Earnings Call Transcript - VIRT Q2 2021

Operator, Operator

Good day, and welcome to the Virtu Financial 2021 Second Quarter Results Conference Call. I would now like to turn the conference over to Andrew Smith. Please go ahead. Thanks, Tom, and good morning. Thanks for joining us today. Our second quarter results were released this morning and are available on our website. On this morning's call, we have Mr. Douglas Cifu, our Chief Executive Officer; and Mr. Joseph Molluso, our Co-President and Co-Chief Operating Officer; and Mr. Sean Galvin, our Chief Financial Officer. They will begin with prepared remarks and then take your questions. First, a few reminders. 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. Please note that our actual results and financial condition 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 of factors contained in our Annual Report and Form 10-K, 10-Q and other public filings. During today's call, 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. Non-GAAP measures should be considered as supplemental to, and not superior to, financial measures prepared in accordance with GAAP. We direct listeners to consult the Investor portion of our website where you'll find supplemental information referred to on this call as well as reconciliation of non-GAAP measures to the equivalent GAAP term in the earnings materials with an explanation of why we deem this information to be meaningful as well as how management uses these measures. And with that, I'll turn the call over to Doug.

Douglas Cifu, CEO

Good morning, and thank you, Andrew. This morning we reported our second quarter results which reflect our resilient and balanced business model as well as the continued success of our organic growth initiatives. For the quarter ended June 30, we generated $0.63 of adjusted EPS and $5.4 million per day of Adjusted Net Trading Income, bringing our results for the first half of 2021 to $2.67 per share, and an average Adjusted Net Trading Income of $8.63 million per day. Last quarter, we announced a $300 million increase to our share repurchase program, which brought our total authorization to $470 million. We have repurchased 3.4 million shares for approximately $100 million during the second quarter and over $30 million worth since the end of the second quarter, bringing the total amount repurchased under the current authorization to approximately $230 million. As we stated previously, we remain committed to returning capital to investors and have prioritized share repurchases for the foreseeable future. We aim to be in the market consistently buying back shares as we work to accomplish our capital management goal. Importantly, in the second quarter, our more Greenfield growth initiatives continue to shine in both relative and absolute terms, compared to historical results. On Page 6, you'll see - you can see how these initiatives contributed meaningfully to our performance, generating $500,000 per day of Adjusted Net Trading Income, and representing 9% of our ANTI for the quarter. These initiatives are truly organic in that our ANTI from revenue sources was nascent only a few years ago, and we've achieved these results by leveraging our scaled infrastructure and distribution channel, supplemented with a handful of individual hires. While these results are impressive, we are especially excited about the continued growth potential of these truly organic opportunities. In options market making, for example, our daily Adjusted Net Trading Income grew quarter-over-quarter despite the 13% decline in options market volume. We continue to view options market making as a key long-term engine of growth that complements and enhances our existing Market Making business creating new revenue synergies across asset classes and regions. Other key initiatives include our ETF block desk and our deployment of legacy KCG quantile strategy, continued their long-term growth trend in the quarter. Market volumes in US ETF declined about 13% in the quarter while our ETF block volume was down less than 1% illustrating the strength of our unique offering in various market conditions. Our expansion into cryptocurrency market making also continues to progress with our ANTI from crypto market making doubling in Q2 versus Q1. Today, our focus has been on market making in Bitcoin and Ether in various forms, including spot instruments on a couple of the major venues as well as ETFs in futures. As a leading market maker in ETFs around the globe, crypto ETF fit naturally into our scaled market making operations leveraging our growing ETF block desk. We're also in the early stages of developing our ability to stream cryptocurrencies over our direct to dealer streaming liquidity platform VFX. Through this platform, we will provide liquidity in cryptocurrencies to select brokers and institutions around the globe. The key takeaway here is that the growth of liquid tradable crypto-related products is yet another way that the total addressable market is growing for Virtu's scaled liquidity provisioning and execution services. Taken together, our growth initiatives are making tremendous progress which may help raise our baseline performance through the cycle. As Joe will detail in a few moments, we believe that this positive growth trajectory combined with our stock buyback program provides a compelling long-term story for our investors. We look forward to updating you in the future about the progress we're making on each of these opportunities, and their contribution to our growth. Additionally, the steady growth of these initiatives as well as the continuous less volatile performance of our Execution Services segment has led us to provide public guidance around where Virtu's results should be, given various levels of ANTI in a given quarter. We believe our performance this quarter