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Virtu’s IPO set to land, a year after postponement-Reuters

(Reuters) – Shares of Virtu Financial Inc (VIRT.O), an electronic market maker that postponed its IPO a year ago amid the furor over Michael Lewis’ book “Flash Boys,” are slated to begin trading on Thursday in a possible sign that public angst over “high-frequency” trading is waning.

Virtu, whose stock will trade under the symbol “VIRT” and list on Nasdaq, is offering 16.5 million class A shares that are expected to price at $17 to $19 a share, and value the company at $2.6 billion. Virtu will raise up to $314 million.

The New York-based company was thrust into a firestorm in April 2014 after Lewis’ book alleging the stock market is rigged in favor of high-speed traders was published, leading regulators to cast a wide net in search of abusive activity.

Within a month the company pulled its IPO. Virtu also was criticized because it said it had incurred only one day of trading losses in five years, which angered people as it seemed to give credence to Lewis’ claims that the fast traders were making billions at the expense of the little guy.

Doug Cifu, chief executive of Virtu, later acknowledged he was foolish to highlight the company’s profitability in such a way. Virtu, with 148 employees as of Dec. 31, generated $190.1 million in net income last year.

“I thought it was a good thing to disclose to the world that the firm was profitable every day like McDonald’s and a lot of other businesses are. But, boy, did that backfire in my face,” Cifu told a Sandler O’Neill conference last June.

Virtu was founded by Vincent Viola, a former chairman of the New York Mercantile Exchange. As a middleman, it makes small amounts of money on the difference between what buyers are willing to pay and sellers are willing to accept on a large volume of transactions, some 5.3 million trades a day last year.

Understanding market volatility, as well as likely price movements after a trade, both during the session and from the market close to the next day’s open, are important considerations for a market maker, said David Weisberger, managing director at RegOne Solutions, a market analytics firm.

“Market makers always model price behavior as part of what they’re doing,” said Weisberger. “Every market maker worth their salt has a notion at any time of the fair value of a price.”

Virtu plans to pay a dividend that will equal between 70 percent and 100 percent of its net income. Its first dividend of $0.24 a share will be paid in the third quarter.

The company makes markets in equities, fixed income, currencies and commodities across 225 markets in 34 countries. Last year, Virtu said it was profitable 51 percent or 52 percent of the time, but this year’s prospectus pegged its winning rate at 49 percent.

The notion that the remainder were losses and resulted in a rough 1:1 win-loss ratio supported suspicion as to how Virtu is so profitable. Gregory Laughlin, an astrophysicist at the University of California, Santa Cruz later calculated the win-loss ratio was about 2:1 because a quarter of trades neither make or lose money, but they break even.
Cifu has said Virtu’s “secret sauce,” aided by the firm’s broad and diverse trading, is the firm’s risk management that limits losses.

Manoj Narang, co-founder and former CEO of high-frequency trading firm Tradeworx, said Virtu’s IPO vindicates its business model, that markets cannot function without a market maker.

“It’s good for purposes of disclosure and transparency, and for catalyzing deal-making in that space as well,” Narang said.