Aug 3, 2016
Executive
Andrew Smith - IR Douglas Cifu - CEO Joseph Molluso - CFO
Analyst
Rich Repetto - Sandler O’Neill Alex Blostein - Goldman Sachs Alex Kramm - UBS William Katz - Citigroup Ashley Serrao - Credit Suisse Ken Worthington - JP Morgan
Operator
Good day, ladies and gentlemen, and welcome to the Virtu Financial Conference Call announcing our 2016 Second Quarter Results. At this time all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].
As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Andrew Smith, Head of Investor Relations.
Please go ahead.
Andrew Smith
Good morning. As you know, our second quarter results were released this morning and are available on our website.
Today’s call may include forward-looking statements, which represent Virtu’s current belief regarding future events and are therefore subject to risks, assumptions and uncertainties which may be outside the company’s control, and our actual results and financial conditions may differ materially from what is indicated in these forward-looking statements. It is important to note that any forward-looking statements made on this call are based upon information presently available to the company and we do not undertake to update or revise any forward-looking statements as new information becomes available.
We refer you to disclaimers in our press release and encourage you to review the description risk factors contained in our 10-K and other filings with the Securities and Exchange Commission. In addition to GAAP results, we may refer to certain non-GAAP measures including adjusted net trading income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin.
You’ll find a reconciliation of these non-GAAP measures to the GAAP trends included in the earnings materials with an explanation of how management uses these materials. When used on this call, adjusted net trading income refers to our trading income net of all interest and dividend income and expenses and all brokerage clearing in exchange fees.
Speaking and answering your questions today are Mr. Douglas Cifu, our Chief Executive Officer; and Mr.
Joseph Molluso, our Chief Financial Officer. They will begin with prepared remarks and then take your questions.
Now I’d now like to turn the call over to Doug.
Douglas Cifu
Thank you very much, Andrew. Good morning and thank you for joining our call this morning to discuss Virtu’s second quarter results.
I will begin the call by discussing the results of our business and the report on important progress on various strategic initiatives. Overall the second quarter was characterized generally by low levels of volume and volatility across all global markets, which presented a challenging environment.
The quarter did however, end on a strong note with the results of the UK referendum on the EU producing heightened levels of activity in the final two trading days of the quarter, while Brexit certainly had a positive impact in the final week of June, it did not change the overall tone of the volume and volatility of the quarter. Despite this challenging environment, Virtu performed well throughout the quarter and generated $102.3 million of adjusted net trading income, an average of approximately $1.6 million per day.
I will review some of the highlights of each of the various categories we report. Our Americas equity results were down 17% versus the prior quarter against the backdrop of a 15% decline in share volume and a 14% decline in notional value traded in US equities.
Implied volatility as measured by the VIX was down 24% during the period. Notably implied volatility continued outpace realized volatility with the ratio between the two measures declining to 87%.
As I have noted in prior calls and in other public remarks, realized volatility is a better predictor of the opportunity of a true market making firm such as Virtu. Realized volatility is a useful metric as it captures the intraday volatility in the US equities market which typically will reflect the bid offer spread investors are willing to pay for liquidity.
Against this backdrop of volume declines and muted realized and implied volatility, the firm performed as anticipated during the quarter in our US equity segment. Our European and Asian Pacific equities businesses continued to perform well, comprising 24% of our adjusted net trading income for the first six months of 2016.
Taken together, these businesses were up 15% and 2% compared to Q2 2015 and the first half of 2015 respectively. European equities performance was strong on a relative basis, as results were down 6% versus the prior quarter while consolidated European equity volumes were down 8% on a share volume basis and 13% on a notional value basis.
Asia Pacific equities performance was even strong, as results were up 15% versus the prior quarter, while volumes overall were down 16%. We continue to benefit from growth in many of the unique market places in Asia in particular in Japan and we believe that the need for the firms’ market making services in the region will continue to grow as evidenced by the strategic investment we made in July in a key Japanese market center that I will comment on later.
During the second quarter, our global commodities business under performed some of the benchmark metrics. Overall, results were down 30% versus the prior quarter, while volumes on selected benchmarks on the ICE and CME decline between 8% and 14%.
In addition to the decline in volumes, we would also point to volatility as a key reason for the decline in results. As is the case for US equities business, realized volatility in the key commodities market was down significantly.
For example, the CBO energy sector volatility was down 29% and the CBOE oil ETF VIX index was down 28%. Finally, each of the key publicly available volume benchmarks for spot and future and foreign exchange market volumes markets showed declines in volume during the quarter from the low to mid-teens in terms of percentages.
It is important to note that this decline includes the impact of the somewhat unexpected outcome of the Brexit vote at the end of the quarter, which resulted in record or near record volumes days for some of these future and spot FX platforms. Compared to the prior quarter, CME’s future ADV was down 11% and the notional value of CMEs futures was down 10%.