is consistent with that guidance. After several quarters of elevated market activity, realized volatility fell nearly 30% in the second quarter dropping to 9% below the 2019 average. And as you know, 2019 was a historically low point for volatility. Further, US equity volumes were down 28% overall and retail equity volumes in the United States were down even more compared to Q1. Despite the steep drop in volatility which highlights sustained levels of retail engagement and general market volumes compared to historical levels. It is important to note that despite the changing operating conditions versus last quarter, our Market Making business realized $232 million and Adjusted Net Trading Income were $3.7 million per day. This quarter's performance is similar to the third quarter of 2020, where we generated $4 million in the ANTI per day, albeit realized volatility was 34% lower this quarter than in Q3 2020. Our Execution Services business also performed in line with the market opportunity this quarter, realizing $110 million in Adjusted Net Trading Income. We are now two full years past the acquisition of ITG. And looking at the bottom of Page 3, you can see the steady progression of this business. This continued growth reduces the quarter-to-quarter variability to our operations while still giving investors significant upside exposure from our global market making operations. Before I turn it over to Joe, I'd like to take a few minutes to talk about the recent industry discussion around market structure, payment for order flow, and wholesale market making. As I said in the first quarter earnings call, we at Virtu welcome the robust dialogue around the regulatory framework that governs our capital markets. However, we and others are concerned that the calls for reform are based on false narratives and factually unsupportable conclusions. These misconceptions obscure the fact that we are participants in the most robust, transparent and fair marketplace in the world. For retail investors, their experience in the United States has never been better and by comparison, is markedly worse in Canada, the United Kingdom and Europe. Developments in market structure, advances in technology, and the introduction of intense competition have resulted in vastly expanded product offerings, low or no cost trading and importantly, superior execution quality. In summary, the benefits of today's market structure to retail investors are quantifiable, and the supporting factual evidence is striking. In the current high-profile debate about US equity market structure, many folks including regulators, politicians, and critics are looking at the available data to draw conclusions. However, the data being used to assess execution quality for retail investors comes from Rule 605, which most agree, has significant shortcomings and provides an incomplete view of execution quality. Current Rule 605 significantly underestimates the benefits that regulation, competition transparency, and the current market structure have created for retail investors. We recently published a report which we furnished to the SEC that addresses many of 605's shortcomings, and proposes updates to enhance the Rule. The biggest hole in Rule 605 is that it measures price improvement by comparing an order's execution price to the prevailing NBBO without regard for the number of shares being executed. This means, for example, that when we fill a retail order for 9000 shares of a stock, execution quality is measured based on the NBO price level, no matter how many or how few shares are available at the NBBO price. When we fill an order for more size than is available at the NBBO, that provides the retail investor with size improvement, and it happens a lot. In fact, in 2020, 45% of the shares we filled were on orders that outsize the entire NBBO, that's 45%. If Rule 605 was updated to measure this benefit, as many folks have requested, including numerous retail brokers and exchanges like NASDAQ, regulators and brokers would see that in 2020, Virtu provided over $3 billion in price and size improvement to retail investors. That's three times the amount reported on Rule 605 today. It defies logic to conclude that this price and size improvement retail investors receive today would exist if, as some critics suggest, retail orders were all sent to exchanges. Thankfully, in part due to the request from Virtu, and many other brokers and exchanges, the SEC is now reviewing Rule 605. In addition to having a complete view of all available data which means actual trade, not theoretical model, having an accurate understanding of our current market structure is imperative to conducting a thorough review and proposing changes that help, not hurt retail investors. To this end, we have had multiple meetings with regulators and politicians to help correct various myths and misconceptions that cloud the existing debate. In our report that I just mentioned, which is included in the Appendix of today's Investor Presentation, and in our discussions with the staff and commissioners at the SEC, as well as folks on Capitol Hill, we use data to address their concerns, and we will be releasing a follow-up paper to provide even further important detail. At Virtu, we serve as a trusted counterparty to nearly every retail broker and wealth manager in the United States, but also to all of the top broker-dealers and hundreds of institutional buy-side firms, including the top 10 asset managers in the United States. We are confident that in the end, the data and reason will win the day and regulators, politicians, and critics will continue to see the massive benefits of the ecosystem which regulation, competition, and transparency have created for retail investors. With that, Joe will now provide more details on our quarter and our growth initiatives.

