as of March 31, 2021 in the amount of $175.4 million and tax receivable agreement obligation in the amount of $271.2 million, in each case as described in greater detail in Note 4 "Tax Receivable Agreements" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q;

(iii) a portion of the member's equity of Virtu Financial is represented as non-controlling interest on our Condensed Consolidated Statements of Financial Condition as of March 31, 2021;

and (iv) provision for corporate income tax in the amount of $62.4 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021.

(i) cash and cash equivalents reflected on our Condensed Consolidated Statements of Financial Condition as of June 30, 2021 in the amount of $111.2 million;

(ii) deferred tax assets reflected on our Condensed Consolidated Statements of Financial Condition as of June 30, 2021 in the amount of $171.0 million and tax receivable agreement obligation in the amount of $254.7 million, in each case as described in greater detail in Note 4 "Tax Receivable Agreements" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q;

(iii) a portion of the member's equity of Virtu Financial is represented as non-controlling interest on our Condensed Consolidated Statements of Financial Condition as of June 30, 2021;

and (iv) provision for corporate income tax in the amount of $17.4 million and $79.8 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021, respectively.

Components of Our Results of Operations

The following table shows our i) Total revenue, ii) Total operating expenses, and iii) Income before income taxes and noncontrolling interest by segment for the three months ended March 31, 2021 and 2020:

(in thousands) Three Months Ended March 31,

The following table shows our i) Total revenue, ii) Total operating expenses, and iii) Income before income taxes and noncontrolling interest by segment for the three and six months ended June 30, 2021 and 2020:

(in thousands) Three Months Ended June 30, Six Months Ended June 30,

Market Making 2021 2020 2021 2020

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Income before income taxes and noncontrolling interest $ 135,002 $ 404,535 $ 624,789 $ 870,760

The following table shows our results of operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The following table shows our results of operations for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2021 2020 2021 2020

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Our trading income, net, results from gains and losses associated with trading strategies, which are designed to capture small bid-ask spreads, while hedging risks.

Trading income, net, accounted for 80% and 80% of our total revenues for the three months ended March 31, 2021 and 2020, respectively.

Trading income, net, accounted for 77% and 81% of our total revenues for the six months ended June 30, 2021 and 2020, respectively.

Interest and dividends income.

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Interest is also earned on securities borrowed from other market participants pursuant to collateralized financing arrangements and on cash held by brokers.

Dividends income arises from holding market making positions over dates on which dividends are paid to shareholders of record.

Dividend income arises from holding market making positions over dates on which dividends are paid to shareholders of record.

Commissions, net and technology services.

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• “EBITDA”, which measures our operating performance by adjusting net income to exclude Financing interest expense on long-term borrowings, Debt issue cost related to debt refinancing, prepayment, and commitment fees, Depreciation and amortization, Amortization of purchased intangibles and acquired capitalized software, and Income tax expense, and “Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude severance, transaction advisory fees and expenses, termination of office leases, charges related to share based compensation and other expenses, which includes reserves for legal matters, COVID-19 one-time costs and donations and Other, net.

• “Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items including IPO-related adjustments and other non-cash items, assuming that all vested and unvested Virtu Financial Units have been exchanged for Class A Common Stock, and applying an effective tax rate, which was approximately 24%.

• “Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items and other non-cash items, assuming that all vested and unvested Virtu Financial Units have been exchanged for Class A Common Stock, and applying an effective tax rate, which was approximately 24%.

• Operating Margins, which are calculated by dividing net income, EBITDA, and Adjusted EBITDA by Adjusted Net Trading Income.

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GAAP measure.

The following table reconciles the Condensed Consolidated Statements of Comprehensive Income to arrive at Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, and Operating Margins for the three months ended March 31, 2021 and 2020.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2021 2020 2021 2020

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(3) Calculated by dividing Adjusted EBITDA by Adjusted Net Trading Income.

The following table reconciles Net Income to arrive at Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted Net Income and Normalized Adjusted EPS for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands, except share and per share data) 2021 2020 2021 2020

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(2) Assumes that (1) holders of all vested and unvested non-vesting Virtu Financial Units (together with corresponding shares of the Company's Class C common stock, par value $0.00001 per share (the “Class C Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of Class A Common Stock on a one-for-one basis, (2) holders of all Virtu Financial Units (together with corresponding shares of the Company's Class D common stock, par value $0.00001 per share (the “Class D Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of the Company's Class B common stock, par value $0.00001 per share (the “Class B Common Stock”) on a one-for-one basis, and subsequently exercised their right to convert the shares of Class B Common Stock into shares of Class A Common Stock on a one-for-one basis.

Includes additional shares from dilutive impact of options, restricted stock units and restricted stock awards outstanding under the Amended and Restated 2015 Management Incentive Plan and the Amended and Restated ITG 2007 Equity Plan during the three months ended March 31, 2021 and 2020 as well as warrants issued in connection with the Founder Member Loan during the three months ended March 31, 2020.

The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31, 2021

Includes additional shares from dilutive impact of options, restricted stock units and restricted stock awards outstanding under the Amended and Restated 2015 Management Incentive Plan and the Amended and Restated ITG 2007 Equity Plan during the three and six months ended June 30, 2021 and 2020 as well as warrants issued in connection with the Founder Member Loan during the three and six months ended June 30, 2020.

