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Item 2. Management’s Discussion and Analysis

2023-07-28 compared with 2023-04-28 · 226 added, 86 removed, 627 unchanged (33% 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, 2023, and 2022 should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes for the period ended March 31, 2023, which are included in Part 1, 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, 2022, 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, 2022.

The following management’s discussion and analysis covers the three and six months ended June 30, 2023, and 2022 should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes for the period ended June 30, 2023, which are included in Part 1, 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, 2022, 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, 2022.

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

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Although we believe that the forward-looking statements contained in this Quarterly Report on Form 10-Q are based on reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in our 2022 Form 10-K, could affect our actual financial results or results of operations and cash flows, and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

• the continuing impacts of COVID-19 and the governmental and other responses thereto, including but not limited to the risk of employees and executives contracting COVID-19 and the deployment of our business continuity plan pursuant to which a significant number of our employees may work remotely and our return to office plan, each of which may increase operational risk, as well as increases in market, counterparty and other forms of operational risk;

• volatility in levels of overall trading activity;

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• the effects of and changes in economic conditions (such as volatility in the financial markets, increased inflation, monetary conditions and foreign currency and continued or exacerbated exchange rate fluctuations, foreign currency controls and/or government mandated pricing controls, as well as in trade, monetary, fiscal and tax policies in international markets), political conditions (such as military actions and terrorist activities), and other global events such as fires, geopolitical conflicts, natural disasters, pandemics or extreme weather;

• risks associated with potential growth and associated corporate actions;

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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 vested in equal annual installments over a period of four years from the grant date and expire not later than 10 years from the grant date.

Subsequent to the IPO and through March 31, 2023, options to purchase 1,633,750 shares in the aggregate were forfeited and 6,072,474 options were exercised.

Subsequent to the IPO and through June 30, 2023, options to purchase 1,643,750 shares in the aggregate were forfeited and 6,072,474 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, 2023 in the amount of $3.6 million;

(ii) deferred tax assets reflected on our Condensed Consolidated Statements of Financial Condition as of March 31, 2023 in the amount of $135.9 million and tax receivable agreement obligation in the amount of $238.8 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 noncontrolling interest on our Condensed Consolidated Statements of Financial Condition as of March 31, 2023;

and (iv) provision for corporate income tax in the amount of $17.9 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023.

(i) cash and cash equivalents reflected on our Condensed Consolidated Statements of Financial Condition as of June 30, 2023 in the amount of $5.4 million;

(ii) deferred tax assets reflected on our Condensed Consolidated Statements of Financial Condition as of June 30, 2023 in the amount of $129.1 million and tax receivable agreement obligation in the amount of $215.5 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 noncontrolling interest on our Condensed Consolidated Statements of Financial Condition as of June 30, 2023;

and (iv) provision for corporate income tax in the amount of $1.1 million and $19.0 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023, 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, 2023, and 2022:

(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, 2023, and 2022:

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

Market Making 2023 2022 2023 2022

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Income before income taxes and noncontrolling interest $ 35,467 $ 173,784 $ 170,231 $ 415,494

The following table shows our results of operations for the three months ended March 31, 2023, and 2022:

Three Months Ended March 31,

The following table shows our results of operations for the three and six months ended June 30, 2023, and 2022:

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

(in thousands) 2023 2022 2023 2022

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Selected Operating Margins

Net Income Margin (1) 17.7 % 28.5 %

GAAP Net income Margin (1) 5.8 % 24.6 % 12.4 % 26.7 %

(1) Calculated by dividing Net income by Total revenue.

Net income available to stockholders and basic and diluted earnings per share are presented below:

Three Months Ended March 31,

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

(in thousands, except for share or per share data) 2023 2022 2023 2022

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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 66% and 74% of our total revenues for the three months ended March 31, 2023 and 2022, respectively.

Trading income, net, accounted for 64% and 70% of our total revenues for the six months ended June 30, 2023 and 2022, respectively.

Interest and dividends 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, 2023, and 2022.

Three Months Ended March 31,

The following table reconciles the Condensed Consolidated Statements of Comprehensive Income to arrive at Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, and Non-GAAP Operating Margins for the three and six months ended June 30, 2023, and 2022.

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

(in thousands) 2023 2022 2023 2022

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Selected Operating Margins

Net Income Margin (1) 29.5 % 39.6 %

GAAP Net income Margin (1) 5.8 % 24.6 % 12.4 % 26.7 %

Non-GAAP Net income Margin (2) 10.6 % 41.7 % 21.4 % 40.4 %

EBITDA Margin (3) 33.7 % 64.3 % 44.0 % 64.1 %

Adjusted EBITDA Margin (4) 43.8 % 58.6 % 50.5 % 64.1 %

(1) Calculated by dividing Net income by Total revenue.