Joseph Molluso, Co-President and Co-COO

Hi, thanks, Doug. I will review some thoughts on Virtu's ability to generate growth through both organic initiatives, through the excess cash flow we generate and how this all translates into revenue and earnings growth rates over time. If you look at Slide 5 in our supplemental materials, we try to show what a good strong growth rate for Virtu looks like. We have published this slide previously and we are reproducing it here. Understanding that our results will be volatile on a quarter-to-quarter basis, on this slide we have distilled the historical pro forma median ANTI for Virtu. So I'm assuming Virtu, KCG, and ITG were one company from the time of working on PFOF. So you can see that this is the $5.5 million per day. Using the current operating expense projections, this translates into $2.69 of EPS and using the current capital structure, this has EBITDA of $831 million. This is an extraordinary median performance over a six-year period that excludes any of the growth initiatives that profit them. In net, if we look at the parameters around the growth initiatives, yes, these amounts may be themselves volatile. The near-term set of organic initiatives will generate between $0.5 million per day to $1.5 million. We can apply the marginal cost figures to be used and now arrive at the 18% revenue and 26% growth rate you see on this slide. And that is assuming no share repurchases. We understand this growth is difficult to determine on a streamlined basis, I wanted to point out this real underlying significant growth in Virtu's profits. Layering on top of this growth is our ability to generate significant cash flow. Virtu generates significant amounts of free cash flow across any environment, including an environment like this one. And in the quarter, it's worth noting that even in this more subdued environment, our business generated $0.63 of EPS, almost 58% EBITDA margins, and we were able to buy back approximately $100 million worth of our shares. With our current overall debt levels now at a long-term sustainable notional amount of $1.6 million, our quarterly dividend of $0.24 is more than secure and no immediate plans for any major acquisitions, our ability to focus substantial cash return through repurchases will continue. We view this cash flow as substantial in relation to our current market capitalization, and allows us over time, in any sample time periods through the cycle to acquire open market repurchases a meaningful percentage of our company. Importantly, if you look at the chart at the bottom of the page of Slide 5, you see the annual amount of free cash flow expected to be generated by Virtu at various hypothetical ANTI amounts. Corresponding percentages represent, based on shares outstanding, the amount that can be purchased in any one year. It is important to know that these are annual amounts. So even if you factor in a full year, the lower end of the chart in any given time period, we should be able to repurchase a significant amount. For example, in the first half of this year, we have averaged $8.6 million per day in NTI. We purchased $195 million of our shares year-to-date, representing approximately 4% of total shares outstanding and this is consistent with the guidance we provide. Finally, our organic growth initiatives, while again themselves volatile quarter-to-quarter, are real and accrue our bottom line, and have significant runway. These organic initiatives together with this substantial cash flow to appropriate levels of debt going forward enhance evidence of Virtu's ability to thrive in any environment while producing significant returns to shareholders.

Sean Galvin, CFO

Thanks, Joe. In the second quarter as presented on Slide 3 of our supplemental materials, our Adjusted Net Trading Income represents our trading gains, net of direct trading expenses, totaled $342 million or $5.4 million per day, is 49% lower than Q2 of 2020 and 55% below first quarter. Market Making's Adjusted Net Trading Income was $232 million, or $3.7 million per day, 58% lower than the year-ago quarter and 61% below the first quarter. Execution Services' Adjusted Net Trading Income was $110 million, or $1.7 million per day, which is a 6% decrease year-over-year. Our adjusted EPS was $0.63 for the second quarter. In second quarter, our overall compensation expense was $84 million, or 20% less than Q1. Our cash and overall compensation ratios were 21% and 25% of Adjusted Net Trading Income respectively. As I previously said about our compensation ratio, consistent with past practice, we accrued year-end compensation to a range of percentages earlier in the year. And as the remainder of the year unfolds, this may result in adjustments to our compensation ratio in later quarters this year as we refine our specific compensation targets. Overall, we believe that our full-year cost results are consistent with the specific cost guidance we previously provided for 2021. Adjusted EBITDA was $197 million in Q2, 59% lower than the prior year quarter and 65% below the first quarter. Our adjusted EBITDA margin was 57.6% for the second quarter which is down 20 points from the first quarter that continues to be reflective of our efficient cost structure and disciplined expense management. As Joe mentioned, our capitalization remains adequate. Our long-term debt was $1.6 billion at quarter end, reflecting a $35 million repayment in the second quarter. Finance interest expense was $20 million for the second quarter of 2021 compared to $22 million for the prior year second quarter which has decreased primarily due to the repayment of $289 million of long-term debt in 2020. We remain committed to our $0.24 quarterly dividend, which we have consistently paid over 24 quarters in every environment since our IPO, and the approximately $100 million share repurchase in the second quarter demonstrate our continued commitment to returning capital to our shareholders. I'll now turn the call back over to the operator for Q&A.