The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30, 2021

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 232,074 $ 109,756 $ — $ 341,830

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 552,114 $ 116,614 $ — $ 668,728

The following table shows our Adjusted Net Trading Income and average daily Adjusted Net Trading Income by segment for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

Six Months Ended June 30, 2021

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 1,181,926 $ 15,650 $ — $ 1,197,576

Commissions, net and technology services 23,217 311,547 — 334,764

Interest and dividends income 16,469 72 — 16,541

Brokerage, exchange, clearance fees and payments for order flow, net (367,978) (62,045) — (430,023)

Interest and dividends expense (46,436) (2,563) — (48,999)

Adjusted Net Trading Income $ 807,198 $ 262,661 $ — $ 1,069,859

Six Months Ended June 30, 2020

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 1,547,347 $ (886) $ — $ 1,546,461

Commissions, net and technology services 136 318,345 — 318,481

Interest and dividends income 35,453 403 — 35,856

Brokerage, exchange, clearance fees and payments for order flow, net (309,476) (67,845) — (377,321)

Interest and dividends expense (69,071) (1,210) — (70,281)

Adjusted Net Trading Income $ 1,204,389 $ 248,807 $ — $ 1,453,196

The following table shows our Adjusted Net Trading Income and average daily Adjusted Net Trading Income by segment for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30,

Adjusted Net Trading Income by Segment (in thousands):

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Execution Services 109,756 116,614 (5.9)%

Corporate — — NM

Adjusted Net Trading Income $ 341,830 $ 668,728 (48.9)%

Three Months Ended March 31,

Three Months Ended June 30,

Average Daily Adjusted Net Trading Income by Segment (in thousands):

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Execution Services 1,742 1,851 (5.9)%

Corporate — — NM

Average Daily Adjusted Net Trading Income $ 5,426 $ 10,615 (48.9)%

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Six Months Ended June 30,

Adjusted Net Trading Income by Segment (in thousands):

2021 2020 % Change

Market Making $ 807,198 $ 1,204,389 (33.0)%

Execution Services 262,661 248,807 5.6%

Adjusted Net Trading Income $ 1,069,859 $ 1,453,196 (26.4)%

Six Months Ended June 30,

Average Daily Adjusted Net Trading Income by Segment (in thousands):

2021 2020 % Change

Market Making $ 6,510 $ 9,635 (32.4)%

Execution Services 2,118 1,990 6.4%

Average Daily Adjusted Net Trading Income $ 8,628 $ 11,625 (25.8)%

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Total Revenues

Our total revenues increased $12.0 million, or 1.2%, to $1,012.6 million for the three months ended March 31, 2021, compared to $1,000.6 million for the three months ended March 31, 2020.

This increase was primarily attributable to revenues earned by Execution Services.

The following table shows the total revenues by segment for the three months ended March 31, 2021 and 2020.

Three Months Ended March 31,

Our total revenues decreased $356.9 million, or 39.4%, to $549.0 million for the three months ended June 30, 2021, compared to $905.9 million for the three months ended June 30, 2020.

The decrease was primarily driven by a decrease of $359.2 million in Trading income, net, which was primarily driven by lower market volatility and trading volumes across global markets and major asset categories during the three months ended June 30, 2021 compared to the same period in 2020, which experienced elevated levels of market volatility and trading volumes largely due to the impacts of the COVID-19 pandemic and the governmental and other responses thereto.

The following table shows total revenues by segment for the three months ended June 30, 2021 and 2020.

Three Months Ended June 30,

(in thousands, except for percentage) 2021 2020 % Change

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Trading income, net $ 4,188 $ (689) NM

Interest and dividends income 96 83 15.7%

Interest and dividends income (24) 320 NM

Commissions, net and technology services 134,028 148,370 (9.7)%

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Trading income, net was primarily earned by our Market Making segment.

Trading income, net, increased $10.3 million, or 1.3%, to $812.7 million for the three months ended March 31, 2021, compared to $802.5 million for the three months ended March 31, 2020.

The increase was primarily driven by a combination of higher trading volumes in U.S.

equities and lower market volatility during the three months ended March 31, 2021 compared to the first quarter of 2020 at the onset of the COVID-19 pandemic.

Average daily realized volatility of the S&P 500 Index decreased 72.4% compared to the prior period, while average daily U.S.

equity consolidated volumes increased 33.5%.

Trading income, net decreased $359.2 million, or 48.3%, to $384.8 million for the three months ended June 30, 2021, compared to $744.0 million for the three months ended June 30, 2020.

The decrease was primarily driven by the lower market volatility and trading volumes across global markets and major asset categories during the three months ended June 30, 2021 compared to the same period in 2020, which experienced elevated levels of market volatility and trading volumes largely due to the impacts of the COVID-19 and the governmental and other responses thereto.

Average daily realized volatility of the S&P 500 Index decreased 64.8% during the period as compared to the prior period, while average daily U.S.

equity consolidated volumes decreased 14.5%.

Rather than analyzing trading income, net, in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income, together with Interest and dividends income, Interest and dividends expense, Commissions, net and technology services and Brokerage, exchange, clearance fees and payments for order flow, net, each of which is described below.