HotSpot ADV was down 11%, Reuters was down9% and EBS was down 17%. Overall, our global currencies results were down 18% and given the lack of volatility in most of the quarter, we would consider this in line with market metrics.
We continue to believe that our global currencies business will be a driver of growth for the firm in the near to medium term future, as we saw favorable trends in certain segments of the global commodities market, most notably in the overseas NDF market places. Now I would like to touch on progress that we have made on several key strategic initiatives during the quarter, each of which will contribute to the growth and diversity of our overall business.
As you know, we announced a strategic minority investment in SBI Japannext. SBI Japannext is a thriving Japanese PTS venue or alternative market place, and Virtu is an active market maker on the platform.
We decided to make the investment for several reasons. We were invited by Japannext to do so in the context of overall enhanced relationship and we were honored to be selected by this leading platform to be a key strategic partner.
We believe that this reflects well on the market making services we have historically provided to this platform and our reputation as being a firm that enhances markets globally. This transaction also brings us closer to Japannext’s corporate parent, SBI Securities a leading online broker in Japan and a key participant in that country’s financial markets.
SBI also provided us financing at an attractive rate to complete the transaction, and we believe Japannext will be a key participant in the evolution of market structure in a very important part of the world. As a result of the transaction, we will own approximately 29% of Japannext and have one Board seat which I will occupy.
While we are not in the business of making financial investments, this investment is important to the firm as Japannext is a key strategic partner and we also believe we made this investment at an attractive entry point for firms like Japannext. We believe firmly that this expanded relationship with Japannext will result in continued growth in our APAC business, which already highly successful.
Let me turn next to our JP Morgan partners which we announced today. JP Morgan has been an important and valued business part of Virtu since our founding.
JP Morgan is well acquainted with the firm as our primer broker and clearing partner in a variety of asset classes, as a lead underwriter of our initial public offering and from Virtu serving as a designated market maker for JP Morgan stock on the floor of the New York Stock Exchange. We believe therefore that this strategic partnership with JP Morgan Chase where by Virtu will provide technology and market access to JP Morgan is a natural evolution of our relationship, and we are greatly humbled by the trust they have placed in Virtu.
Specifically, JP Morgan will use Virtu’s technological capabilities to access and trade dealer to dealer market in US treasuries. The agreement is for a minimum of three years.
This is important to Virtu for several reasons: First, it is an opportunity for Virtu to scale its robust and efficient technology and connectivity business in fixed income long in asset class we have endeavored to grow with one of the pre-eminent global banks. Second, we believe it is a win-win for both firms as Virtu’s technological powers and micro market structure knowledge will be paired with JP Morgan’s US treasuries trading acumen.
Finally, we believe that this validates further Virtu’s strategy of partnering with financial institutions by providing leading technology that allows those financial institutions to be more nimble and responsive while reducing cost. While we do not expect the material impact to our financial results in the near term, we seek to make this initial phase part of a longer term and growing our relationship with a key strategic business partner.
Finally, I am pleased to report on the progress of our agency execution services initiative. During the second quarter, we connected to one client who began using Virtu’s order routing technology.
The early feedback has been extremely positive with Virtu’s generating efficiency and reduced market impact for the client. We are onboarding additional Blue Chip buy side firms in the US and are putting in place the mechanism it needs to begin providing similar services in Europe.
We are excited about the prospects for this business, and have a backlog of buy side firms in the US and Europe ready to onboard. As we have said in prior calls, we view as a velvet rope offering that leverage Virtu’s existing technology without adding to technology, personnel or overhead costs in any significant manner.
And in this way we will continue to build this business out. While we are not ready to provide estimates as to the potential size of this business, in a previous call I mentioned that we would undertake this initiative to demonstrate the leveragability and scalability of Virtu’s technology and to contribute meaningfully to Virtu’s revenues over the long term.
I mentioned that 10% of our 2015 adjusted net trade income was an ambitious benchmark that we would aspire to, and we continue to maintain that as our goal. The technology in trading partnership with JP Morgan and our execution services initiatives are very exciting to Virtu, as they demonstrate the scalability and applicability of our technology to various uses and importantly we’ll provide sources of revenues to Virtu that are not wholly tied directly to market volumes and volatility.
I’ll finish my remarks by noting how the firms performed on the trading days, where the market was reacting for the Brexit vote in the UK. Given the market volatility in volume surrounding the Brexit vote, Virtu had trading days that were quite strong.
More importantly, our systems performed flawlessly and there was no strain in terms of performance or capacity. We do not disclose the specific adjusted net trading income results of any given day.
As I have mentioned in the past, the announcements of any single day, be it Brexit, August 24 of last year or the Swiss de-pegging is not necessarily indicative of the impact that a particular event had on our overall result. The days that followed Brexit were also active and resulted in above average adjusted net trading income and given our global operations and diversified platform, the impact of an even like Brexit while extremely positive cannot be measures as a single event.
In terms of the longer term Brexit, there obviously remains significant uncertainty about the UK’s role and ultimate relationship with the EU. As you may know, we access the European markets through our wholly-owned subsidiary in Dublin.