Rich Repetto, Analyst

Good morning Doug, good morning, Joe and team. I guess the first question is a follow-up on the size improvement. Doug, we got a chance to go through the deck and see the deck again. On it, I guess the question is about the reception that you're getting with regulators. You said you brought it to them, and they're reviewing the Rule 605 reports. But are you getting any indications that this is actually sinking in, they're absorbing and getting this? And that they may - it may factor into whatever evaluation of the market structure that they come up with in the next - in the coming months?

Douglas Cifu, CEO

Yeah. Good morning, Rich and thanks for the question. Yeah, I think it has been very, very impactful. The response from, I'll talk about the regulators in a second. From the industry, as well and we recognize that 605 was outdated, and that there was need for reform. And frankly, the primary driving force behind our report was, there was this narrative myth out there that somehow odd lots are skewing the data. And a lot of the critics were saying it's just about odd lots on Robinhood, blah, blah, blah, whatever, complete bunk. We knew it was complete bunk, and we debunked it. We just showed the data and said, when you actually include odd lots and assume their quotes, then it actually improves the 605 statistics. So we kind of flipped the script, if you will, on the critics there. And so we're all about myth-busting here and providing facts and data. And so when we brought this to the regulators, I think they were frankly shocked, and in a positive way. I don't think they recognized the value. And it's not just Virtu, it's the entire wholesaling ecosystem. It's pretty robust behind the other six or seven competitors that provide this price and size that are meaningful. When you segment the order flow, it permits the wholesaler to the great benefit of the retail investor to have meaningful size and price improvement. I said it in my script, and let me reiterate it, 45% of the shares that we sell, the orders that we get exceed the liquidity that is at the top of the book on National Securities Exchange are 45%, 54% of the notional size. So there we are, providing real liquidity to small and mid cap-ish. Well, it's exactly what the regulators and the critics want. And this is what helps capital formation. And it was of intense focus at the SEC, in the last 10 years, in terms of how do you get liquidity to small and mid-cap names? Well, there it is folks, well that's what we do. And so if the wholesalers weren't there, you would have enormous widening in bid-offer exchanges and the capital markets would suffer. So the evidence is compelling. And at the end of the day, the SEC has always been driven by facts and data. I mean, that's what they're there for, right? Analyze the facts and data available to them, and then propose rules and regulations that enhance the marketplace. So every one of the proposals I've heard thus far bandied around in the Twitter sphere, if you will, would have the opposite effect. So we're going to continue to be, forceful advocates for what we think is right. We're going to be - continue to be very, very transparent and positive in how we present this information, and we'll continue to be responsive to requests for data. And as I said in my prepared remarks, we're going to - we're updating our reports to include some supplemental questions we've got to address, the narratives on how that execution quality in Canada and Europe is better because they've banned or they've limited PFOS. The actually the opposite is exactly the case that there's lack of competition out there. The opposite is exactly the case, price improvement is increased 750% since 2013. So the facts and data don't lie. And when regulators look at that and this is the country of laws and rules, right? And so, the Administrative Procedures Act is very, very clear. If you're going to start changing rules and regulations, you better have the facts and data to support it. And this isn't about politics. This is about impacting marketplaces. And we take our responsibilities very, very seriously in the market, right? Again, we know that regulators will do the right thing. And we're here to assist in that process.

Rich Repetto, Analyst

Thanks Doug. That's very helpful. And the follow up maybe, if you could do it simple so like the most of us can understand it. But it's a lot has been said about payment for order flow not being accepted in Canada and Europe. And could you explain, why that is in sort of simple term, brief term so a lot of us can follow along and that's been used as a big comparison, I guess.