(2) Calculated by dividing net income by Adjusted Net Trading Income.

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(4) 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, 2023, and 2022:

Three Months Ended March 31,

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

(in thousands, except share and per share data) 2023 2022 2023 2022

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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, 2023 and 2022.

The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three months ended March 31, 2023, and 2022:

Three Months Ended March 31, 2023

The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three and six months ended June 30, 2023, and 2022:

Three Months Ended June 30, 2023

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 193,191 $ 85,496 $ — $ 278,687

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 253,724 $ 103,634 $ — $ 357,358

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, 2023, and 2022:

(in thousands, except %) 2023 2022

Adjusted Net Trading Income by Segment:

Total Average Daily % Total Average Daily %

Six Months Ended June 30, 2023

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 710,655 $ 8,024 $ — $ 718,679

Commissions, net and technology services 16,334 214,614 — 230,948

Interest and dividends income 175,283 4,940 — 180,223

Brokerage, exchange, clearance fees and payments for order flow, net (222,791) (45,202) — (267,993)

Interest and dividends expense (208,431) (1,663) — (210,094)

Adjusted Net Trading Income $ 471,050 $ 180,713 $ — $ 651,763

Six Months Ended June 30, 2022

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 906,621 $ 11,614 $ — $ 918,235

Commissions, net and technology services 20,194 270,801 — 290,995

Interest and dividends income 51,775 29 — 51,804

Brokerage, exchange, clearance fees and payments for order flow, net (254,636) (52,730) — (307,366)

Interest and dividends expense (88,382) (2,872) — (91,254)

Adjusted Net Trading Income $ 635,572 $ 226,842 $ — $ 862,414

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, 2023, and 2022:

Three Months Ended June 30,

Adjusted Net Trading Income by Segment (in thousands):

2023 2022 % Change

Market Making $ 193,191 $ 253,724 (23.9)%

Execution Services 85,496 103,634 (17.5)%

Adjusted Net Trading Income $ 278,687 $ 357,358 (22.0)%

Three Months Ended June 30,

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

2023 2022 % Change

Market Making $ 3,116 $ 4,092 (23.9)%

Execution Services 1,379 1,672 (17.5)%

Average Daily Adjusted Net Trading Income $ 4,495 $ 5,764 (22.0)%

Six Months Ended June 30,

Adjusted Net Trading Income by Segment (in thousands):

2023 2022 % Change

Market Making $ 471,050 $ 635,572 (25.9)%

Execution Services 180,713 226,842 (20.3)%

Adjusted Net Trading Income $ 651,763 $ 862,414 (24.4)%

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Six Months Ended June 30,

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

2023 2022 % Change

Market Making $ 3,799 $ 5,126 (25.9)%

Execution Services 1,457 1,829 (20.3)%

Average Daily Adjusted Net Trading Income $ 5,256 $ 6,955 (24.4)%

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Total Revenues

Our total revenues decreased $80.9 million, or 11.5%, to $620.4 million for the three months ended March 31, 2023, compared to $701.3 million for the three months ended March 31, 2022.

The decrease was primarily driven by lower market volumes and lower volatility across global markets, and decreased opportunity in our customer market making trading as a result of lower spread opportunity and decreased quality of the order flow with which we interacted during the three months ended March 31, 2023 compared to the same period in 2022.

The following table shows total revenues by segment for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

Our total revenues decreased $97.9 million, or 16.2%, to $506.9 million for the three months ended June 30, 2023, compared to $604.7 million for the three months ended June 30, 2022.

The decrease was primarily driven by lower market volumes and lower volatility across global markets, and decreased opportunity in our customer market making trading as a result of lower spread opportunity and decreased quality of the order flow with which we interacted during the three months ended June 30, 2023 compared to the same period in 2022, as well as a decrease in Other, net, which was driven by gains recorded on sales of various strategic investments in 2022.

The following table shows total revenues by segment for the three months ended June 30, 2023 and 2022.

Three Months Ended June 30,

(in thousands, except for percentage) 2023 2022 % Change

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Trading income, net $ 3,856 $ 5,665 (31.9)%

Interest and dividends income 2,557 29 8,717.2%

Interest and dividends income 2,384 — NM

Commissions, net and technology services 102,870 125,195 (17.8)%

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Total revenues from Execution Services $ 109,116 $ 130,997 (16.7)%

Other, net $ 2,981 $ 2,956 0.8%

Total revenues from Corporate $ 2,981 $ 2,956 0.8%

Other, net $ (7,512) $ 41,146 NM

Total revenues from Corporate $ (7,512) $ 41,146 NM

Trading income, net $ 306,168 $ 395,928 (22.7)%

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Commissions, net and technology services 109,504 136,340 (19.7)%

Other, net 4,181 3,289 27.1%

Other, net (6,797) 41,678 NM

Total revenues $ 506,854 $ 604,738 (16.2)%

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

Trading income, net decreased $109.8 million, or 21.0% to $412.5 million for the three months ended March 31, 2023, compared to $522.3 million for the three months ended March 31, 2022.