We have no offices in the UK. We do not anticipate any meaningful impact on our ability to conduct business in Europe or the UK.
However as I have mentioned, it remains early days. Now I will turn the call over to our CFO, Joseph Molluso to review our financial results for the second quarter.
Joe.
Joseph Molluso
Thank you Doug. I’ll review the summary of our results and point out some figures with regard to expenses before we open it up to questions.
Our GAAP net income before attribution to non-controlling interests was 39.3 million, which equates to $0.21 per share of diluted GAAP EPS. Consistent with the financial presentation in our 10-K and 10-Q, we provide non-GAAP financial information to supplement our presentation.
On a non-GAAP basis, our adjusted net income which excludes the impact of stock based compensation, investing of stock based awards granted at the IPO was 45.8 million for the second quarter. Assuming a normalized tax rate and 139.7 million fully converted shares outstanding, this equated to $0.24 per share in adjusted EPS.
Our adjusted EBITDA which again excludes the impact of stock based compensation was 65.8 million for the quarter, with a corresponding margin of 63%. Let me touch on adjusted net trading income, we spent time last quarter outlining the circumstances around unallocated bucket.
As you will note, this quarters’ unallocated amount is lower. The unallocated amount results from a difference in how we report US GAAP results for trading income and how we track and allocate those results among the various categories internally.
As an illustration, if we make markets in equity security listed on a European exchange, and we also make markets in an ADR tied to that European security, this could result in an unallocated amount. The reason is that the markets in Europe close11:30 AM Easter Time.
From 11:30 Eastern Time until the market’s close in the US at 4:00 PM Easter Time, we will continue to make markets in the ADR. For financial statement purposes, we will us the settlement prices in New York at 4:00 PM.
However because the underlying security on the European exchange naturally did not trade between 11:30 AM and 4:00 PM Easter, for GAAP purposes it may appear as if we had a trading gain or loss. However we are always hedged in reality, there is not gain or loss.
On the expense side, we focus on communications and data processing, employee compensation and overhead as our key core expenses. I’ll touch on all three here.
For communications and data processing, year-to-date 2016 versus year-to-date 2015, we are up one-half of 1%. This essentially flat expense growth in the key technology expense line item is a result of our overall aggressive cost management and deployment of scale across our markets.
Similarly, our operations and administrative expenses are down meaningfully year-to-date. Turning to our compensation accruals, for the second quarter our employee compensation expense is 20.8 million.
Excluding the impact of non-cash amortization of options granted and valued at the time of the IPO, GAAP compensation expense for the quarter is 19.3 million. Including stock based comp; this is 18.4% of net revenues.
Excluding stock based comp; this is 14.3% of net revenues. For the full year 2015, these figures are 16.1% and 13.1% respectively.
We will continue to manage our expenses aggressively including our compensation ratio in appropriate response to market conditions, while continuing to attract and retain the most talented employees. As mentioned earlier, our Board of Directors has authorized the distribution of $0.24 per share payable September 15 to shareholders of record of September 1.
Looking back over the past five quarters since our IPO, our pay-out ratio based on adjusted EPS is 81% consistent with our promise to target a 70% to 100% payout ratio at IPO. Finally looking at our company as a fully taxed [C Corp] with all the shares converted to the public company, our fully taxed adjusted net income for the quarter would have been 32.9 million or $0.24 per share, assuming 139.7 million shares outstanding.
Now I will turn the call back to the moderator to begin the Q&A part.
Operator
[Operator Instructions] our first question today comes from the line of Rich Repetto with Sandler O’Neill. Your line is open.
Rich Repetto
The first quarter first congrats on this partnership or agreement with JP Morgan and I just wanted to get some more detail on it. And Doug I guess if you could walk through, how did it develop, have they tested it with your on the fixed income side with you, how will you get paid and then I know it starts with treasuries but what’s the potential to get to other fixed income instruments or beyond fixed income.
Douglas Cifu
Well as I said in my remarks, we’re really very humbled to be doing business with a global bank like JP Morgan. It’s truly a great reflection on the firm and the result of the last six months of testing which I will get in to what not, but really in these 30 plus relationship with JP Morgan and as a firm our eight year plus relationship with JP Morgan, they were there at the beginning of the formation of the firm and were a key business partner for the firm for many years and a lot of asset classes and more recently we became their DMM as I mentioned on the floor of the New York Stock Exchange.
And as part of that review of their DMM capabilities and understanding of market structure, we gave them some in-depth analysis of how the equities market work and basic stuff that we do at Virtu around market structure that compelled them to a further discussion of how our technology works and this was a very long due diligence period I guess I’ll call it of over six months. We began a proof of concept to see how we would route their treasury market orders and could we be compelling and more efficient and what not, and so it’s not like we’re both flying in to this line.
I mean there’s been a long detailed review of our technology and how we would work with their trading DNA. And really the most significant thing is we’re marrying their years and years of fantastic trading DNA with our very efficient we think scaled market access and technology.
