High-Speed Trader Virtu Financial Aims to Prove It’s No ‘Bogeyman’

(Bloomberg) -- High-speed trader Virtu Financial Inc. wants Wall Street to know it’s no fox poised to attack the $1 billion henhouse it’s acquiring.

Virtu, originally founded to trade with its own money, agreed last week to buy Investment Technology Group Inc., a broker-dealer that executes trades for more more than 1,000 firms, including mutual, pension and hedge funds. The ITG deal, valued at about $1 billion, has caused some to worry that Virtu, one of modern finance’s most successful traders, will snoop on its soon-to-be clients’ orders, leveraging that knowledge to place winning trades before they do.

Virtu denies it’ll do that and says it will erect barriers to keep those businesses separate and assuage critics’ concerns. The security regime will be overseen by a client-data governance committee made up of representatives from investment firms, Virtu Chief Executive Officer Doug Cifu said in an interview this week.

“We’re going to empower folks on the buy side -- our clients -- to assist us in how we design and implement these barriers,” he said, declining to name potential members. “If you’re upfront about things and transparent about how you do things, not only does it eliminate the bogeyman factor, it’s the best sales pitch we have.”

Virtu’s proprietary traders -- who are based in a suburb of Austin, Texas, as well as Chicago and Dublin, far from ITG’s customer-facing employees in New York and London -- won’t have the key cards needed to enter the workspace of the division that has outside clients, Cifu said. Software will block proprietary traders from viewing client data. An outside auditor will vet the safeguards. And Cifu mentioned a few hypothetical high-tech solutions that the governance committee could ask Virtu to deploy, like biometric scanners or facial-recognition software for unlocking doors.

“If that’s what people want us to do, that’s what we’ll do,” he said.

Virtu is pushing back against the notion that high-frequency trading is bad -- or, at least, that its own market-making techniques are -- as Cifu tries to transform Virtu into a company with more predictable financial results. When the ITG deal closes, 37 percent of its adjusted net trading income will come from customers -- a smoother stream of money -- up from 10 percent before the transaction.

That’s something shareholders might welcome, too. The company’s stock has recently traded just below $25 after going public at $19 in 2015.

Firm’s Transformation

The company’s 2017 purchase of KCG Holdings Inc. got it into executing trades for retail brokers, another client-facing business. Between ITG and KCG, Virtu will have spent almost $2.5 billion transforming itself into a bigger Wall Street player.

Concerns about Virtu’s use of ITG were raised a few months ago, when rumors of the planned transaction emerged, said Mehmet Kinak of mutual fund company T. Rowe Price Group Inc., a current ITG customer. “People freaked out,” he said.

“Doug Cifu got the message pretty quickly,” said Kinak, T. Rowe’s global head of systematic trading and market structure. The money Virtu is spending on ITG would be wasted if it cheated by letting its traders snoop on customers, he said. “They’re not going to risk everything they’re purchasing. You’d sacrifice that if you did anything nefarious. There’s no reason to do that.”

Kinak thinks Virtu can make ITG’s services even better. One example: ITG tracks how well investors’ trades are executed, a critical function called transaction cost analysis. (It’s also an area where ITG competes with Bloomberg LP, the parent company of Bloomberg News.) That ITG product is currently a $45 million-a-year business focused mostly on stocks, though the company also evaluates currencies, futures and fixed income. Virtu, which has vast amounts of data on trading in hundreds of markets around the globe, could expand the business into other asset classes, Kinak said.

Kinak said he’d be interested should Virtu invite him to join the planned client-data governance committee.

“I’ll find the time,” he said. “I trust the Virtu guys. I’ve traded with them for a long time.”

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