Trading income, net decreased $89.8 million, or 22.7% to $306.2 million for the three months ended June 30, 2023, compared to $395.9 million for the three months ended June 30, 2022.

The decrease was largely a result of lower market volumes and lower volatility across global markets and decreased opportunity in our customer market making trading as a result of lower spread opportunity and decreased quality of the order flow with which we interacted.

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

Interest and dividends income increased $61.2 million, or 291.4%, to $82.2 million for the three months ended March 31, 2023, compared to $21.0 million for the three months ended March 31, 2022.

Interest and dividends income increased $67.2 million, or 218.2%, to $98.0 million for the three months ended June 30, 2023, compared to $30.8 million for the three months ended June 30, 2022.

This increase was primarily attributable to the higher dividends earned on market making trading assets held over periods when dividends are paid along with an increase in interest income earned on cash collateral posted as part of securities borrowing transactions and interest earned on balances maintained at banks and prime brokers, both of which benefited from higher interest rates for the period compared to the same period during the prior year.

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

Commissions, net and technology services revenues decreased $33.2 million, or 21.5%, to $121.4 million for the three months ended March 31, 2023, compared to $154.7 million for the three months ended March 31, 2022.

Commissions, net and technology services revenues decreased $26.8 million, or 19.7%, to $109.5 million for the three months ended June 30, 2023, compared to $136.3 million for the three months ended June 30, 2022.

This decrease was driven by lower market volumes, a reduction of institutional investors' commissions available, and declining institutional engagement.

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.

Other, net increased $0.9 million, or 27.1%, to $4.2 million for the three months ended March 31, 2023, compared to $3.3 million for the three months ended March 31, 2022.

Other, net comprises changes in the valuation on our level 3 investment, as well as other miscellaneous income including gains and losses attributable to our variable interest entities.

Other, net decreased $48.5 million, or 116.3%, to $(6.8) million for the three months ended June 30, 2023, compared to $41.7 million for the three months ended June 30, 2022.

Other, net comprises changes in the valuation on our level 3 investment, as well as other miscellaneous income including gains and losses attributable to our variable interest entities and other investments.

The three months ended June 30, 2022 included gains from sales of investments in our strategic investments

Refer to Note 9 "Financial Assets and Liabilities" in Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for more details on our level 3 investment.

Adjusted Net Trading Income

Adjusted Net Trading Income, which is a non-GAAP measure, decreased $132.0 million, or 26.1%, to $373.1 million for the three months ended March 31, 2023, compared to $505.1 million for the three months ended March 31, 2022.

This decrease was primarily attributable to lower Trading income, net in the Market Making segment during the three months ended March 31, 2023 compared to the same period in 2022, as noted above.

Adjusted Net Trading Income per day decreased $2.1 million, or 25.9%, to $6.0 million for the three months ended March 31, 2023, compared to $8.1 million for the three months ended March 31, 2022.

Adjusted Net Trading Income, which is a non-GAAP measure, decreased $78.7 million, or 22.0%, to $278.7 million for the three months ended June 30, 2023, compared to $357.4 million for the three months ended June 30, 2022.

This decrease was primarily attributable to lower Trading income, net in the Market Making segment during the three months ended June 30, 2023 compared to the same period in 2022, as noted above.

Adjusted Net Trading Income per day decreased $1.3 million, or 22.0%, to $4.5 million for the three months ended June 30, 2023, compared to $5.8 million for the three months ended June 30, 2022.

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.

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Operating Expenses

Our operating expenses increased $26.1 million, or 5.7%, to $485.6 million for the three months ended March 31, 2023, compared to $459.6 million for the three months ended March 31, 2022.

The increase in operating expenses is primarily due to an increase in Interest and dividends expense, partially offset by a decline in Debt issue cost related to debt refinancing, prepayment and commitment fees, described in more detail below.

Our operating expenses increased $40.4 million, or 9.4%, to $471.4 million for the three months ended June 30, 2023, compared to $431.0 million for the three months ended June 30, 2022.

The increase in operating expenses is primarily due to an increase in Interest and dividends expense, partially offset by a decline in Brokerage, exchange, clearance fees and payments for order flow, net, 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 $4.9 million, or 3.2%, to $145.5 million for the three months ended March 31, 2023, compared to $150.4 million for the three months ended March 31, 2022.

