Virtu or Vice? Fund Managers Face Dilemma Over Speed-Trading IPO

Traders work on the floor of the New York Stock Exchange.

Traders work on the floor of the New York Stock Exchange.

Photographer: Jewel Samad/AFP via Getty Images

Virtu Financial Inc. has plenty of attributes that IPO investors should clamor over: The high-frequency trader is profitable, growing and should benefit from an uptick in stock market volatility.

There’s one major sticking point. Some can’t get over the idea lionized by Michael Lewis’s book “Flash Boys” -- that the split-second trading strategies deployed by Virtu hurt the very fund managers who buy new shares.

“There are going to be people who think it’s a good business and want to get in,” said Frank Ingarra, head trader at Northcoast Asset Management LLC, with $3 billion under management. “It’s the bigger guys like myself that don’t like them because they’re chipping away at our performance.”

Scheduled to price Wednesday, Virtu’s initial public offering was postponed for a year after “Flash Boys” created unprecedented scrutiny over high-frequency traders, by alleging they, together with Wall Street brokerages and exchanges, are making money at the expense of slower-moving asset managers.

Lewis also appeared on television to argue that the U.S. equity market is rigged because the fastest traders are able to determine which stocks big investors plan to buy, purchase them first and then sell them back at a higher price.

While no new regulations were passed as a result of the scrutiny that followed “Flash Boys,” a survey by New York-based brokerage Convergex Group LLC last month found that 57 percent of financial professionals believe the market isn’t fair to all participants. One-third say high-frequency trading is harmful.

Investors shouldn’t bet on agitating change at Virtu either. The company has structured its corporate governance with four different classes of shares, giving founder and Chairman Vincent Viola 95 percent of the voting power.

$314 Million

“Mutual funds will stay away from it because they may not want to be labeled as owning a stock that could benefit from market manipulation, which could ultimately undermine investor confidence,” said Jeff Sica, who oversees $1.5 billion as president and chief executive officer of Circle Squared Alternative Investments in Morristown, New Jersey.

A representative from Virtu declined to comment on the IPO.

Virtu is looking to raise as much as $314 million in an IPO that would value the company at $2.59 billion, according to the company’s latest prospectus.

Revenue Growth

Regardless of the hesitation among some investors, Virtu’s filings show it is doing well. Revenue last year rose 8.8 percent from the previous year to $723 million, while net income was $190 million, up from $182 million in 2013. That works out to a profit of almost $1.3 million per employee for the 148-person firm.

Virtu could also be set up to benefit from an increase in stock market volatility -- something that may come as the Federal Reserve moves closer to raising interest rates this year. As a market maker, Virtu profits from the difference in the price to buy and sell securities.

Not everyone’s a critic. At the height of the outcry caused by “Flash Boys,” two of the world’s largest asset managers, Vanguard Group Inc. and BlackRock Inc., defended aspects of high-frequency trading that they said reduce costs for investors and provide liquidity in the fragmented U.S. market.

“The irony about Michael Lewis is that he assisted in making Virtu valuable by shining a light on the industry by showing how profitable these firms are,” said Ari Rubenstein, chief executive officer of Global Trading Systems LLC, another high-frequency trader. “The markets have never been cheaper or more efficient than they are today.”

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