And so we think hopefully one plus one equals three, a win-win type of situation. It’s structured as a technology and trading partnership where as I mentioned it’s a three year term, but effectively we’re providing them with market access and our order routing capabilities if you will, and they’re obviously providing the capital and the market, the expertise if you will of trading treasuries and then there is an incentive component to it based on the profitability of how their trading does being routed through Virtu.
So it could potentially be an important contributor to our fixed income business, which as you know historically, has been a very small part of what we do. We view this and I think JP Morgan views as this hopefully the first step of a longer term relationship.
I mean they’ve talked about how they want to get more nimble and leaner in terms of how they access the market and hopefully we can be their valued partner in a lot of asset classes where it works. That begins by developing trust within the organizations and demonstrating to them that we can add value to their business and that’s - we’ve done that over the last six months and hopefully this relationship will grow from US Treasuries where we’re starting it.
We’re putting some of our best folks on it. They’ve got some quality, very talented folks that they’ve had over here at Virtu and we really opened up the kimono to show them how we operate and what not.
So we’re very optimistic here at Virtu that this is going to be an important long term relationship as frankly it has been Rich for the last eight years. And it’s important; you know this is not a transaction or a partnership if you will at either side, incident to lightilier or not at the highest levels.
So I think there is buying on both sides to try to make this work and expanded beyond US Treasuries.
Rich Repetto
Just one follow-up question, the investment in SBI Japannext definitely demonstrates your emphasis on that area of the world, and the net trading income results were strong. Is there any connection between, I know the investment didn’t close until July, but how you did in the second quarter versus this investment?
Douglas Cifu
Well not really, I mean we’ve been a market maker on Japannext since its founding. We owned a small piece of equity which we earned.
The fact that we threw an equity jump all over Japannext and we are very big supporters of their senior management team there, there’s a fellow by name of Chuck Chon, who runs it. He’s a really high quality executive, and we’re connected to hundreds of venues around the world and I would put Chuck in the upper decile of people or folks that we interact.
And so we’ve worked them on a variety of different initiatives throughout the years and this was much like the JP Morgan relationship. We’ve built trust with them and they were impressed I guess with the services we provided in our market share and how we’re trying to make the markets better and more efficient there and how we interact with the regulators.
And so therefore they invite us in to their partnership and I had the pleasure of interacting [Kataya San], who is the CEO of SBI as well. And so there’s definitely not a direct correlation or a relationship if you will between how we performed this quarter.
But that being said, going forward this is not just a financial investment for us. This is the second largest platform in Japan.
It’s a meaningful platform; there are certain regulatory initiatives that they are pursuing around margins, financing for equities trading that could be very, very significant. And so we viewed it as a very important strategic relationship in a very significant market place in the world, and the largest market place that we access in Asia.
So we’re optimistic that it will both be rewarding financial investment, because this is a great platform, but also a very key strategic initiative as they try to evolve that market place both on the equity and then future side.
Operator
Our next question comes from the line of Alex Blostein of Goldman Sachs
Alex Blostein
A couple of questions around some of the strategic initiatives. So understanding you guys probably don’t want to get in to the economics pretty much, but helping us understanding just the timing of when the JP Morgan arrangement could become a little bit more renewal mover for the business as a whole would be helpful.
So that’s my first question.
Douglas Cifu
Look we’ve purposely started this venture, this partnership I would say on the dealer-dealer US Treasuries market making side, and that’s obviously you know the platforms and the scope and the scale of the business. It’s a sub-asset class.
So in terms of needle moving obviously you’d have to define what that means, but certainly for the next couple of quarters it’s not going to be significant at all as we kind of get going. And I think in the longer term, it could be meaningful, obviously JP Morgan wouldn’t be entering its initiative nor would we, if we didn’t think that we could get meaningful positive operating results from this.
I’m being intentionally vague because I can’t sit here today and say it’s going to be accurate, it’s going y, it’s going to z. I know that’s going to be a challenge for you all in terms of how you value the relationship.
Obviously I look at this more in the medium to long term. This is continuing the theme Alex that large financial institutions whether they be big buy side institutions that are looking for more efficient to route their equity orders to the market place both here and in Europe and large sell side institutions that are looking for more efficient cost effective ways to access market places for starting in US Treasuries and we’re optimistic that hopefully we can expand this asset other classes.
They are coming to a financial technology firm like Virtu that has the advantage of having great financial technology, but also being a very active participant in the market place. We understand market structure, so we’re not a financial tools technology company.
We don’t have a commoditized products, we don’t have algos that we sell, we really want to partner with these institutions that have to access the market in a more efficient way. So we see a real evolution and confluence if you will of two sides of the market place that need to come together and cooperate in order to access the market.
So again I apologize I can’t give you a definitive, it’s going to extra y or z, but I think medium to longer term and in the short term, this is a very significant important strategic initiative for our firm.
