High Frequency Trading Firm Virtu Plans Rare IPO

High Frequency Trading Firm Virtu Plans Rare IPO

High frequency trading is normally a private, non-disclosed business typically kept under the radar and beyond the prying eyes of regulators.  But Virtu Financial is blazing new trails, filing confidential documents for an initial public stock offering, according to a report in the Wall Street Journal.

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Former derivatives exchange offical founded Virtu

The firm, with 150 employees and founded by former chairman of the New York Mercantile Exchange (NYMEX) Vincent Viola, has been profitable with $274 million of net 2013 earnings on $415 million in gross revenue, up almost 11% from the prior year, according to the report. Performance reviewed by the Wall Street Journal showed profits up the previous two years. With his background in derivatives exchange operations, Viola, who also purchased the Florida Panthers hockey team recently, is intimately familiar with exchange and market making operations, two key elements to running a successful high frequency trading firm.

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Virtu has been working with Goldman Sachs Group Inc (NYSE:GS) on the IPO, but is said to be in discussions with other banks who may be brought into the deal.

The New York-based firm is a major high frequency trading operation, making millisecond bets in nearly 200 stock, futures and currency markets worldwide.

Should regulatory issues surrounding high frequency trading be a concern to investors?

High frequency trading has come under fire of late due to the ability to move markets and its tendency to be involved in flash crashes.  As recently as this January a flash crash in gold, traded on the New York Mercantile exchange, was attributed to a sophisticated high frequency trading operation, as reported exclusively in ValueWalk.

Regulatory issues should be a key concern of any investor seeking exposure into this market, as is the tendency for a trader to gain then lose a trading edge.  One trading edge had always been speed to market, but with the speed advantage now cut to milliseconds and competition piling up in what has become a “commodity,” speed alone cannot be relied upon to be a primary differentiator. Trading strategies and ability to push a market are considered key points of differentiation, but gaining an edge in algorithmic trading can be a fleeting advantage if history is any guide.

Virtu hasn’t made a decision where to list its shares, the report noted. If it selected the New York Stock exchange, owned by derivatives exchange Intercontinentalexchange Group Inc (NYSE:ICE), it would be selecting a rival of the Chicago Mercantile Exchange, which purchased the NYMEX in 2008.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com
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