Brokerage exchange, clearance fees and payments for order flow, net, decreased $34.5 million, or 22.0%, to $122.5 million for the three months ended June 30, 2023, compared to $157.0 million for the three months ended June 30, 2022.

These costs vary period to period based upon the level and composition of our trading activities.

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Communication and data processing.

Communication and data processing expense increased $1.0 million, or 1.7%, to $56.8 million for the three months ended March 31, 2023, compared to $55.8 million for the three months ended March 31, 2022.

This increase was primarily due to increased connectivity spending in various communication and data processing services and subscriptions.

Communication and data processing expense increased $1.3 million, or 2.3%, to $57.0 million for the three months ended June 30, 2023, compared to $55.7 million for the three months ended June 30, 2022.

This increase was primarily due to increased connectivity spending on colocation, and microwave communication networks maintained by our joint ventures.

Employee compensation and payroll taxes.

Employee compensation and payroll taxes remained consistent at $103.4 million for the three months ended March 31, 2023, compared to $103.5 million for the three months ended March 31, 2022.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $8.4 million and $8.5 million for the three months ended March 31, 2023, and 2022, respectively.

Employee compensation and payroll taxes decreased $3.0 million, or 3.1% to $95.6 million for the three months ended June 30, 2023, compared to $98.6 million for the three months ended June 30, 2022.

The decrease in compensation levels was primarily attributable to a decrease in accrued incentive compensation, 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 $10.1 million and $8.3 million for the three months ended June 30, 2023, and 2022, respectively.

Interest and dividends expense.

Interest and dividends expense increased $55.1 million or 129.4% to $97.6 million for the three months ended March 31, 2023, compared to $42.5 million for the three months ended March 31, 2022.

Interest and dividends expense increased $63.8 million or 130.9% to $112.5 million for the three months ended June 30, 2023, compared to $48.7 million for the three months ended June 30, 2022.

This increase was primarily attributable to higher dividend expense with respect to securities sold, not yet purchased and higher interest expense incurred on cash collateral received as part of securities lending transactions and higher financing costs with respect to trading assets driven by higher interest rates.

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Operations and administrative.

Operations and administrative expense decreased $0.9 million or 3.6% to $24.3 million for the three months ended March 31, 2023, compared to $25.2 million for the three months ended March 31, 2022.

This decrease was primarily driven by decreased regulatory expenses incurred during the three months ended March 31, 2023.

Operations and administrative expense increased $11.9 million or 87.8% to $25.5 million for the three months ended June 30, 2023, compared to $13.6 million for the three months ended June 30, 2022.

This increase was primarily driven by favorable foreign exchange rate movements in the prior year period.

Depreciation and amortization.

Depreciation and amortization decreased $2.1 million, or 12.2% to $15.3 million for the three months ended March 31, 2023, compared to $17.5 million for the three months ended March 31, 2022.

Depreciation and amortization decreased $0.4 million, or 2.6% to $15.9 million for the three months ended June 30, 2023, compared to $16.3 million for the three months ended June 30, 2022.

The decrease is driven primarily by decreased amortization of capitalized software compared to the prior period.

Amortization of purchased intangibles and acquired capitalized software.

Amortization of purchased intangibles and acquired capitalized software decreased $0.5 million, or 2.8%, to $16.0 million for the three months ended March 31, 2023, compared to $16.5 million for the three months ended March 31, 2022.

Amortization of purchased intangibles and acquired capitalized software decreased $0.3 million, or 1.6%, to $16.0 million for the three months ended June 30, 2023, compared to $16.3 million for the three months ended June 30, 2022.

This decrease was due to certain intangible assets being fully amortized during 2022.

Termination of office leases.

Termination of office leases was $0.1 million for the three months ended March 31, 2023, compared to $0.7 million for the three months ended March 31, 2022.

Termination of office leases was $(0.1) million for the three months ended June 30, 2023, compared to $0.7 million for the three months ended June 30, 2022.

These expenses are related to the impairment of lease right-of-use assets, leasehold improvements and fixed assets for certain abandoned or vacated office space.

There were no significant lease terminations in either period.

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

Expense from debt issue cost related to debt refinancing, prepayment and commitment fees decreased to $2.2 million for the three months ended March 31, 2023, compared to $25.7 million for the three months ended March 31, 2022.

The decrease was primarily driven by the acceleration of deferred debt issuance costs incurred as a result of refinancing our long-term debt transaction in January 2022, described in further detail below.

Expense from debt issue cost related to debt refinancing, prepayment and commitment fees increased to $1.8 million for the three months ended June 30, 2023, compared to $1.4 million for the three months ended June 30, 2022.