Douglas Cifu, CEO

Yeah. And I understand the appeal in the headline of saying, 'Well, payment for order flow is banned in Canada,' for example. Well in Canada, there's - and I want to be very careful about how I describe it, because I don't want to disparage anybody's motivations, but there's no price improvement in Canada. And the retail brokers, which in large measure are the large financial institutions, because of the market structure in Canada, which provides for price broker time, right? Like, so if you are a broker, and you're posting the market maker an order, you're able to have priority over other market participants. So if you're a retail broker that has the order, your order gets sent to a National Securities Exchange, and so the dealers can selectively internalize, right? Because of the price broker time preference and firms like Virtu, Citadel, and others are effectively excluded, even if we have the ability to match or even improve that price. And so you have selective internalization in Canada. So talk about conflicts, right? There is this concern that payment for order flow creates a conflict between the broker. How about a marketplace where the retail broker is the market maker? And people's hair would be on fire here in the United States, if they saw that level of conflict. And as well in Canada, there's the taker-maker venues. So if you're a retail broker, and you choose not to internalize an order, you can route that order to a taker-maker venue, and you have a firm like Virtu, Citadel, etc., that they're making prices, like we're paying to make, and then the retail broker effectively routes it to an Exchange, and get what's known as a rebate provided by Virtu. Well, that's just payment of order flow by another name, right? Again, I have no problem with that, right? I think that's part of what makes markets function. But let's not mischaracterize a marketplace. So you're mischaracterizing a marketplace, through material omission by suggesting some kind of payments order flows and then they can assure that. But if you look at the entire ecosystem, the experience is just materially worse. So yes, I'm a very proud American. I'm very proud of everything that we've accomplished here at Virtu, and I'm very proud of the ecosystem because it's just much better. I'm happy to go through Europe, I don't want to belabor it. There effectively the bid-offer is just widened out. So rather than having a direct rebate, the retail investor gets the worst experience. So really, at the end of the day, Rich, when regulators ultimately look at the facts and understand how marketplaces work in the United States and other places. I think, categorically, I have no concern that the level of competition and transparency is just markedly better and the experience is markedly better than any other jurisdiction. So, the facts and data don't lie, we'll continue to be front-footed about that. And we're very, very confident that at the end of the day, sense and sensibility will prevail.

Ken Worthington, Analyst

Hi, good morning. When thinking about new initiatives, it seems to me like Virtu is well positioned to further expand into the 606 or 605 versions of market making for both equity options and crypto. And both seem like big businesses and potentially big opportunities. So I guess, is it logical to extend your current presence in options and crypto to the equivalent of the 605 business? And is this where you ultimately expect to take these asset classes for Virtu? And then if so, what are the challenges you see in expanding your market making there? And then what is a reasonable timeframe to build up these businesses to scale in those asset classes?

Douglas Cifu, CEO

Great question, Ken. Thank you and good morning to you. So let me address options first and categorically that's the plan. I mean we have all of the infrastructure in place. That's a nice way of saying, we have the relationships with the Robinhood, the Fidelity's, the Schwab's, the E-Trade and all of the other aggregators of retail options flow in this country. I've said many times on these calls, and in my conversations with investors, that we began our path toward being an options market maker by taking on the most challenging of challenges, which is to be a market maker in index products on lead exchanges in the United States, right? That is what I would call, the knife fight and you got to bring a big machete for that knife fight if you want to be successful. Well, we have seen success, we built the infrastructure, where we have a very robust, low latency infrastructure that we were able to leverage off of. We built the technology in order to become a firm that could quote in options, and to be competitive in options. So we have all of the tools to compete, and we've got significant resources to do that. Now we have the relationships on the other side and candidly, all of our counterparties which trust us, and which have gotten great service and experience from us in cash equities have asked us to be a competitor. They want more competition. I mean, there are two firms today that are very significant players, they're great firms. We're not suggesting we're going to overtake them tomorrow. We're not. It would be wonderful to be number three, at some point. That would be success in the first instance. In terms of when that will launch, we will launch that in sometime in 2022. Only in the first half and we hope to see meaningful runway. I'm excited about it. This is just a similar feeling to I had back in 2008 and 2009, when we were starting Virtu. We had nothing. It was Vinnie and myself and another partner, a bunch of capital, and some great ideas. And we grew Virtu really from nothing to something that I think is very meaningful. So it's the same kind of feeling we have in options. We have a wonderful team, which is both an internal team, and we've supplemented with some wonderful people from the outside. So we're excited. There's a ton of runway there, and you can make your own estimates on the total addressable market. With respect to crypto, it's a similar story. And obviously, we want to make sure that the regulation sort of catches up to the marketplace. We've taken great strides in Canada and Europe, where there have been ETF avalanche. The Chairman was on television this morning, talking about regulation of crypto exchanges and how that's so important. I couldn't agree more with him. And so again, it's - we have all of the accoutrements, if you will, to manage the counterparty risk. To be a meaningful participant in crypto, its spot future, an ETF it's kind of right in our wheelhouse. And so that's the beauty and the scale of the model that we've created. And we've always said we wanted to be a ubiquitous market maker that could be at the bid and the offer as much as possible for as long as possible during the day. And that's Virtu's DNA. We've supplemented that with customer market making through the acquisition of Knight. So we've expanded our reach. And these two initiatives are indicative of that expansion.

