Virtu/high-frequency trading: hockey stick recovery

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Professional sports franchise owners face a double jeopardy. Not only are the primary businesses that made them wealthy under pressure, the sports teams they own have ceased play during the coronavirus pandemic. Vincent Viola, owner of the Florida Panthers professional hockey team, bucks the trend. Virtu, the high-frequency trading firm Mr Viola co-founded, profits from high trading volumes and record-setting volatility. Rocky markets have led to Virtu shares rallying nearly a third so far this year. 

While other businesses are shuttering, Virtu is on the hunt for more growth capital. Mr Viola announced late last week that he would lend up to $300m to the company in exchange for up to 10m shares in the form of warrants. Other businesses may not have the same option but opportunistic financiers can always find ways to strike while others remain paralysed.

In the four quarters of 2019, Virtu’s daily trading profits averaged between $3m and $4m. Over the year its share price dropped nearly 40 per cent. Tight bid-ask spreads, modest trading volumes and a market driven by passive funds did not cause enough dislocation for its algorithms to exploit.

This year the situation looks markedly different. The Vix index, which provides a measure of market volatility, has shot above 72. This is higher than levels reached during the financial crisis. Wider spreads from volatile markets plus heavy volumes provided the chance for Virtu to profit from these slightly bigger gaps between securities prices. The company announced last week that average daily trading profits had rocketed to $9.5m so far in the first quarter.

Understandably, Mr Viola sees his chance. His loan along with another $150m of capacity from an existing credit facility give Virtu an opportunity to take market share. When the founder is putting his chips into the game it sends a powerful message. Trading businesses, particularly technological ones, are inherently risky in choppy times. With a bit of luck, and its owner’s capital, Virtu has more than a sporting chance.

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