Interest and dividends income.

Interest and dividends income was primarily earned by our Market Making segment.

Interest and dividends income increased $0.2 million, or 2.2%, to $9.5 million for the three months ended June 30, 2021, compared to $9.3 million for the three months ended June 30, 2020.

This increase was primarily attributable to the higher interest income earned on cash collateral posted as part of securities borrowing transactions driven by a slight increase in balances compared to the same period in 2020.

As indicated above, rather than analyzing interest and dividends income in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Commissions, net and technology services.

Commissions, net and technology services revenues were primarily earned by our Execution Services segment.

Commissions, net and technology services revenues decreased $4.6 million, or 3.1%, to $143.1 million for the three months ended June 30, 2021, compared to $147.7 million for the three months ended June 30, 2020.

The decrease was primarily attributable to lower market volatility and trading volumes.

Other, net increased $6.6 million, or 137.5%, to $11.5 million for the three months ended June 30, 2021, compared to $4.8 million for the three months ended June 30, 2020.

The increase was primarily due to a $12.2 million unrealized gain recorded on the minority investment in Japannext Co., Ltd.

(see Note 9 "Financial Assets and Liabilities" of Part I Item I "Financial Statements" of this Quarterly Report on Form 10-Q for details on the JNX Investment).

Adjusted Net Trading Income

Adjusted Net Trading Income decreased $326.9 million, or 48.9%, to $341.8 million for the three months ended June 30, 2021, compared to $668.7 million for the three months ended June 30, 2020.

This decrease was primarily attributable to lower Trading income, net in the Market Making segment driven by lower market volatility and trading volumes across major asset categories during the three months ended June 30, 2021 compared to the same period in 2020.

Average daily realized volatility of the S&P 500 Index and average daily CVIX realized volatility decreased 64.8% and 46.4%, respectively, compared to the prior period, while average daily U.S.

equity consolidated volumes decreased 14.5%.

Adjusted Net Trading Income per day decreased $5.2 million, or 48.9%, to $5.4 million for the three months ended June 30, 2021, compared to $10.6 million for the three months ended June 30, 2020.

There were 63 trading days for both the three months ended June 30, 2021 and 2020.

Adjusted Net Trading Income is a non-GAAP measure.

For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to trading income, net, see “Non-GAAP Financial Measures and Other Items” in this Item 2.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Operating Expenses

Our operating expenses decreased $87.4 million, or 17.4%, to $414.0 million for the three months ended June 30, 2021, compared to $501.4 million for the three months ended June 30, 2020.

The decrease in operating expenses is primarily due to a decrease in brokerage, exchange, clearance fees and payments for order flow, net and employee compensation and payroll taxes and other operating expenses described in more detail below.

Brokerage, exchange, clearance fees and payments for order flow, net.

Brokerage exchange, clearance fees and payments for order flow, net, decreased $32.8 million, or 16.1%, to $170.7 million for the three months ended June 30, 2021, compared to $203.5 million for the three months ended June 30, 2020.

This decrease was primarily attributable to the decrease in market volatility and trading volumes during the three months ended June 30, 2021 compared to the same period in 2020.

We evaluate this category representing direct costs associated with transacting business, in the broader context of our Adjusted Net Trading Income.

Communication and data processing.

Communication and data processing expense decreased $3.2 million, or 5.7%, to $52.5 million for the three months ended June 30, 2021, compared to $55.7 million for the three months ended June 30, 2020.

This decrease was primarily due to reductions in connectivity connections as a result of an on-going effort to consolidate various communication and data processing subscriptions.

Employee compensation and payroll taxes.

Employee compensation and payroll taxes decreased $37.1 million, or 30.7%, to $83.8 million for the three months ended June 30, 2021, compared to $120.9 million for the three months ended June 30, 2020.

The decrease in compensation levels was primarily attributable to a reduction in accrued incentive compensation in the second quarter, which is recorded at management’s discretion and is generally accrued in connection with the overall level of profitability on a year-to-date basis, as well as the anticipated mix of cash and stock-based awards.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $8.9 million and $11.7 million for the three months ended June 30, 2021, and 2020, respectively.

Interest and dividends expense.

Interest and dividends expense decreased $3.9 million, or 13.4%, to $25.0 million for the three months ended June 30, 2021, compared to $28.8 million for the three months ended June 30, 2020.

This decrease was primarily attributable to lower interest expense incurred on cash collateral received as part of securities lending transactions, as well as a reduction in securities lending transactions for the period compared to the same period during the prior year.

As indicated above, rather than analyzing interest and dividends expense in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Operations and administrative.

Operations and administrative expense remained consistent at $21.8 million for the three months ended June 30, 2021, compared to $21.7 million for the three months ended June 30, 2020.

Depreciation and amortization.

Depreciation and amortization decreased $0.4 million, or 2.2%, to $16.3 million for the three months ended June 30, 2021, compared to $16.7 million for the three months ended June 30, 2020.

This decrease was primarily attributable to certain assets being fully depreciated partially offset by an increase in capital expenditures on telecommunication, networking and other assets.

Amortization of purchased intangibles and acquired capitalized software.

