initial public offerings (IPOs) trading on American exchanges

Friday, April 4, 2014

Virtu Financial's postponed IPO

"After having executed hundreds of thousands of trades [of U.S. stocks] worth hundreds of billions of dollars, we can, with great confidence, acknowledge the fact those mudcat bottom-feeders have used technology to steal tens of billions of dollars from unsuspecting market participants," says Steve Previs, a longtime equity-sales trader at Mint Partners, a leading London agency brokerage and an independent division of BGC Partners.

On the record, most major institutional investors are rather more restrained in their views of high-frequency trading, even though they're the ones who are paying the tab when they have to pay a higher price to buy a block of stock, or get a lower price when they're selling. That's through what Schneiderman termed "latency arbitrage," a fancy way of describing how HFT firms get a peek at orders a few milliseconds early.

Vincent Viola is the former Chairman of the New York Mercantile Exchange (NYMEX) and is one of the nation's foremost leaders in electronic trading. He is currently the Chairman and CEO of Virtu Financial. Mr. Viola started his career in the financial services industry on the floor of the New York Mercantile Exchange and rose to be Vice Chairman (1993-1996) and Chairman (2001-2004).

Is this front-running? Is it illegal? That's to be decided by the various investigations (and, as our colleague Steve Sears suggests, likely class actions, which inevitably follow any loss, no matter how dubious the basis). In the court of public opinion, for what that's worth, HFT has gotten a bad name.

For some reason, the initial public offering of Virtu, the first firm specializing in electronic trading, was postponed last week with the road show for prospective investors about to get under way. Virtu's S-1 SEC registration statement already had become one of the best-read regulatory documents in recent times. Not least because it shows how profitable the business has been, with the preliminary prospectus listing just one losing trading day out of the 1,238 from Jan. 1, 2009, through Dec. 31, 2013—a statistic that has had the Street abuzz.

Virtu attributes this extraordinary record to its stringent risk controls, a claim that HFT critics might dispute. Be that as it may, it's clear that the company's chief executive, Vincent Viola, is a master trader. He's the ex-head of the New York Mercantile Exchange (now owned by the CME) and a graduate of West Point and Brooklyn Tech (one of New York's three elite special high schools). His Virtu stake would be worth about $2 billion, if the initial offering comes off as planned.

Viola isn't selling any shares in the planned IPO. But going public would give him a chance to "monetize" his stake in the future, to use the buzzword popular among private-equity types who have been cashing in their investments via the strong IPO market. He also draws no salary and receives no equity options, although he's in line for a raise after the company goes public—to $1 a year.

In addition, Viola and his wife have put their East Side mansion, just off Fifth Avenue, up for sale at $114 million, which would be a record price for a New York City property. They paid about $20 million for the 40-foot-wide, 16,000- square-foot manse, and invested a few bucks in improvements, including expanding the basement for a swimming pool. Viola also has been a buyer of other assets, notably the Florida Panthers hockey team, for $240 million.

Viola, the trader extraordinaire, stands to cash in on two of the biggest bull markets ever—the boom in financial markets and Manhattan real estate. Could that be a sign of a peak?

The Financial Times noted on Friday that, long before the Lewis book shone a light on high-frequency trading, HFT's revenue from U.S. stocks actually has been declining steadily since 2009. Virtu, for its part, stands to gain from the growing electronic trading in other markets, notably credit derivatives.

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