Alex Blostein
Understood. And then may be a little bit of a bigger picture question.
The number of some of these strategic initiatives seems to have picked up over the last couple of quarters, and whether it’s the buy-sell arrangements on their order routing side with a few left firms as well as the JP Morgan obviously, the Japanese announcement as well. So taking a step back if you think about capacity for Virtu as you try to venture out in to some of the new initiatives, how should we think about spending for them?
It historically sounded like you’re not planning to add a ton or more headcount or resources in order to support these initiatives. So should we be thinking about these potential revenue streams as a fairly high incremental margin business for you?
Douglas Cifu
Yeah, I’ve always said on these phone calls and I’ve said internally and externally like we take great pride in the fact that we run a very efficient high margin business, right. You can see our adjusted EBITDA margins, they fluctuate but they start with a six in front of them and my goal as a CEO is always to maintain that.
So yeah, there’s certainly going to be a question of scale for our agency execution business. You all know Steve Cavoli joined us about a year ago from Morgan Stanley, not just for that role but for other roles.
But other than that we haven’t added any incremental personnel. We are using our existing technology or existing algorithms.
What really has become apparent to us is as I just said two minutes ago, we are a great financial technology firm that really understands market structure, right. And so we have these great assets that we think we can leverage and scale without adding incremental cost.
I’m not a believer in managing sales forces not if there’s wrong in that. I didn’t start this firm with Vinnie to be a guy that’s managing T&E and a hundred different sales people.
We don’t need to do that. We think we can have high end clients, customers, business partners that really understand what we’re offering, understand it’s a premium product and are willing to pay for it.
So, we’re entering this strategic with JP Morgan and might bring other institutions that we partner with down the road, absolutely, we’re open to that. We’ve had some preliminary discussions with other financial institutions not surprisingly, about seeing along these lines, because look the world is getting more efficient, it’s not getting less efficient.
The world is looking for ways to access markets in a more cost effective manner. That’s what Virtu is.
I would tell people, we access 235, 236 markets in 36 countries and 12,000 financial instruments, and we do it with a 150 people because that’s the advantage that we have. We recognize that scalability, automation and using was our advantage.
Not a market structure advantage, we are not smarter than anybody, we’re not faster than anybody, but we can scale and use technology in a way that’s very efficient access to market. I think that that is compelling to people and we’re going to pick and choose our partners the right way to obviously generate financial results for us that has to be compelling to us.
I’m not going to be in the business of selling tools or algos on a commoditized basis, that’s not what we’re going to do. I’m not going to change the whole nature of this firm for that purpose.
But we think Alex that this is a way to grow our business in a way that’s not wholly depending on market volumes and volatility. So it’s attractive and I think it woos us to continue to explore these opportunities.
Operator
Our next question comes from the line of Alex Kramm with UBS. Your line is open.
Alex Kramm
Wanted to start with a dividends, I think Joe mentioned at the end of his remarks a little bit the 70% to 100% payout ratio. Now obviously this is the first quarter post IPO that you did, actually EPS matched your dividend, but we also know that Brexit helped and the third quarter is looking pretty tough again.
So just maybe talk a little bit more about how safe you think the dividend is if we trade in to a weaker environment, if you have some other opportunities to keep it here even if we earn less going forward?
Joseph Molluso
We view the dividend as very safe. We are conservative from a cash flow standpoint.
Alex if you look at our CapEx year-to-date its mid-single digit millions if you exclude what we capitalize in terms of software and that’s down meaningfully from last year. It’s actually running less than half of what it was last year.
So our cash flow profile looks very good and as I said, we look at this on a long term basis as well. So you look at 81% as a payout ratio carrying the five quarters that we’ve been public and given our cash flow profile.
We feel pretty comfortable with that for the foreseeable future.
Alex Kramm
And then just may be secondly, may be you can talk about the market share; it seems from us looking from the outside, it’s sometimes difficult to see if you’re still having the same kind of opportunities to engage in the market that you had previously. I know you probably don’t see a lot of other competitors in the market either, but does anything feels different than it was previously for example in the past few year to other firms, non-bank firms building up their capabilities in FX for example.
So are you seeing that or are you still feeling like you have the same kind of trading opportunities that you had previously and with the volume that you’re getting.
Douglas Cifu
Good question. We obviously track market share minute by minute, hourly, daily, monthly in every one of the categories and sub asset classes and sometimes within symbols.
So we are very cognizant to that. And we don’t disclose it for competitive reasons, but I can say US equities, Asia equities, European equities, all of the equities categories our market share has been - it fluctuates but it’s been consistent.
It’ll go up and down and sometimes you’ll have an ETF that will do a reverse stock split, so instead of trading 50 million shares a day, all of a sudden its trading 5 million shares a day and you can track - your market share goes down because you’re a big market maker in that ETF. So you have things like that that makes sense, but we’re obviously very focused on it.
In terms of FX, it’s a little more difficult obviously as you know because it’s not some central repository that minute by minute gives you overall market volume. It depends how people will report them and what not and obviously we look the ECNs and we look at the CMEs reporting.