Amortization of purchased intangibles and acquired capitalized software decreased $0.9 million, or 4.6%, to $18.1 million for the three months ended June 30, 2021,

compared to $19.0 million for the three months ended June 30, 2020.

This decrease was due to certain technology intangible assets acquired in connection with the KCG Acquisition being fully amortized.

Termination of office leases.

Termination of office leases was $3.7 million for the three months ended June 30, 2021 due to the impairment of leasehold improvements and fixed assets for certain abandoned office space as part of the effort to integrate and consolidate office space in connection with the Acquisition of KCG and the ITG Acquisition.

There were minimal expenses incurred on termination of office leases for the three months ended June 30, 2020.

Debt issue cost related to debt refinancing, prepayment and commitment fees.

Expense from debt issue costs related to debt refinancing, prepayment and commitment fees decreased $11.2 million, or 84.9%, to $2.0 million for the three months ended June 30, 2021, compared to $13.2 million for the three months ended June 30, 2020.

The decrease was primarily driven by the prepayment of $188.5 million made during the second quarter of 2020.

Transaction advisory fees and expenses.

There was minimal expense incurred related to transaction advisory fees and expenses during the three months ended June 30, 2021, compared to $0.1 million during the three months ended June 30, 2020.

These expenses were primarily incurred in prior years related to the ITG Acquisition and Acquisition of KCG, for which we incurred significant transaction advisory fees.

Financing interest expense on long-term borrowings.

Financing interest expense on long-term borrowings decreased $1.6 million, or 7.5%, to $20.1 million for the three months ended June 30, 2021, compared to $21.7 million for the three months ended June 30, 2020.

This decrease was primarily attributable to the decrease in outstanding principal as a result of the prepayment on the First Lien Term Loan Facility in the second and third quarters of 2020.

Provision for income taxes

We incur corporate tax at the U.S.

federal income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial.

Our income tax expense reflects such U.S.

federal income tax as well as taxes payable by certain of our non-U.S.

subsidiaries.

Our provision for income taxes was $26.1 million for the three months ended June 30, 2021, compared to $69.3 million for the three months ended June 30, 2020.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Total Revenues

Our total revenues decreased $345.0 million, or 18.1%, to $1,561.5 million for the six months ended June 30, 2021, compared to $1,906.5 million for the six months ended June 30, 2020.

This decrease was primarily attributable to a decrease of $348.9 million in Trading income, net, which was primarily driven by lower market volatility during the six months ended June 30, 2021 compared to the prior period.

The following table shows the total revenues by segment for the six months ended June 30, 2021 and 2020.

Six Months Ended June 30,

(in thousands, except for percentage) 2021 2020 % Change

Market Making

Trading income, net $ 1,181,926 $ 1,547,347 (23.6)%

Interest and dividends income 16,469 35,453 (53.5)%

Commissions, net and technology services 23,217 136 NM

Other, net 4,653 6,767 (31.2)%

Total revenues from Market Making $ 1,226,265 $ 1,589,703 (22.9)%

Execution Services

Trading income, net $ 15,650 $ (886) NM

Interest and dividends income 72 403 (82.1)%

Commissions, net and technology services 311,547 318,345 (2.1)%

Other, net 100 79 27%

Total revenues from Execution Services $ 327,369 $ 317,941 3.0%

Other, net $ 7,903 $ (1,120) NM

Total revenues from Corporate $ 7,903 $ (1,120) NM

Trading income, net $ 1,197,576 $ 1,546,461 (22.6)%

Interest and dividends income 16,541 35,856 (53.9)%

Commissions, net and technology services 334,764 318,481 5.1%

Other, net 12,656 5,726 121.0%

Total revenues $ 1,561,537 $ 1,906,524 (18.1)%

Trading income, net.

Trading income, net was primarily earned by our Market Making segment.

Trading income, net, decreased $348.9 million, or 22.6%, to $1,197.6 million for the six months ended June 30, 2021, compared to $1,546.5 million for the six months ended June 30, 2020.

The decrease was primarily driven by lower market volatility during the six months ended June 30, 2021 compared to the same period of 2020, which experienced elevated levels of market volatility and trading volumes largely due to the impacts of the COVID-19 and the governmental and other responses thereto.

Average daily realized volatility of the S&P 500 Index decreased 69.7% compared to the prior period, and the average daily realized volatility of the CVIX decreased 70.4% compared to prior period.

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Interest and dividends income was primarily earned by our Market Making segment.

Interest and dividends income decreased $19.5 million, or 73.6%, to $7.0 million for the three months ended March 31, 2021, compared to $26.5 million for the three months ended March 31, 2020.

Interest and dividends income decreased $19.3 million, or 53.9%, to $16.5 million for the six months ended June 30, 2021, compared to $35.9 million for the six months ended June 30, 2020.

This decrease was primarily attributable to lower interest income earned on cash collateral posted as part of securities borrowed transactions driven by lower interest rates compared to the prior period.

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Commissions, net and technology services revenues were primarily earned by our Execution Services segment.

Commissions, net and technology services revenues increased $20.9 million, or 12.2%, to $191.6 million for the three months ended March 31, 2021, compared to $170.7 million for the three months ended March 31, 2020.

