Wall Street is worried that a $1 billion acquisition will allow Virtu to spy on clients, but the firm has a big plan to quell those anxieties

Virtu, Vinnie Viola, Doug CifuDouglas A. Cifu, Vice Chairman, Partner and Alternate Governor of Sunrise Sports & Entertainment, the Florida Panthers Hockey Club and the BB&T Center, celebrates with Vincent J. Viola, ChairmanAP Images

  • Virtu Financial last week announced it would acquire ITG, the New York broker dealer.
  • The acquisition will position Virtu to break into the business for stock trading on behalf of large asset managers.
  • Some worry that Virtu would be able to trade on its clients' data.
  • In an interview, CEO Doug Cifu outlined a plan to stop that from happening, talked about the firm's hopes for the future, and its unique company culture.

Virtu Financial got its start in the secretive world of high-frequency trading.

But in recent years it has been trying to break into a business dominated by Wall Street's bulge bracket banks: buying stock on behalf of large asset-management clients such as hedge funds and pension firms. The acquisition of New York broker dealer ITG for $1 billion, which Virtu announced last week, could position the firm for success in those businesses. It's not its first large deal. In 2017, the firm acquired KCG which opened Virtu up to global quant strategies in equities and futures.

That acquisition was viewed widely on Wall Street as a success.

As for the ITG acquisition, which is set to close in early 2019, there are concerns about conflicts of interest. Specifically, market observers are worried about Virtu's stock trading business - which trades the firm's capital - peeking into its new broker-dealer business and using that information to trade against clients.

Its an issue that's important to CEO Doug Cifu said in an interview that the firm is building a committee of global clients to oversee the firm to ensure that data is protected. Cifu also spoke about the firm's future plans for growth and its unique military culture.

Frank Chaparro: Let's get into the reasoning behind the deal. It appears to be part of the game plan to build out the client-facing brokerage business? And what's the logic behind entering that market?

Doug Cifu: Our agency execution services took a huge step forward with our acquisition of KCG in 2017 and our agreement to buy ITG is a natural next step in further expanding our transparent global technology and liquidity solutions for our clients.

This is the first time a broker has applied performance and scaled financial technology to a traditional brokerage model; this is what banks and brokers had been trying to do. Clients benefit by using the same DNA that we use and develop for ourselves, and ITG's products and offerings will be enriched with the same.

As I've said publicly, ITG's key offerings comprise a complete suite of agency execution services, including liquidity sourcing, trading algorithms, single stock and program trading, workflow technology, and trading analytics - products and services that its clients rely on to manage their day-to-day operations, risk management and fiduciary responsibilities. Each of ITG's businesses operate in areas that utilize trading technologies which are core to Virtu's businesses and stand to benefit from our common R&D and shared technology plant.

Chaparro: What does the deal say about the market for high-frequency trading firms in your opinion?

Cifu: The KCG and ITG deals further demonstrate the difference between what most folks consider "HFT" and the market's appreciation for the value an electronic market maker like Virtu, who competes to provide risk transference services, brings to the financial markets.

I think the deal also highlights the importance of scale and the role that scaled operators like Virtu will play in future consolidation. As our markets continue to become more connected and more competitive, scale is essential to compete in our technology driven financial services markets. Because of the robust competition in the marketplace and the demand from clients for cutting edge technology, firms like ours must continually invest in technology and talent. In order to operate profitably in this environment, it becomes necessary to operate at significant scale.

Chaparro: Are there any other areas the firm is interested in exploring to build out, either organically or through another acquisition?

Cifu: The ITG combination gives us a slate of organic growth opportunities. As combined firms, Virtu and ITG have built incredible franchises with very complementary products and geographies. While these businesses are distinct and unique from what Virtu does today, they revolve around a common technology infrastructure - like the one I was just describing. For example, I'm excited to offer Virtu's expertise and access to the global FX markets across ITG's suite of execution services, workflow technology and analytics franchises.

Our first order of business is to take the great ITG products, Analytics, Workflow Technology, and Commission Management Aggregation products and invest in them, and of course, we're going to enhance safeguards and transparency around the protection of client data.

I can't overstate how important it is to me personally that client information is properly protected and, to that end, we're talking to the buy-side about establishing a client data governance committee made up of clients from all over the globe to assist in the oversight, design, implementation, and integrity of logical and physical barriers. It's still early and we are engaging the buy-side, getting their input, but the idea is that clients would oversee the management of their data and be empowered to recommend and engage an outside auditing firm and the meetings will be open to the all clients.

The committee concept is an extension of our history of always pushing for more transparency and using technology to deliver more transparency. This is a good thing - no other firm gives this much transparency to its clients into how their information is protected.

Chaparro: Virtu is known for its unique company culture (hard work ethic, military-esque, virtuous). What's your best piece of advice for the ITG employees who will join after the acquisition for finding success at the firm?

Cifu: That's a good question, our culture is a bit unique and it's something we're quite proud of. I'd say, don't worry about titles or who you report to, we're not big fans of titles or org charts at Virtu. Titles and org charts tend to make people think and work in silos, which is not who we are. Virtu is a meritocracy that rewards folks who can identify opportunities, propose and implement solutions, and lead others by example to improve the firm.

Frank Chaparro is a senior correspondent at The Block, a cryptocurrency and blockchain news site. He previously wrote about digital assets, market structure, and fintech for Business Insider. Follow him on Twitter at @FintechFrank for news updates on market structure and crypto.

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