Ken Worthington, Analyst

Okay, great. And then just following up on that, as you expand into the 605 business, how should we think about capital requirements or even other risks to further building out those businesses?

Douglas Cifu, CEO

Yeah, it's a great question. I'll just - the risk first. I mean, obviously, when you're making markets in single names, there's idiosyncratic risks, both from a dividend and a corporate action perspective with regard to those names. I feel there is clearly more risk, no different than the risk we took on when we bought Knight and we became a market maker in 8000 names. Very different from what we did in legacy Virtu. Options are a different breed, right? I can - I don't speak degrees, particularly well, we have people here that do. And so clearly in terms of idiosyncratic and volatility curve risk, there's more exposure, and we will manage those in Virtu kind of way. We have, our global risk management framework can cover that, we'll supplement it with subject matter experts in options which we already have. And we will continue to market making in the Virtu style. This is not going to be a firm that is betting on vol curve. That's just not what we do. We don't bet on direction to market. We certainly don't bet on the direction of volatility. We need to understand the vol curve and we've built models to price it. But at the end of the day, that's not really what we're about. We're not a hedge fund that makes that something. So managing risk there will be meaningful. In terms of capital, I actually asked Joe to address that because he'll do a much better job than I will.

Joseph Molluso, Co-President and Co-COO

Okay. There's nothing, it's a market that is suited to Virtu style market making record setters. It's actually clear. And we will use a prime broker, we have a - anything that we put out there in terms of a capital plan for share buy backs and different amounts of cash flow with different levels of ANTI contemplates required capital for expansion. And it doesn't matter whether its options, block or even crypto. Crypto's - if you ask, that crypto, it's a little bit different than in that, we're managing different counterparties. But we are very conservative initially here in terms of how we access counterparties, and how we get about - how we just manage our account.

Douglas Cifu, CEO

The last thing I should have mentioned it, Joe, if you were finished, which is with regard to options. I mean, the thing that's obviously not stated, again, is that we have the delta hedge in all these products, Ken. Right? So we're really, really well positioned. I mean, we're obviously a large market maker in US equities, but also commodity products. And then internationally, we're going to be launching an Asian options business in the fourth quarter of this year. Right? And we're already there. So that's just in terms of adding some subject matter experts. We have connectivity, we have the delta hedge. So the growth in options just enables us to achieve more synergies within our equities business globally and within our commodities business. We're excited about it going forward.

Dan Fannon, Analyst

Thanks, and good morning. And I guess the follow up is just on, when you think about options market making and you obviously saw a strong quarter-over-quarter growth, despite industry volumes coming down. As you look at the capabilities and what you've built out, is there anything that you're lacking and just trying to think about the potential of this business and kind of the growth from here? Are there - is there anything on your end from either a capability technology functionality that is still needed to be built out? Or is it now just more kind of the blocking and tackling of normal competition?

Douglas Cifu, CEO

Yeah, no. Dan, it's a great question, and good morning. I look at it really as blocking and tackling. Like I said, in answer to the last question, it feels to me, like it's 2009 and I'm a younger man, and we're at Virtu and we're starting to launch US equities, and then we launched FX, and then we launched energy products. It is a laborious time, time taking, if you will, activity to grow a business. It's what we have done exceptionally well here. And you grow in step functionality. I remember when we launched Virtu, the first day we traded we made $24,000, the first day. And Vinnie said to me, don't worry, the next time it'll be - you'll get excited when it's $100,000 and then you'll get excited when it's $1 million. And you know what? He was right and he was right about a lot of different things. It's the same thing with options. We started two years ago, we were making a pittance. And we're banging our head against the wall and all of a sudden you have a good day. And you get connectivity and you add new venues and you learn about the micro market structure of each venue, it is a very difficult thing to build a market making business. The good news is, we've done it before. We have all the blocking pieces and all the credibility and all the capital that we need to do it. It's just a question of doing the hard work to build the business. And we've done it before at Virtu and we will be successful in it because that's what we do. So there's no impediments, the only impediment is, the frustration of time and of having the right personnel to do it. We have all of those things. And so it's just going to take putting our heads down and doing the hard work, which we like doing here at Virtu.