The increase was primarily driven by costs incurred related to amending VAL's credit facility.

Refer to Note 8 "Borrowings" in Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for more details on our borrowing arrangements.

Transaction advisory fees and expenses.

Transaction advisory fees and expenses were immaterial for the three months ended March 31, 2023, compared to $0.4 million for the three months ended March 31, 2022.

Transaction advisory fees and expenses were immaterial for the three months ended June 30, 2023, compared to $0.6 million for the three months ended June 30, 2022.

These expenses were primarily incurred in relation to our strategic investment portfolio.

Financing interest expense on long-term borrowings.

Financing interest expense on long-term borrowings increased $3.0 million or 13.9% to $24.3 million for the three months ended March 31, 2023, compared to $21.3 million for the three months ended March 31, 2022.The increase was attributable to the increase in outstanding principal as a result of refinancing our long-term debt transaction in January 2022, as described in further detail below, and the effect of higher interest rates.

Financing interest expense on long-term borrowings increased $2.8 million or 12.5% to $24.9 million for the three months ended June 30, 2023, compared to $22.1 million for the three months ended June 30, 2022.The increase was attributable to the effect of higher interest rates applied on our outstanding principal.

Provision for income taxes

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subsidiaries.

Our provision for income taxes and effective tax rates were $24.7 million and 18.3% for the three months ended March 31, 2023, compared to $41.8 million and 17.3% for the three months ended March 31, 2022.

Our provision for income taxes and effective tax rates were $5.9 million and 16.7% for the three months ended June 30, 2023, compared to $24.9 million and 14.3% for the three months ended June 30, 2022.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Total Revenues

Our total revenues decreased $178.8 million, or 13.7%, to $1,127.2 million for the six months ended June 30, 2023, compared to $1,306.0 million for the six months ended June 30, 2022.

This decrease was primarily attributable to a decrease of $199.6 million in Trading income, net, during the six months ended June 30, 2023 compared to the prior period, as well as a decrease of $47.6 million in Other, net, which was driven by gains recorded on sales of various strategic investments in 2022, partially offset by an increase of $128.4 million in Interest and dividends income which is largely driven by the level of trading assets held over periods when dividends are paid, and the levels of stock borrowing and trading asset financing during the six months ended June 30, 2023 compared to the same period in 2022.

The following table shows the total revenues by segment for the six months ended June 30, 2023 and 2022.

Six Months Ended June 30,

(in thousands, except for percentage) 2023 2022 % Change

Market Making

Trading income, net $ 710,655 $ 906,621 (21.6)%

Interest and dividends income 175,283 51,775 238.5%

Commissions, net and technology services 16,334 20,194 (19.1)%

Other, net 1,897 568 234.0%

Total revenues from Market Making $ 904,169 $ 979,158 (7.7)%

Execution Services

Trading income, net $ 8,024 $ 11,614 (30.9)

Interest and dividends income 4,940 29 16934.5%

Commissions, net and technology services 214,614 270,801 (20.7)%

Other, net 15 298 (95)%

Total revenues from Execution Services $ 227,593 $ 282,742 (19.5)%

Other, net $ (4,529) $ 44,100 NM

Total revenues from Corporate $ (4,529) $ 44,100 NM

Trading income, net $ 718,679 $ 918,235 (21.7)%

Interest and dividends income 180,223 51,804 247.9%

Commissions, net and technology services 230,948 290,995 (20.6)%

Other, net (2,617) 44,966 NM

Total revenues $ 1,127,233 $ 1,306,000 (13.7)%

Trading income, net.

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

Trading income, net, decreased $199.6 million, or 21.7%, to $718.7 million for the six months ended June 30, 2023, compared to $918.2 million for the six months ended June 30, 2022.

The decrease was largely a result of the decreased opportunity in our customer market making trading as a result of lower spread opportunity and decreased quality of the order flow with which we interact.

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 are described below.

Interest and dividends income.

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

Interest and dividends income increased $128.4 million, or 247.9%, to $180.2 million for the six months ended June 30, 2023, compared to $51.8 million for the six months ended June 30, 2022.

This increase was primarily attributable to higher dividends earned on market making trading assets held over periods when dividends are paid, along with an increase in interest income earned on cash collateral posted as part of securities borrowed transactions, both of which benefited from higher interest rates for the period compared to the prior period.

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 $60.0 million, or 20.6%, to $230.9 million for the six months ended June 30, 2023, compared to $291.0 million for the six months ended June 30, 2022.

This decrease was driven by the reduction of institutional investors commissions available, and declining institutional engagement, both of which result in lower commission income.

