IPO Lockup Expiration: Virtu Financial
Virtu Financial - (NASDAQ:VIRT) - Sell or Short Recommendation - PT $21.25
October 13, 2015 ends the 180-day lockup period on Virtu Financial Inc. .
With the conclusion of the lockup period, the company's pre-IPO shareholders will have an opportunity to sell their own shares totaling over 15 million units, roughly equal the shares trading on the open forum (~16.5 million). This potential for a sharp increase in the stock available in the secondary market could result in a dramatic decrease in the stock price.
We previewed this event on our IPO Insights platform.
Business Summary: Provider of Market Making and Liquidity Services to the Global Financial Industry
Virtu Financial provides market making and liquidity services to the global financial industry through its technology platform that provides quotes to both buyers and sellers in commodities, equities, options, fixed income debt securities, currencies and other types on securities across a wide variety of exchanges, liquidity pools and markets.
Currently, Virtu Financial operates in over 225 exchanges, liquidity pools and markets worldwide by providing quotes on over 11,000 securities and other financial instruments. They provides services in North, South and Central America, Europe, the Middle East, Africa, and Asia and other Pacific countries.
The company notes in its SEC filings that it performs as a market neutral trading entity, which does not take positions on speculation. Virtu Financial seeks to mitigate the risks of long and short positions by earning small spreads on larger trading volumes. While not every trade results in a profit for the company, Virtu Financial result in a profit approximately 49 percent of the time, and the company has experienced only one losing trading day over a period of 1,485 trading days.
In fact, Virtu financial does not participate in high-risk principal investing, predictive momentum or signal trading that is highly automated. To minimize trading risks, its proprietary technology platform will freeze, or lockdown, the system if the risk management system detects any trading strategy outside its parameters. The company notes that this limits potential returns in volatile markets, although the approach is designed to produce consistent profitability.
The proprietary technology platform provides market data, transaction processing, order routing, risk management, and market surveillance technology. Their modules integrate with existing exchanges, liquidity pools and other markets.
Second Quarter 2015 Financial Highlights
- · GAAP net income reached $7.6 million while adjusted net income reached $55.9 million excluding adjustments related to the April IPO.
- · GAAP basic and diluted EPS of $0.01 with a normalized EPS of $0.27
- · Adjusted net trading income reached $105.9 million, an increase of 12 percent
- · Adjusted EBITDA reached $73.3 million, an increase of 27 percent, and adjusted EBITDA margin came in at 67.5 percent
- · Quarterly cash dividend of $0.24 per share was paid on September 15
See full results here.
Management Team Highlights
CEO and Director Douglas Cifu was a co-founder of Virtu in 2008. Prior to joining Virtu, he was a partner at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Cifu completed his J.D. at Columbia Law School in 1990 and his B.A. from Columbia University in 1987 where he graduated magna cum laude.
CFO and EVP Joseph Molluso has been with Virtu Financial since November 2013. Prior to joining Virtu, he served as a Managing Director at J.P. Morgan. He also has experience at Donaldson, Lufkin & Jenrette as well as its successor, Credit Suisse Securities. Mr. Molluso received his M.B.A. from New York University and his B.B.A. from Pace University.
Competition: BofA Merrill Lynch, Goldman Sachs, Morgan Stanley, UBS and Others
Generally, Virtu Financial faces competition from traditional registered market making companies that range from small sole proprietors to the largest integrated broker-dealers worldwide. These companies include BofA Merrill Lynch (NYSE:BAC), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), UBS (NYSE:UBS) and Nomura Securities (NYSE:NMR). In addition, other non-traditional providers of market-making services include Citadel, Wolverine Trading, Timber Hill, Susquehanna, KCG Holdings, Hudson River Trading, and DRW Holdings.
Early Market Performance: Strong Start
Virtu Financial opened on its first day of trading at $24.10, 26.8 percent above its IPO price of $19. It closed on its first day of trading at $22.96 for an increase of 20 percent over its IPO price. The stock reached a high of $24.29 on July 8, a low of $20.23 on August 6 and currently trades in the $23 to $23.50 price range.
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(Nasdaq.com)
Conclusion: Short Sale Ahead
With four firms and nine individuals holding restricted shares; the temptation to take initial profits at the expiration of the lockup period could prove overwhelming, particularly as VIRT stock still trades well above its initial price.
If even some of these insiders sell, it could send VIRT stock tumbling down. Our firm has found drops of ~5% in the two weeks surrounding many lockup expirations.
We suggest selling ahead of the event for full gains.
Disclosure: None.