Certainly right, there’s been new competitors, but our market share and capture rate have been consistent with the volume and volatility in the market place. You’re seeing new entrants but also seeing new opportunity i.e.
a lot of banks have gone from being principal market makers to more agency or market centers. So we can make markets to them.
There’s been new opportunities in NDFs. So it’s really - particularly in currencies which I think was your question, there is multiple market and overall market share.
It’s not like US equities you can say, okay, well we got x percent single and double digit market share in overall FX, you really have to look at it pair by pair and in some instances ECN or platform by platform. We’ve seen no material changes other than the normal ebbs and flows based on volume and volatility on a day like the Brexit vote and in the few days after our market share will actually go up, because there are some entrants or participants in the market that may be can’t handle the flow or don’t have the same technology and systems that we do.
So they pull back from the market place. You have days that are lot quitter where our market share might be a little lower than a Brexit type of day because there are more participants.
But overall I’m very bullish about that business; I continue to think how that’s going to be a growth area for us. Unfortunately in FX and in these other categories we need the market place cooperate and if you pro forma it out the Brexit period, it was really a very low volume and very muted volatility period, which as I mentioned in my prepared remarks is not ideal for a market maker.
But I think we performed very well given the market opportunities.
Operator
Our next question comes from the line of William Katz with Citigroup. Your line is open.
William Katz
On the [easy] side, you’ve mentioned your aspirational goal was 10% of 2015 [trade] income. Can you walk through speaking of what the timeline might be to sort of reach that aspirational goal?
Douglas Cifu
Sure. Look let me just recalibrate.
We went through this experimental period, we decided we may have something here that started like late last year and first quarter we continued it and we said, we may actually have something here and the counter party we were interacting with was giving us positive feedback. So kind of went “live” if you will during the second quarter, and got great feedback from the institution that we’re working with.
Very, very smart guy that helped us understand that market better in a way that we thought made the service and the routing algorithms we are providing more effective. During that same time period obviously we know a lot of buy side institutions, a lot of them happen to be shareholders as well and we’ve known them for years and so because of the some of the publicity around being a public company and the fact that details of this experiment somehow appeared in the paper, we got a lot of inbound calls and we’ve developed a queue or a backlog if you will of buy side institutions that have gone through credit and complains and what not and are ready to be start to go live.
I don’t feel any pressure to ramp them all up and get them on immediately. You know the expression goes, you only have one chance to make a first impression and we really didn’t want to make a bad first impression.
And so we have a list here internally of half dozen institutions that were going to onboard in the next three to six months and then we’re going to, we’ve got other institutions behind that and then they are geared up and what not. So I would say over the next 6 to 12 months this will become a growing business and I don’t think we’ll reach that 10% aspirational goal that I mentioned.
But certainly over the next year or two, we’ll talk about how we report this separately and how we disclose it and what not when it becomes more significant, so you fellow can track it more in earnest. We think that based on the feedback we’ve received thus far; we think this can become a significant contributor to our business.
And I think the most important thing which I mentioned in response to Alex’s question is, we think we can do this without any significant incremental spend. We’re using existing resources and employees and existing algorithms which obviously we’ve tweaked somewhat to deal with a different type of market and more importantly also I should have mentioned earlier, we’ve got great analytical tools here at Virtu that we developed over the last eight years in order to enable us to access the market.
We are making those tools available to these buy side institutions as well. So we’re providing them with great execution, great analytical tools and I think most important see real transparency in market structure understanding, that’s what is the most compelling thing to them.
So I think it’s the product, a service offering that ultimately will be very compelling to people.
William Katz
That’s very helpful, and then just maybe a follow-up, I may have a two-part question I apologize, two little things in there which (inaudible) your thoughts. May be its all in the volume and volatility time that you’re talking about, but it looks like your capture rates in both global [commodity] and income just fell a lot more than the volatility compliance were.
Just sort of wondered if you can talk to that, and I was a little confused on your discussion comps or revenue. Should we be thinking about the first half of the year or ’15 as more of a guide tool as we think about the second half of the year.
Douglas Cifu
I’ll do the first part and then I’ll ask Joe to do the comp for revenue thing. I screw that all the time, I’m not great at math, Joe is a lot better than I am.
So In terms of capture rates, you’re right obviously we had decline in capture rates in those categories during the quarter. It’s hard to always say hey we’re in line; we’re not in line with volumes and volatility.
I think a lot of it does have to do with volatility. I’ve always said that volatility particularly realized volatility is our friend; it’s really the measure of what market place participants are willing to pay for our services, our liquidity and when it declines the bid offer spread, which is obviously the capture rate.
What we live and breathe and eat of off, if you will decline. So I don’t see any systemic or long term trends that are of concern to me.
Over the last eight years we’ve had ebbs and flows of our capture rates that we tracked daily, weekly and monthly, and they’ve always come back when market places respond and come back. Are we focused on it?