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

Other, net decreased $47.6 million, or 105.8%, to $(2.6) million for the six months ended June 30, 2023, compared to $45.0 million for the six months ended June 30, 2022.

The decrease was primarily due to gains recognized during the 2022 period from sales of investments in our strategic investments portfolio.

Adjusted Net Trading Income

Adjusted Net Trading Income, which is a non-GAAP measure, decreased $210.7 million, or 24.4%, to $651.8 million for the six months ended June 30, 2023, compared to $862.4 million for the six months ended June 30, 2022.

This decrease was primarily attributable to lower Trading Income, net as noted above, partially offset by lower Brokerage, exchange, clearance fees and payments for order flow, net as described below, incurred by Market Making.

Adjusted Net Trading Income per day decreased $1.7 million, or 24.4%, to $5.3 million for the six months ended June 30, 2023, compared to $7.0 million for the six months ended June 30, 2022.

The number of trading days was 124 days for both the six months ended June 30, 2023 and June 30, 2022.

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 increased $66.5 million, or 7.5%, to $957.0 million for the six months ended June 30, 2023, compared to $890.5 million for the six months ended June 30, 2022.

The increase was primarily driven by increased in Interest and dividends expense, offset in part, by lower Brokerage, exchange, clearance fees and payments for order flow, net, and lower Debt issue cost related to debt refinancing, prepayment and commitment fees.

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

Brokerage, exchange, clearance fees and payments for order flow, net, decreased $39.4 million, or 12.8%, to $268.0 million for the six months ended June 30, 2023, compared to $307.4 million for the six months ended June 30, 2022.

These costs vary period to period based upon the level and composition of our trading activities.

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

Communication and data processing.

Communication and data processing expense increased $2.2 million, or 2.0%, to $113.8 million for the six months ended June 30, 2023, compared to $111.5 million for the six months ended June 30, 2022.

This increase was primarily attributable to increased connectivity spending on colocation, and microwave communication networks maintained by our joint ventures.

Employee compensation and payroll taxes.

Employee compensation and payroll taxes decreased $3.1 million, or 1.5%, to $199.0 million for the six months ended June 30, 2023, compared to $202.1 million for the six months ended June 30, 2022.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $19.8 million and $16.7 million for the six months ended June 30, 2023 and 2022, respectively.

Interest and dividends expense.

Interest and dividends expense increased $118.8 million, or 130.2%, to $210.1 million for the six months ended June 30, 2023, compared to $91.3 million for the six months ended June 30, 2022.

This increase was primarily attributable to higher dividend expense with respect to securities sold, not yet purchased and higher interest expense incurred on cash collateral received driven by higher interest rates, as well as an increase 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 generally evaluate it in the broader context of our Adjusted Net Trading Income.

Operations and administrative.

Operations and administrative expense increased $11.0 million, or 28.4%, to $49.8 million for the six months ended June 30, 2023, compared to $38.8 million for the six months ended June 30, 2022.

The increase was primarily driven by the beneficial effect of a strong U.S.

dollar on foreign exchange translation gains during the prior year period.

Depreciation and amortization.

Depreciation and amortization decreased $2.6 million, or 7.5%, to $31.3 million for the six months ended June 30, 2023, compared to $33.8 million for the six months ended June 30, 2022.

This decrease is driven primarily by decreased amortization of capitalized software compared to the prior period.

Amortization of purchased intangibles and acquired capitalized software.

Amortization of purchased intangibles and acquired capitalized software decreased $0.7 million, or 2.2%, to $32.0 million for the six months ended June 30, 2023, compared to $32.8 million for the six months ended June 30, 2022.

This decrease was primarily attributable to certain intangible assets being fully amortized in 2022.

Termination of office leases.

Termination of office leases was $(0.1) million for the six months ended June 30, 2023, compared to $1.4 million for the six months ended June 30, 2022.

These expenses are related to the impairment of lease right-of-use assets, leasehold improvements and fixed assets for certain abandoned or vacated office space.

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

Expense from debt issue cost related to debt refinancing, prepayment and commitment fees decreased $23.2 million, or 85.4%, to $3.9 million for the six months ended June 30, 2023, compared to $27.1 million for the six months ended June 30, 2022.

The decrease was primarily driven by the acceleration of deferred debt issuance costs as a result of refinancing our long-term debt transaction in January 2022.

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 six months ended June 30, 2023, compared to $1.0 million for the six months ended June 30, 2022.

These expenses were primarily incurred in relation to our strategic investment portfolio.

Financing interest expense on long term borrowings.

Financing interest expense on long-term borrowings increased $5.7 million, or 13.2%, to $49.1 million for the six months ended June 30, 2023, compared to $43.4 million for the six months ended June 30, 2022.