Commissions, net and technology services revenues increased $16.3 million, or 5.1%, to $334.8 million for the six months ended June 30, 2021, compared to $318.5 million for the six months ended June 30, 2020.

The increase was primarily attributable to higher trading volumes in U.S.

Other, net increased $0.3 million to $1.2 million for the three months ended March 31, 2021, compared to $0.9 million for the three months ended March 31, 2020.

The increase was primarily due to a $2.5 million gain on the minority investment in JNX (see Note 12 "Financial Assets and Liabilities" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for details on the JNX Investment).

Average daily U.S.

equities consolidated volumes increased 8.1% compared to prior period.

As indicated above, rather than analyzing commissions, net and technology services in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Other, net increased $6.9 million to $12.7 million for the six months ended June 30, 2021, compared to $5.7 million for the six months ended June 30, 2020.

The increase was primarily due to a $12.2 million unrealized gain

recorded on the minority investment in JNX (see Note 9 "Financial Assets and Liabilities" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for details on the JNX Investment).

Adjusted Net Trading Income

Adjusted Net Trading Income decreased $56.4 million, or 7.2%, to $728.0 million for the three months ended March 31, 2021, compared to $784.5 million for the three months ended March 31, 2020.

This decrease was primarily attributable to higher Brokerage, exchange, clearance fees and payments for order flow, net (described below) incurred by Market Making and higher Commissions, net and technology services earned by Execution Services, driven by higher trading volumes despite lower volatility during the three months ended March 31, 2021 compared to the prior period.

Adjusted Net Trading Income decreased $383.3 million, or 26.4%, to $1,069.9 million for the six months ended June 30, 2021, compared to $1,453.2 million for the six months ended June 30, 2020.

This decrease was primarily attributable to higher Brokerage, exchange, clearance fees and payments for order flow, net (described below) incurred by Market Making and higher Commissions, net and technology services earned, driven by higher trading volumes despite lower volatility during the six months ended June 30, 2021 compared to the prior period.

Average daily realized volatility of the S&P 500 Index and average daily CVIX realized volatility decreased 69.7% and 70.4%, respectively, compared to the prior period, while average daily U.S.

equity consolidated volumes increased 8.1%.

Adjusted Net Trading Income per day decreased $0.7 million, or 5.7%, to $11.9 million for the three months ended March 31, 2021, compared to $12.7 million for the three months ended March 31, 2020.

The number of trading days was 61 days for the three months ended March 31, 2021 and 62 days for the three months ended March 31, 2020, respectively.

Adjusted Net Trading Income per day decreased $3.0 million, or 25.8%, to $8.6 million for the six months ended June 30, 2021, compared to $11.6 million for the six months ended June 30, 2020.

The number of trading days was 124 days for the six months ended June 30, 2021 and 125 days for the six months ended June 30, 2020.

Adjusted Net Trading Income is a non-GAAP measure.

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Operating Expenses

Our operating expenses decreased $11.6 million, or 2.2%, to $522.8 million for the three months ended March 31, 2021, compared to $534.4 million for the three months ended March 31, 2020.

Our operating expenses decreased $99.0 million, or 9.6%, to $936.7 million for the six months ended June 30, 2021, compared to $1,035.8 million for the six months ended June 30, 2020.

The decrease in operating expenses was primarily due to lower employee compensation and payroll taxes and interest and dividends expense, offset by an increase in Brokerage, exchange, clearance fees and payments for order flow, net compared to the same period in the prior year, described in more detail below.

Brokerage, exchange, clearance fees and payments for order flow, net.

Brokerage, exchange, clearance fees and payments for order flow, net, increased $85.5 million, or 49.2%, to $259.3 million for the three months ended March 31, 2021, compared to $173.8 million for the three months ended March 31, 2020.

Brokerage, exchange, clearance fees and payments for order flow, net, increased $52.7 million, or 14.0%, to $430.0 million for the six months ended June 30, 2021, compared to $377.3 million for the six months ended June 30, 2020.

This increase was primarily attributable to increases in volumes from our broker-dealer clients eligible for payments for order flow, driven by higher participation of retail investors in the market during the quarter compared to the prior year.

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Communication and data processing.

Communication and data processing expense decreased $3.3 million, or 6.1%, to $51.7 million for the three months ended March 31, 2021, compared to $55.0 million for the three months ended March 31, 2020.

Communication and data processing expense decreased $6.5 million, or 5.9%, to $104.2 million for the six months ended June 30, 2021, compared to $110.7 million for the six months ended June 30, 2020.

This decrease was primarily attributable to reductions in connectivity connections as a result of an on-going effort to consolidate various communication and data processing services and subscriptions.

Employee compensation and payroll taxes.

Employee compensation and payroll taxes decreased $65.6 million, or 38.5%, to $104.8 million for the three months ended March 31, 2021, compared to $170.4 million for the three months ended March 31, 2020.

The decrease in compensation levels was primarily attributable to higher incentive compensation in the first quarter of 2020, which is recorded at management’s discretion and is generally accrued in connection with the overall level of profitability, as well as a result of one-time cash bonuses awarded to certain employees to mitigate the effects of the COVID-19 pandemic.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $9.2 million and $7.8 million for the three months ended March 31, 2021 and 2020, respectively.