Dan Fannon, Analyst

Got it, and then obviously, the environment is much different in 2Q versus the previous several quarters. Could you maybe talk about the progression of ANTI throughout on a monthly basis to kind of throughout the quarter and I know you don't - you've gone away from kind of the shorter term stuff, but maybe some context for how Q3 has started and just from kind of a run rate perspective.

Douglas Cifu, CEO

Yeah, yeah, that's fine. Obviously, we've gone away from monthly. But yeah, I mean, the quarter was, I don't recall each of the months, I could probably look them up here. I mean, it doesn't. I have no recollection that there was a big uptake and then a downtime. It was kind of around the same feeling for the entire quarter. It felt like a little bit and like the market was just taken a deep breath between the election and all the events, choices surrounding that. New administration, COVID spending bills, potential changes to tax policy, opening, reopening. You know, what's going to happen? Vaccine rollouts, all those kind of stuff. It was clear that the marketplace was taking a deep breath. Volumes overall were down and volatility was markedly down, payment flow for equities, for example, was down 41% from Q2 to Q1, and obviously a significant drop in retail engagement. There was just a lot in our ring of spreads. During the quarter, you could see because of realized volatility being down, almost 40%. So look, we were very, very competitive during the quarter. We gained market share in our 605 business. Our options business continued to grow. So it's a constant fight here, if you will, to continue to maintain and grow our market share and to improve our growth initiatives. And that's what we continue to do. So, was I satisfied with the quarter? No, I'm never satisfied with the quarter. If we had, if we had made $0.68, I would have said we should have made $0.72. So that's what you want out of it. See, I've never been satisfied with any quarter we've ever had, even when we've made $2.05. So I know we can do better, we will continue to do better. The most important thing, though, is that the plan that we lay out, a year and a half ago, whenever it was, where we said, listen, this is what we're going to do, we're going to grow this firm organically, we're going to continue to fight to maintain and to grow same-store sale, we're going to manage our expenses the way we've always managed our expenses and we're going to be incredibly judicious about capital management. That's a nice way of saying, if a penny - every penny here that we don't need for market making that's not nailed down, we're going to return to our investors in the form of our $0.96 dividend and buying stock back. And that's my game plan for the foreseeable future.

Michael Cyprys, Analyst

Hey, thanks for taking the question. I just wanted to ask about buybacks in the sensitivity table that you guys show on Page 8. I'm just looking at the scenario of $8 a day of daily trading net income, which is like $2 billion of adjusted trading net income for the for the year. And then I kind of offset that with the expense guidance, say at the high end of $645 million. But to just that your cash generation is called about $1.4 billion or about a $1 billion after tax, yet the range you show for buybacks is about $300 to $400. So that's like a 30% to 40% payout ratio, then you think about the dividend on top, that's another 10%. So all in, it looks like what you're showing on the page is a 40%, 50%, sort of capital return payout ratio on that $8. It would just seem that you have a lot more capacity to potentially return more than that, particularly since you stopped paying down debt. And I just wonder why that's not the case to pay out substantially more, and maybe you could walk us through the different uses of your free cash flow. Sorry, for the long question.

Joseph Molluso, Co-President and Co-COO

Well you have the interest, you have taxes, you have dividends. You have - we do model in here, excess cash flow suite, because we have that in the terms of our debt. So you've got to factor those things in as well. So I think the nominal amount that is appropriate, going forward, and obviously, if we had an outsized quarter where we were called on the debt that we're going to repay, for a chunk of it, we would obviously look for an opportunity to refinance and kind of get that back to the nominal level that we are at today, right? So have the right capital structure today, I guess, to the extent that you want a modeling like we're seeing a very kind of, reduction, because it requires repayments in your items.

Douglas Cifu, CEO

I just want to thank everybody for taking the time and I would be remiss if I did not note and comment as Chris and Ken really hope about Rich Repetto's running style. Rich, we're proud of the fact that you're after exercising and we assure you that you are much faster than Joe and myself. We are not a running management team. So - we would beat you in the shot-put. Anyhow, we look very much forward to engaging with our investors and talking to you all next quarter. Thank you.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.