This increase was attributable to the increase in outstanding principal as a result of refinancing our long-term debt in January 2022, as described in further detail below, and the effect of higher interest rates.

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 and effective tax rate was $30.6 million and 18.0% for the six months ended June 30, 2023, compared to a provision for income taxes and effective tax rate of $66.7 million and 16.0% for the six months ended June 30, 2022.

Liquidity and Capital Resources

As of March 31, 2023, we had $769.0 million in Cash and cash equivalents.

As of June 30, 2023, we had $698.7 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, 2023, we had borrowings under our prime brokerage credit facilities of approximately $285.1 million, borrowings under our broker dealer facilities of $125.0 million, and long-term debt outstanding in an aggregate principal amount of approximately $1,808.3 million.

As of June 30, 2023, we had borrowings under our prime brokerage credit facilities of approximately $140.6 million, borrowings under our broker dealer facilities of $115.0 million, and long-term debt outstanding in an aggregate principal amount of approximately $1,806.3 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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Certain of our cash balances are insured by the Federal Deposit Insurance Corporation, generally up to $250,000 per account but without a cap under certain conditions.

From time to time these cash balances may exceed insured

limits, but we select financial institutions deemed highly credit worthy to minimize risk.

From time to time these cash balances may exceed insured limits, but we select financial institutions deemed highly credit worthy to minimize risk.

We consider highly liquid investments with original maturities of less than three months, when acquired, to be cash equivalents.

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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, and subsequent payments of $12.4 million in September 2018, $13.3 million in March 2020, $16.5 million in April 2021, and $21.3 million in March 2022.

We made our first payment of $7.0 million in February 2017, and subsequent payments of $12.4 million in September 2018, $13.3 million in March 2020, $16.5 million in April 2021, $21.3 million in March 2022, and $23.3 million in April 2023.

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

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broker-dealer, and its primary regulators include the SEC and the Financial Industry Regulatory Authority ("FINRA").

In June 2023 our U.S.

subsidiary RFQ-Hub Americas LLC ("RAL") became a registered U.S.

broker-dealer and as such is subject to regulation and capital requirements from its primary regulators, the SEC and FINRA.

The SEC and FINRA impose rules that require notification when regulatory capital falls below certain pre-defined criteria.

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VAL is also subject to rules set forth by NYSE and is required to maintain a certain level of capital in connection with the operation of its designated market maker business.

Our Canadian subsidiaries, Virtu Canada Corp (f/k/a Virtu ITG Canada Corp.) and Virtu Financial Canada ULC, are subject to regulatory capital requirements and periodic requirements to report their regulatory capital and submit other regulatory reports set forth by the Investment Industry Regulatory Organization of Canada.

Our Irish subsidiaries, Virtu Financial Ireland Limited ("VFIL") and Virtu Europe Trading Limited ("VETL") (f/k/a Virtu ITG Europe Limited) are regulated by the Central Bank of Ireland as Investment Firms and in accordance with European Union law are required to maintain a minimum amount of regulatory capital based upon their positions, financial conditions, and other factors.

Our Irish subsidiaries, Virtu Financial Ireland

Limited ("VFIL") and Virtu Europe Trading Limited ("VETL") (f/k/a Virtu ITG Europe Limited) are regulated by the Central Bank of Ireland as Investment Firms and in accordance with European Union law are required to maintain a minimum amount of regulatory capital based upon their positions, financial conditions, and other factors.

In addition to periodic requirements to report their regulatory capital and submit other regulatory reports, VFIL and VETL are required to obtain consent prior to receiving capital contributions or making capital distributions from their regulatory capital.

Failure to comply with their regulatory capital requirements could result in regulatory sanction or revocation of their regulatory

Failure to comply with their regulatory capital requirements could result in regulatory sanction or revocation of their regulatory license.

Virtu ITG UK Limited is regulated by the Financial Conduct Authority in the United Kingdom and is subject to similar prudential capital requirements.

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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, 2023, there was an outstanding principal balance on our broker-dealer facilities of $125.0 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 $285.1 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, 2023, there was an outstanding principal balance on our broker-dealer facilities of $115.0 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 $140.6 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 20, 2020, a broker-dealer subsidiary of the Company entered into a loan agreement (the “Founder Member Loan Facility”) with TJMT Holdings LLC (the “Founder Member”), as lender and administrative agent, providing for unsecured term loans from time to time (the “Founder Member Loans”) in an aggregate original principal amount not to exceed $300 million.

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The revolving commitments will terminate on January 13, 2025.

As of March 31, 2023, $1,782.0 million was outstanding under the term loans.

We were in compliance with all applicable covenants under the Credit Agreement as of March 31, 2023.

As of June 30, 2023, $1,782.0 million was outstanding under the term loans.