Yes. Am I concerned about it in the medium to long term?
Absolutely not. Our business continues to be robust; our market share continues to be there.
But you’re right; when volumes were muted we tend to struggle in terms of capture rates. And we see where you’ve got major platforms like EBS and HotSpot that are down double digits and you’ve got the CME futures as well down significant double digits.
It makes it more challenging for us to generate the types of capture rates and the types of adjusted net trading income that we historically have. Joe you want to answer that consultation question?
Joseph Molluso
Sure. Here’s how we look at comp to net revenues.
We’re looking at the employee compensation on our financials, and I’m subtracting the IPO investing of the option grant to get a net compensation number and then I compare that to net revenues which we look at as they are just the net trading income plus the technology services. So if you look at that number for the full year 2015, the ratio including stock based comps so fully loaded was 16.1%, and if you take out stock based comp it was 13.1%.
Year-to-date, we’re running at 18.1% including stock based comp and 13.7% excluding stock based comp. So we’re slightly higher than last year.
I would note down on a nominal dollar basis as you annualize our net compensation through the first two quarters of this year, the nominal number is actually lower than fully year of 2015 and naturally that’s - the reason for that is, our annualized net revenues are lower than last year as well. So what you should expect going forward, I’ve always guided that this number is going to bounce around a little bit including stock based comp fully loaded.
It should be in the mid-teens, upper teens on a excluding stock based comp on low teens. We’re very comfortable with where we are in the middle of the year here.
I’ll remind you, we connect to more markets than employees and when we look at our comp to net revenue ratio and look around at some peers, we’re very, very comfortable with where we sit. So this number reflects the fact that our net revenues are down a little bit, but we’re managing it aggressively.
Nominal dollars are down and if you - what can you expect for the second half of the year, hopefully net revenues are higher, so we’ll be closer to last year’s percentage on a full year basis.
Operator
Our next question comes from the line of Ashley Serrao with Credit Suisse. Your line is open.
Ashley Serrao
My first question is, can you just help us understand what the impact of an appreciating dollar is on the business. It feels like some of the impact here it manifests itself through the capture rate, but just wanted to get a sense of when we look at everything in revenues and expenses, how should we be thinking about that going forward?
Douglas Cifu
Joe you want to try that one?
Joseph Molluso
Sure. In terms of an appreciating dollar, it’s really hard to pin down just because we trade 35 countries in 235 market centers.
So we’ve got on our GAAP financials we’ve got other comprehensive income which flows through, which sort of is the literal GAAP impact of an appreciating dollar. So you can see the foreign exchange translation adjustment net of taxes is negative 1.2 million for the quarter, and for the year its positive 1.3 million.
So it’s kind of hard to give you some guidance in terms of what that’s going to be in the future just because we trade so many asset classes in some many different countries and so many different categories that are hedged against each other that it’s not going to be something that you’re going really be able to reliably forecast.
Douglas Cifu
Ashley it’s a very good question, right, because as Joe mentioned we’re in so many different countries. So it can be headwind, it can be tailwind.
Like the good example is, the Canadian and Aussie dollars have declined significantly. I don’t’ remember the exact numbers and what not over the last two or three years.
So a Canadian penny and an Aussie penny if you will is worth less than US dollar terms today than it was worth four years ago. But that’s still the bid offer increments in each of those market places.
So in a way if you look at like our Asia equities results, probably we were doing better in Asia than we may even get credit from you guys for, because like our Australian results on a notional basis, US dollar adjusted basis, have actually improved, but the notional amounts’ gone down because the Australian dollar has declined so severely and the same thing in Canada with regards to our Americas equity segment. And obviously that could cut the other way depending upon what’s happening with the US dollar relative to these other currencies.
It’s one of the strengths I guess have been in and the challenges of running in multi asset class, multi geography business, and obviously we are cognizant of it when we are look at our Australian [P&L], I don’t panic if it’s gone from x to 10% less when the currency is gone down 30%. I’d say on a relative basis, we are actually capturing more when you translate that to US dollars unfortunately it declines.
Does that answer your question?
Ashley Serrao
Yeah, thank you for all the color there. And my second question is, can you just talk about the interplay between your core market making business that’s built off your great technology and then licensing your secret source out.
When everything is said and then, should this ultimately help you grow some of your core market making businesses as well?
Douglas Cifu
That’s a very interesting question as well, I thought a lot about that. I mean just to be very clear, we are not providing anybody on a permanent our secret source or our technology right like obviously on the buy side, institutions have the ability to us our algorithms but they don’t have access to the code if you will and we obviously traders here that are monitoring the orders and what not.
But look on that side and then on the experience we’ve had with JP Morgan thus far in the proof of concept, we’re learning a lot just on how these institutions look at these markets. Obviously, big buy side institutions that are making directional investments in stocks in large quantities look at the market place very, very differently than Virtu Financial does.
