Coronavirus picks: part 1, Virtu Financial
Disclosures: I am no longer an investment professional or investment advisor, and I own a significant stake in the company discussed.
My biggest stake I've taken in response to Coronavirus is buying a significant exposure to Virtu Financial. I did this because I used to work for them and I believe that they do extremely well in volatile conditions, particularly volatile conditions with high volumes, and that these conditions will persist for the foreseeable future.
I took the position mainly expecting Q2 to be strong, but I wanted to take it before the Q1 earnings call just in case they gave particularly strong guidance for Q2. I took it far enough in advance, that I am about flat on the sell-off after the Q1 earnings call, so all things considered, I could have waited.
When I entered the position, I believe earnings estimates for Q1 were around $1.30 and for Q2 were still about $0.50 a share. These numbers seem crazy to me. I haven't worked in HFT during a sustained volatility spike, but my guess would be that nearly all HFT companies profit slightly more after they adjust to the conditions than they do when the volatility first spikes. I'm also not convinced that the extreme volatility that we saw in March is better for HFT than the high volatility we saw in April. I mostly worked for ex-Getco KCG, so I never fully got used to Virtu's trading which seemed to be better suited to extreme volatility than ex-Getco's trading was, but all of the trades I know how to write would perform better in the conditions of Q2 than in the conditions of Q1.
Virtu is a company with the resources and expertise to execute on trades that are very similar to ones that I would be writing if I had those resources and an incentive to write them. As such, I expect that they will absolutely trounce expectations in Q2 and that their Q2 performance will significantly exceed the record numbers they posted in Q1.
Finally, Virtu has an incredibly strong track record of returning capital to investors. This make Virtu a much better company to own stock in than it is to work for, which is one of the reasons I left. Doug Cifu's interests are very well-aligned with shareholder interests, and he is going to be taking care of shareholders. One of the things this means is that Virtu will reinvest its profits efficiently. They'll buy back debt and buy back shares. A lot of CEOs want to grow the head count of their business. Doug Cifu isn't one of those people. He likes to acquire companies so that he can fire people and streamline their businesses. He's been trying to force his industry to consolidate to encourage volatility to spike.
I know this because I know he's a smart guy, and I know I'm smart enough to think of this as a way to make Virtu more profitable. It's not what I think is the right thing to do, but it is the thing I think is the obvious thing to do. And looking at what Virtu has done recently, it's the thing Virtu is doing.
And they're going to stay efficient and well-capitalized, and they have been planning for times like these and positioning themselves for times like these for a very long time, and they're going to make smart acquisitions and smart divestitures.
I have two pieces of advice about the HFT business. If you have a choice between working for Virtu and working someplace else in the industry, work at the other place. But if you are looking for a good counterparty or a good investment in the industry, I think Virtu is a really good choice.
I'd like to have my own hedge fund someday. If I do that, I would expect and plan to use Virtu for execution services. I think they're going to gain market share in execution services.
I've got about 10% of my liquid net worth invested in them right now, and I feel pretty good about that.
All of this is either my own private opinion or very public information, it's just not that well-known because Virtu is a relatively small company, and the media is full of disinformation about high frequency trading.
I think Doug Cifu is a snake, but he's a smart snake, and his interests are aligned with shareholders. I think Vinnie Viola is a weird guy and not in a good way, and it's for the best that he's no longer leading the company. I think Daniel Coleman was an incompetent, arrogant dunce and that Doug Cifu knew this and that he acquired KCG specifically because he knew this.
Virtu is a well-run company. It's in a good business overall. The timing was bad for a long time, but it isn't bad anymore.
This position is also pretty much a generic hedge. All of my other coronavirus picks are stocks that I think benefit from the pandemic but that I don't necessarily like if the bottom falls out of the economy after this. I still like Virtu if the bottom falls out of the economy.
My biggest stake I've taken in response to Coronavirus is buying a significant exposure to Virtu Financial. I did this because I used to work for them and I believe that they do extremely well in volatile conditions, particularly volatile conditions with high volumes, and that these conditions will persist for the foreseeable future.
I took the position mainly expecting Q2 to be strong, but I wanted to take it before the Q1 earnings call just in case they gave particularly strong guidance for Q2. I took it far enough in advance, that I am about flat on the sell-off after the Q1 earnings call, so all things considered, I could have waited.
When I entered the position, I believe earnings estimates for Q1 were around $1.30 and for Q2 were still about $0.50 a share. These numbers seem crazy to me. I haven't worked in HFT during a sustained volatility spike, but my guess would be that nearly all HFT companies profit slightly more after they adjust to the conditions than they do when the volatility first spikes. I'm also not convinced that the extreme volatility that we saw in March is better for HFT than the high volatility we saw in April. I mostly worked for ex-Getco KCG, so I never fully got used to Virtu's trading which seemed to be better suited to extreme volatility than ex-Getco's trading was, but all of the trades I know how to write would perform better in the conditions of Q2 than in the conditions of Q1.
Virtu is a company with the resources and expertise to execute on trades that are very similar to ones that I would be writing if I had those resources and an incentive to write them. As such, I expect that they will absolutely trounce expectations in Q2 and that their Q2 performance will significantly exceed the record numbers they posted in Q1.
Finally, Virtu has an incredibly strong track record of returning capital to investors. This make Virtu a much better company to own stock in than it is to work for, which is one of the reasons I left. Doug Cifu's interests are very well-aligned with shareholder interests, and he is going to be taking care of shareholders. One of the things this means is that Virtu will reinvest its profits efficiently. They'll buy back debt and buy back shares. A lot of CEOs want to grow the head count of their business. Doug Cifu isn't one of those people. He likes to acquire companies so that he can fire people and streamline their businesses. He's been trying to force his industry to consolidate to encourage volatility to spike.
I know this because I know he's a smart guy, and I know I'm smart enough to think of this as a way to make Virtu more profitable. It's not what I think is the right thing to do, but it is the thing I think is the obvious thing to do. And looking at what Virtu has done recently, it's the thing Virtu is doing.
And they're going to stay efficient and well-capitalized, and they have been planning for times like these and positioning themselves for times like these for a very long time, and they're going to make smart acquisitions and smart divestitures.
I have two pieces of advice about the HFT business. If you have a choice between working for Virtu and working someplace else in the industry, work at the other place. But if you are looking for a good counterparty or a good investment in the industry, I think Virtu is a really good choice.
I'd like to have my own hedge fund someday. If I do that, I would expect and plan to use Virtu for execution services. I think they're going to gain market share in execution services.
I've got about 10% of my liquid net worth invested in them right now, and I feel pretty good about that.
All of this is either my own private opinion or very public information, it's just not that well-known because Virtu is a relatively small company, and the media is full of disinformation about high frequency trading.
I think Doug Cifu is a snake, but he's a smart snake, and his interests are aligned with shareholders. I think Vinnie Viola is a weird guy and not in a good way, and it's for the best that he's no longer leading the company. I think Daniel Coleman was an incompetent, arrogant dunce and that Doug Cifu knew this and that he acquired KCG specifically because he knew this.
Virtu is a well-run company. It's in a good business overall. The timing was bad for a long time, but it isn't bad anymore.
This position is also pretty much a generic hedge. All of my other coronavirus picks are stocks that I think benefit from the pandemic but that I don't necessarily like if the bottom falls out of the economy after this. I still like Virtu if the bottom falls out of the economy.
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