We were in compliance with all applicable covenants under the Credit Agreement as of June 30, 2023.

In October 2019, the Company entered into a five-year $525 million floating-to-fixed interest rate swap agreement.

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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, 2023, and 2022.

Three Months Ended March 31,

The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2023, and 2022.

Six Months Ended June 30,

Net cash provided by (used in):

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Operating Activities

Net cash used in operating activities was $148.4 million for the three months ended March 31, 2023, compared to net cash used in operating activities of $255.2 million for the three months ended March 31, 2022.

The decrease in net cash used in operating activities was primarily attributable to lower net income, as well as increases in operating assets, net of operating liabilities, related to our trading activities for the three months ended March 31, 2023 compared to the prior period.

Net cash used in operating activities was $26.4 million for the six months ended June 30, 2023, compared to net cash provided by operating activities of $57.6 million for the six months ended June 30, 2022.

The change in net cash used in operating activities was primarily attributable to lower net income, as well as increases in operating assets, net of operating liabilities, related to our trading activities for the six months ended June 30, 2023 compared to the prior period.

Investing Activities

Net cash used in investing activities was $35.8 million for the three months ended March 31, 2023, consistent with net cash used in investing activities of $35.0 million for the three months ended March 31, 2022.

Net cash used in investing activities for the three months ended March 31, 2023 and 2022 consists of cash used for the acquisition of property, equipment, and capitalized software, and transactions related to our strategic investments.

Net cash used in investing activities, which includes cash used with respect to capitalized software and cash used in the acquisition of property and equipment, was $55.1 million for the six months ended June 30, 2023, compared with net cash provided by investing activities of $4.0 million for the six months ended June 30, 2022.

Net cash provided by investing activities for the six months ended June 30, 2022 included cash proceeds from the sale of strategic investments.

Financing Activities

Net cash used in financing activities was $46.5 million for the three months ended March 31, 2023, compared to $212.9 million for the three months ended March 31, 2022.

The cash used in financing activities for the three months ended March 31, 2023 was primarily attributable to $52.0 million in dividends to stockholders and distributions made to noncontrolling interests and $93.2 million in purchases of treasury stock.

Net cash used in financing activities was $215.1 million for the six months ended June 30, 2023, compared to $307.8 million for the six months ended June 30, 2022.

The cash used in financing activities for the six months ended June 30, 2023 was primarily attributable to $145.7 million in dividends to stockholders and distributions made to noncontrolling interests and $135.0 million in purchases of treasury stock.

The cash used in financing activities of $307.8 million during the same period of 2022 primarily reflects $228.8 million net dividends to stockholders and distributions to noncontrolling interests, and $353.1 million purchase of treasury stock, partially offset by $164.4 million of net proceeds from long term borrowings, and an increase of $94.9 million in short-term borrowings.

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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 March 31, 2023, the Company repurchased approximately 36.3 million shares of Class A Common Stock and Virtu Financial

Units for approximately $975.2 million.

As of March 31, 2023, the Company has approximately of $244.8 million remaining capacity for future purchases of shares of Class A Common Stock and Virtu Financial Units under the program.

From the inception of the program through June 30, 2023, the Company repurchased approximately 38.5 million shares of Class A Common Stock and Virtu Financial Units for approximately $1,016.7 million.

As of June 30, 2023, the Company has approximately of $203.3 million remaining capacity for future purchases of shares of Class A Common Stock and Virtu Financial Units under the program.

Critical Accounting Policies and Estimates

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Share-based awards issued for compensation in connection with or subsequent to the Reorganization Transactions and the IPO pursuant to our Amended and Restated 2015 Management Incentive Plan, and assumed pursuant to the Amended and Restated ITG 2007 Equity Plan, were in the form of stock options, Class A Common Stock, restricted stock awards ("RSAs") and restricted stock units ("RSUs").

The fair value of the stock option grants is determined through the application of the Black-Scholes-Merton model.

The fair value of the stock option grants is determined through the application of the Black-

Scholes-Merton model.

The fair value of the Class A Common Stock and RSUs is determined based on the volume weighted average price for the three days preceding the grant.

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Our largest finite-lived intangible asset is customer relationships, which is being amortized over an estimated useful life of ten years.

used a shorter estimated useful life of seven years, the Company would have recorded an additional $4.1 million of amortization expense for the three months ended March 31, 2023, and 2022.

Had we used a shorter estimated useful life of seven years, the Company would have recorded an additional $5.4 million and $10.8 million of amortization expense for the three and six months ended June 30, 2023, and 2022, respectively.

We test finite-lived intangible assets for impairment when impairment indicators are present, and if impaired, they are written down to fair value.

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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