Employee compensation and payroll taxes decreased $102.7 million, or 35.2%, to $188.6 million for the six months ended June 30, 2021, compared to $291.3 million for the six months ended June 30, 2020.

The decrease in compensation levels was primarily attributable to a reduction in accrued incentive compensation in the current period, relative to the prior period, which is recorded at management’s discretion and is generally accrued in connection with the overall level of profitability, as well as a result of one-time cash bonuses awarded in the first quarter of 2020 to certain employees to mitigate the effects of the COVID-19 pandemic.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $18.0 million and $19.5 million for the six months ended June 30, 2021 and 2020, respectively.

Interest and dividends expense.

Interest and dividends expense decreased $17.4 million, or 42.0%, to $24.0 million for the three months ended March 31, 2021, compared to $41.4 million for the three months ended March 31, 2020.

Interest and dividends expense decreased $21.3 million, or 30.3%, to $49.0 million for the six months ended June 30, 2021, compared to $70.3 million for the six months ended June 30, 2020.

This decrease was primarily attributable to lower interest expense incurred on cash collateral received as part of securities lending transactions.

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Operations and administrative.

Operations and administrative expense decreased $1.5 million, or 5.4%, to $25.7 million for the three months ended March 31, 2021, compared to $27.1 million for the three months ended March 31, 2020.

Operations and administrative expense decreased $1.5 million, or 3.0%, to $47.4 million for the six months ended June 30, 2021, compared to $48.9 million for the six months ended June 30, 2020.

The decrease was primarily attributable to decreases in travel and entertainment due to the on-going effects of the COVID-19 pandemic as well the on-going efforts to consolidate office premises and professional services after the ITG Acquisition.

Depreciation and amortization.

Depreciation and amortization decreased $0.6 million, or 3.4%, to $16.8 million for the three months ended March 31, 2021, compared to $17.4 million for the three months ended March 31, 2020.

This decrease was primarily attributable to certain assets being fully depreciated in 2020.

Depreciation and amortization decreased $0.9 million, or 2.8%, to $33.1 million for the six months ended June 30, 2021, compared to $34.1 million for the six months ended June 30, 2020.

This decrease was primarily attributable to certain assets being fully depreciated in 2020 partially offset by an increase in capital expenditures on telecommunication, networking, and other assets.

Amortization of purchased intangibles and acquired capitalized software.

Amortization of purchased intangibles and acquired capitalized software decreased $0.9 million, or 4.6%, to $18.1 million for the three months ended March 31, 2021, compared to $19.0 million for the three months ended March 31, 2020.

Amortization of purchased intangibles and acquired capitalized software decreased $1.8 million, or 4.6%, to $36.2 million for the six months ended June 30, 2021, compared to $37.9 million for the six months ended June 30, 2020.

This decrease was primarily attributable to certain intangible assets being fully amortized in 2020.

Termination of office leases.

Termination of office leases was $1.2 million for the three months ended March 31, 2021, compared to $0.3 million for the three months ended March 31, 2020.

Expense from termination of office leases was due to the impairment of operating lease right-of-use assets for certain abandoned office space as part of the efforts to integrate and consolidate office space in connection with the ITG Acquisition.

Termination of office leases was $4.9 million for the six months ended June 30, 2021, compared to $0.3 million for the six months ended June 30, 2020.

Expense from termination of office leases was due to the impairment of operating lease right-of-use assets and leasehold improvements and fixed assets for certain abandoned office space as part of the efforts to integrate and consolidate office space in connection with the Acquisition of KCG and the ITG Acquisition.

Debt issue costs related to debt refinancing, prepayment and commitment fees.

Expense from debt issue costs related to debt refinancing, prepayment and commitment fees decreased $2.4 million, or 57.9%, to $1.8 million for the three months ended March 31, 2021, compared to $4.2 million for the three months ended March 31, 2020.

The amount for the three months ended March 31, 2020 was primarily driven by the amortization of debt issue costs related to the addition of the Founder Member Loan Facility in March 2020, which expired as of September 20, 2020, as well as costs incurred related to Amendment No.

2 to the Credit Agreement (as defined below).

Expense from debt issue costs related to debt refinancing, prepayment and commitment fees decreased $13.6 million, or 78.4%, to $3.7 million for the six months ended June 30, 2021, compared to $17.4 million for the six months ended June 30, 2020.

The amount for the six months ended June 30, 2020 was primarily driven by the amortization of debt issue costs related to the addition of the Founder Member Loan Facility in March 2020, which expired as of September 20, 2020, costs incurred related to Amendment No.

2 to the Credit Agreement (as defined below), and the prepayment of $188.5 million made during the second quarter of 2020.

See Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for additional details.

Transaction advisory fees and expenses.

Transaction advisory fees and expenses were immaterial for the three months ended March 31, 2021, compared to $0.2 million for the three months ended March 31, 2020.

Transaction advisory fees and expenses were immaterial for the six months ended June 30, 2021, compared to $0.3 million for the six months ended June 30, 2020.

These expenses were primarily incurred in prior years related to the ITG Acquisition and Acquisition of KCG, for which we incurred significant transaction advisory fees.

Financing interest expense on long term borrowings.

