Virtu Financial: think fast and slow

Virtu Financial's business is buying and selling securities in a split second. Executing its listing, alas, took more than a year. The so-called "high-frequency trader" was all set to list its shares last spring until Michael Lewis's pop-finance thriller, Flash Boys, cast computer-based traders as manipulators that exploit widows and orphans. In the intervening months, the controversy has abated enough for even the book's heroes to have had nice things to say about Virtu. Whatever the morality of HFT, the deliberate listing process (Virtu shares debuted on Thursday) has valued it at more than $3bn.

Virtu is trying to capitalise on the proliferation of electronic trading, which has grown at a 16 per cent annual rate since 2004. The company provides liquidity to financial markets by either buying or selling securities in milliseconds. It takes advantage of minuscule differences in bid and ask spreads over millions of transactions across 11,000 securities on 225 marketplaces. Virtu says about 49 per cent of its trades are profitable, but it famously has only had a single day where it lost money overall because of the size of its winning trades.

Computer trading makes for a lean business. In 2014 Virtu made $700m of trading revenue with just 150 staff. Its margin at the earnings before interest, tax, depreciation and amortisation level is almost 70 per cent. It has pledged to return most cash to investors. Even after popping more than a fifth from its listing price, its dividend yield is still 4 per cent.

There is no obvious listed peer to Virtu, though exchanges are a logical benchmark. One concern for Virtu is how volatility, which has been scant in recent years, evolves. Greater volatility leads to both wider bid/ask spreads and chances to exploit them. Another concern is competition, which should narrow profit opportunities and make capital markets even more efficient. It may be that one high-frequency trader is not too much but rather too few.

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