It’s a good thing Virtu Financial doesn’t really need to go public.
The “technology-enabled market maker” Virtu is delaying its initial public offering. Virtu may be different, but too much of what it does sounds similar to the high-frequency trading that’s suddenly in the spotlight.
It’s reasonable to ask why a highly profitable private trading firm aspires to be publicly traded at all. It doesn’t need capital. Virtu disclosed profit of $182 million on total revenue of $665 million last year. And from 2011 to 2013, it paid out nearly $700 million in distributions to its owners, thanks to both business cash flow and the proceeds of borrowing.
Nor does its founder, Vincent Viola, formerly the chairman of the New York Mercantile Exchange, seem to have much inclination to share control, with four classes of shares – part of a complex corporate structure – helping to concentrate voting power in his hands.
The answer may be that private equity firm Silver Lake Partners, which invested about $250 million in Virtu in 2011, wanted a profitable exit route and I.P.O. investors seemed gung-ho enough to invest on Mr. Viola’s coattails at a high enough price. Valued at the ballpark 20 times earnings multiple that attaches to flourishing exchanges in the United States, Virtu could be worth more than $3.5 billion.
Fate has intervened with the publication of Michael Lewis’s book with its claim that stock markets in the United States were “rigged” by high-frequency traders operating at light speed. Virtu distances itself from the momentum and order signal-based trading that Mr. Lewis highlights as particularly troubling. Instead, Mr. Viola’s firm exploits variability in the gap between bid and offer prices for securities, minimizing risk to the extent that it has lost money on only one day since 2009.
Yet huge volumes, pennies-per-trade profit and electronic activity in at least 10,000 securities and other instruments, 210 trading venues and 30 countries make Virtu seem like any high-frequency trader, a business that isn’t widely understood anyway. KCG, the combination of Getco and the former Knight Capital – which suffered a big loss in 2012 as the result of a technological glitch before the merger last year – boasts a trailing price-to-earnings ratio below 10 times. Holding off on the I.P.O. could prevent Virtu’s valuation sliding in that direction, especially as there’s no rush.
Richard Beales is assistant editor for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.