Financing interest expense on long-term borrowings decreased $6.2 million, or 24.1%, to $19.5 million for the three months ended March 31, 2021, compared to $25.7 million for the three months ended March 31, 2020.

This decrease was primarily attributable to a decrease in outstanding principal as a result of $288.5 million in prepayments made during the year ended December 31, 2020, in addition to lower interest rates, as discussed in Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Financing interest expense on long-term borrowings decreased $7.8 million, or 16.5%, to $39.6 million for the six months ended June 30, 2021, compared to $47.4 million for the six months ended June 30, 2020.

This decrease was primarily attributable to a decrease in outstanding principal as a result of prepayments made during the year ended December 31, 2020, in addition to lower interest rates, as discussed in Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Provision for income taxes

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subsidiaries.

Our provision for income taxes was $80.6 million for the three months ended March 31, 2021, compared to a provision for income taxes of $78.0 million for the three months ended March 31, 2020.

Our provision for income taxes was $106.7 million for the six months ended June 30, 2021, compared to a provision for income taxes of $147.2 million for the six months ended June 30, 2020.

Liquidity and Capital Resources

As of March 31, 2021, we had $899.0 million in Cash and cash equivalents.

As of June 30, 2021, we had $848.1 million in Cash and cash equivalents.

This balance is maintained primarily to support operating activities for capital expenditures and for short-term access to liquidity, and for other general corporate purposes.

As of March 31, 2021, we had borrowings under our prime brokerage credit facilities of approximately $204.4 million, borrowings under our broker dealer facilities of $178.0 million, short-term bank overdrafts of $65.0 million, and long-term debt outstanding in an aggregate principal amount of approximately $1,666.7 million.

As of June 30, 2021, we had borrowings under our prime brokerage credit facilities of approximately $201.8 million, borrowings under our broker dealer facilities of $198.0 million, short-term bank overdrafts of $18.5 million, and long-term debt outstanding in an aggregate principal amount of approximately $1,631.3 million.

The majority of our trading assets consist of exchange-listed marketable securities, which are marked-to-market daily, and collateralized receivables from broker-dealers and clearing organizations arising from proprietary securities transactions.

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We have continually received the benefit of uncommitted margin financing from our prime brokers globally.

These margin facilities are secured by securities in accounts held at the prime brokers.

For purposes of providing additional liquidity, we maintain a

committed credit facility and an uncommitted credit facility for our wholly-owned broker-dealer subsidiary, as discussed in Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

These margin facilities are

secured by securities in accounts held at the prime brokers.

For purposes of providing additional liquidity, we maintain a committed credit facility and an uncommitted credit facility for our wholly-owned broker-dealer subsidiary, as discussed in Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Based on our current level of operations, we believe our cash flows from operations, available cash and cash equivalents, and available borrowings under our broker-dealer credit facilities will be adequate to meet our future liquidity needs for more than the next twelve months.

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federal and state income tax returns and realized the cash tax savings from the favorable tax attributes.

We made our first payment of $7.0 million in February 2017, our second payment of $12.4 million in September 2018, and our third payment of $13.3 million in March 2020.

We made our first payment of $7.0 million in February 2017, our second payment of $12.4 million in September 2018, our third payment of $13.3 million in March 2020, and our fourth payment of $16.5 million in April 2021.

Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition to these amounts.

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See Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for details on our various credit facilities.

As of March 31, 2021, the outstanding principal balance on our broker-dealer facilities was $178.0 million and the outstanding aggregate short-term credit facilities with various prime brokers and other financial institutions from which the Company receives execution or clearing services was approximately $204.4 million, which was netted within Receivables from broker-dealers and clearing organizations on the Condensed Consolidated Statements of Financial Condition of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

As of June 30, 2021, the outstanding principal balance on our broker-dealer facilities was $198.0 million and the outstanding aggregate short-term credit facilities with various prime brokers and other financial institutions from which the Company receives execution or clearing services was approximately $201.8 million, which was netted within Receivables from broker-dealers and clearing organizations on the Condensed Consolidated Statements of Financial Condition of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

On March 10, 2020, a broker-dealer subsidiary of the Company entered into a short-term loan arrangement with Jefferies Financial Group, Inc., as lender, for a $20 million demand loan (the "Demand Loan") repayable no later than ninety (90) days after the date of borrowing.

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In January 2020, we entered into a five-year $1,000.0 million floating-to-fixed interest rate swap agreement.

These two interest rate swaps met the criteria to be considered and were designated as qualifying cash flow hedges under ASC 815 in the first quarter of 2020, and they effectively fix interest payment obligations on $1,000.0 million and $525.0 million of principal under the First Lien Term Loan Facility at rates of 4.4% and 4.3% through January 2025 and September 2024, respectively, based on the interest rates set forth in the Amended Credit Agreement.

We were in compliance with all applicable covenants under the Amended Credit Agreement as of March 31, 2021.

These two interest rate swaps met the criteria to be considered and were designated as qualifying cash flow hedges under ASC 815 in the first quarter of 2020, and they effectively fix interest payment obligations on $525.0 million and $1,000.0 million of principal under the First Lien Term Loan Facility at rates of 4.3% and 4.4% through September 2024 and January 2025, respectively, based on the interest rates set forth in the Amended Credit Agreement.