That’s the power of the marriage if you will, because we look at the market on a micro market structure tick by tick, micro second by micro second basis. May be US treasury is slightly different right, because it’s not really a micro second market place all the time.
And these institutions look at the market very differently. So that’s the incremental benefit, the knock on affect if you will of partnering with these great institutions that can add a lot of value and DNA to what we do and does that have application around the rest of our firm, of course it does.
Obviously cognizant of our contractual and confidentiality concerns and all that kind of stuff and we keep the order flow from the buy side institutions separate in a separate broker dealer and all that. So we’re cognizant that we want to be the non-conflicted broker that isn’t looking for any incremental business.
We’re obviously not an IPO calendar research kind of broker. We’re really purely about execution in a non-conflicted very, very efficient cost effective manner and we think that that’s what the firm can offer to these large institutions.
So thematically and as I’ve talked about on that call, we think an important component of how we’re going to grow this firm long term.
Operator
[Operator Instructions] Our next question comes from the line of Ken Worthington with JP Morgan. Your line is open.
Ken Worthington
One of the things that Virtu highlighted on its IPO was that it didn’t have any customers, and that meant really no obligations and lower risk. A number of the initiatives that you’ve been working are really about servicing client.
So with that in mind how do we think about how this changes the risk profile of the firm?
Douglas Cifu
I think it’s a good question, it’s a very question. I think when we talked about not having customers it was less about risk and more about the, how should I put this in a nice way, the managing a sales force and keeping our headcount down and not changing the DNA of the firm.
And in answer to a prior question I made it clear that that is certainly our intention not to add dozens and dozens or hundreds of employees to kind of grow this in to a large institutional business. Certainly there is - when you’re executing on some ones’ behalf, right you’ve got responsibilities to that person and you can averages and all kind of stuff.
And I think we talked about that in context of the issues that Knight had in 2012 in their order routing business and their inability to manage that risk in efficient way which obviously led to their significant loss. We’re not getting in to the payment of order flow, we’re not doing retail execution.
We’re going to have a handful of buy side institutions that are sending us these discrete orders. I think that’s manageable from a risk perspective.
I’m very, very focused obviously on maintaining our margins and being very efficient around the firm. And as I’ve said a number of times on this phone call and I’ve said internally and we’ve shown by our actions thus far, we’re not going to change the headcount of the firm in a meaningful way or a significant way to deal with dozens and dozens of customers we really want this kind to be a real value add relationship between a handful of institutions and virtue that we think we can add a lot of value to.
Ken Worthington
And then in terms of the JP Morgan relationship and may be other relationships like this, how do you go about charging for it? Is it subscription based, is it volume based, what is at least the methodology for your compensation here?
Douglas Cifu
It’s a good question. We have one existing relationship partnership which we’ve talked about and we had in the IPO and it continues and that’s purely or largely just a licensing fee, I guess you’d call that a subscription based model Ken and that appears in our P&L under technology services right, Joe is that we call it?
Joseph Molluso
Yeah.
Douglas Cifu
So that’s essentially just a subscription model not just, it’s a very significant subscription model but a subscription model. The partnership with JP Morgan is going to be more of a hybrid where there’s going to be an element of a subscription fee if you will to offset the fact that we’ve spent a lot of time and money over the last eight years building this technology, but it also is going to have a significant what I will call incentive or trading upside if you will a component to it.
So these transactions obviously can take both forms, it can hybrid like this one, it could be pure trading, it could be pure subscription base. We’re obviously in this business and willing to partner with folks because we want to make it a win-win situation.
We want to make money and we want to make sure that the counter party that we’re interacting feels good about the relationship is making a bunch of money. I think in this particular instance, not to speak for that wonderful institution that you work for, but I think they probably wanted us to have some skin in the game, a significant amount of skin in the game and the more money that this venture, it’s not a separate legal entity but this partnership if you will generates than the better virtue does, so there will be more in focused and more inclined to make it successful.
And obviously we are as I’ve said a dozen times already on this phone call, we view this as a very important strategic focus of this firm going forward. So I think the model could be a mix of both.
And Ken as we proceed with other institutions and talk about other partnerships, we’ll weigh both models and negotiate terms that we feel we’re going to be fairly compensated for the technology that we have and the time and energy we’re going to have to put in to these endeavors.
Operator
Thank you. And that does conclude today’s Q&A portion of the call.
I’d like to turn the call back over to Virtu’s CEO, Douglas Cifu for any closing remarks.
Douglas Cifu
Thank you operator, and thank you everybody for participating today. We know we went a long time, but we felt like we had a lot of strategic initiatives in particularly JP Morgan partnership that we needed to talk about.
We look forward to our continued interaction with our shareholders and with the analysts on the sell side, and if there are any follow-up questions feel free to give me a call or Andrew or Joe at any moment in time, we’re happy to try to answer all your questions. Again thank you everybody and have a great day.
Operator
Ladies and gentlemen, thank you for participating in todays’ conference. This does conclude today’s program.
You may all disconnect. Everyone have a great day.