In April 2021, each of the swap agreements described above was novated to another counterparty and amended in connection with such novation.

The amendments included certain changes to collateral posting obligations and also had the effect of increasing the effective fixed interest payment obligations to rates of 4.5%, with respect to the earlier maturing swap arrangement, and 4.6% with respect to the later maturing swap arrangement.

We were in compliance with all applicable covenants under the Amended Credit Agreement as of June 30, 2021.

Our main sources of liquidity are cash flow from the operations of our subsidiaries, our broker-dealer credit facilities (as described above), margin financing provided by our prime brokers and cash on hand.

The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2021 and 2020.

Three Months Ended March 31,

The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2021 and 2020.

Six Months Ended June 30,

Net cash provided by (used in):

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Operating Activities

Net cash provided by operating activities was $133.9 million for the three months ended March 31, 2021, compared to net cash used in operating activities of $218.7 million for the three months ended March 31, 2020.

The increase in net cash provided by operating activities was primarily attributable to increases in net receivables from broker-dealers and clearing organizations and net receivables from customers for the three months ended March 31, 2020 compared to the current period.

Net cash provided by operating activities was $355.4 million for the six months ended June 30, 2021, compared to net cash provided by operating activities of $499.3 million for the six months ended June 30, 2020.

The decrease in net cash provided by operating activities was primarily attributable to lower revenues, and an increase in trading assets, at fair value, for the six months ended June 30, 2021 compared to the current period.

Investing Activities

Net cash used in investing activities was $25.6 million for the three months ended March 31, 2021, compared to net cash used in investing activities of $20.0 million for the three months ended March 31, 2020.

The increase in cash used in investing activities for the three months ended March 31, 2021 was primarily attributable to a decrease in acquisition of property and equipment, partially offset by an increase in capitalized development costs.

Net cash used in investing activities was $42.7 million for the six months ended June 30, 2021, compared to net cash used in investing activities of $36.7 million for the six months ended June 30, 2020.

The increase in cash used in investing activities for the six months ended June 30, 2021 was primarily attributable to an increase in development of capitalized development costs, partially offset by a decrease in acquisition of property and equipment.

Financing Activities

Net cash used in financing activities was $89.7 million for the three months ended March 31, 2021, while net cash provided by financing activities was $281.0 million for the three months ended March 31, 2020.

The cash used in financing activities for the three months ended March 31, 2021 was primarily attributable to $159.2 million in distributions made to noncontrolling interests and $63.4 million in repurchases of Class A Common Stock and Virtu Financial Units under the share repurchase program (described below).

The cash provided by financing activities of $281.0 million during the same period of 2020 primarily reflects net proceeds from short-term borrowings to increase available short-term liquidity during a period of heightened volatility at the onset of the COVID-19 pandemic.

Net cash used in financing activities was $400.8 million for the six months ended June 30, 2021, while net cash used in financing activities was $483.9 million for the six months ended June 30, 2020.

The cash used in financing activities for the six months ended June 30, 2021 was primarily attributable to $321.9 million in dividends to stockholders and distributions made to noncontrolling interests and $180.8 million in purchases of treasury stock.

The cash used in financing activities of $483.9 million during the same period of 2020 primarily reflects net dividends to stockholders and distributions to noncontrolling interests and repayment of long term borrowings.

Share Repurchase Program

On November 6, 2020, the Company's Board of Directors authorized a new share repurchase program of up to $100.0 million in Class A Common Stock and Virtu Financial Units by December 31, 2021.

The authorized amount was subsequently increased by $70 million on February 11, 2021, for a total authorization of $170 million.

From the inception of the program through March 31, 2021, the Company repurchased approximately 3.7 million shares of Class A Common Stock and Virtu Financial Units for approximately $97.3 million.

As of March 31, 2021, the Company has approximately of $72.7 million remaining capacity for future purchases of shares of Class A Common Stock and Virtu Financial Units under the program.

On May 4, 2021, the Company's Board of Directors authorized the expansion of the Company's share repurchase program, increasing the total authorized amount by $300 million to $470 million in Class A Common Stock and Virtu Financial Units and extending the duration of the program through May 4, 2022.

The share repurchase program authorizes the Company to repurchase shares from time to time in open market transactions, privately negotiated transactions or by other means.

Repurchases are also permitted to be made under Rule 10b5-1 plans.

The timing and amount of repurchase transactions are determined by the Company's management based on its evaluation of market conditions, share price, cash sources, legal requirements and other factors.

From the inception of the program through June 30, 2021, the Company repurchased approximately 7.1 million shares of Class A Common Stock and Virtu Financial Units for approximately $198.6 million.

As of June 30, 2021, the Company has approximately of $271.4 million remaining capacity for future purchases of shares of Class A Common Stock and Virtu Financial Units under the program.

Off-Balance Sheet Arrangements

As of March 31, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have current or future effects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

We believe inflation has not had a material effect on our financial condition as of March 31, 2021, and December 31, 2020, or on our results of operations and cash flows for the three months ended March 31, 2021 and 2020.

As of June 30, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have current or future effects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

We believe inflation has not had a material effect on our financial condition as of June 30, 2021, and December 31, 2020, or on our results of operations and cash flows for the three and six months ended June 30, 2021 and 2020.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis