For many investors, the term "high frequency trading" was not in the popular vernacular until the release earlier this year of Michael Lewis' book "Flash Boys". Lewis made headlines in late March with an interview on the television show 60 Minutes with the explosive claim that the markets are rigged in favor of the various high frequency trading firms since they can "front run", or execute their orders in front of orders from individual investors.
Since this accusation by Lewis, many if not all of the high frequency trading firms have come under intense scrutiny by regulatory authorities. New York Attorney General Eric Schneiderman has announced an investigation into these firms. The Commodities Futures Trading Commission is also investigating along with the FBI.
Without going into the arcane details of high frequency trading, these firms can execute buy or sell orders microseconds before the average investor can, garnering fractions of cent on each order.
Now that doesn't sound like much, but when you consider that their trades typically involve millions of shares per trade, the profit potential is enormous.
One of those firms being investigated is Virtu Financial, which proudly proclaims that in 1,278 trading days, it only had one- ONE- losing day of trading.
Virtu Financial is owned by Vincent (Vinnie) Viola.
Hockey fans may recognize that name, as Viola bought the Florida Panthers this past September. Douglas Cifu, CEO of Virtu, is a co-owner.
The Panthers finished the just completed regular season with the second lowest average attendance in the NHL with 14,200 fans per home game. According to the team CEO Rory Babich and confirmed by a review of Broward County, the team is losing $25 million per year.
Because of these substantial losses, Viola has asked lawmakers in Broward County to take over the bond payments on BB&T Arena, which total $64 million over the next 14 years. Additionally, he has asked for concessions from the county that would total $14 million over the same period.
Obviously, this has put the legislators in Broward County in a difficult spot. According to Broward Mayor Barbara Sharief,
"If we lose the Panthers and the arena operator, we would devalue our asset. The building could stay vacant for six months out of the year. That is a significant loss."
Sharief estimates that the value of the arena would decline by 70% if Broward loses the Panthers. She also believes the arena would lose its concert promoter, Live Nation, and that the county would forfeit a $2 million annual state subsidy.
Virtu Financial had planned to go public and had expected to raise $200-250 million from their stock offering. Those plans have been shelved for the time being since the release of Lewis' book and the resulting negative backlash toward high frequency trading firms.
In its public filing, Virtu announced that it made $182.2 million on revenue of $664.5 million in 2013.
That public filing also revealed that Virtu identified a "material weakness" (legal speak for a very big problem) in its procedures for preparing accurate financial statements because of "a lack of reconciliations, a lack of detailed review, and insufficient resources and level of technical accounting expertise. There can be no assurance that we will remediate this material weakness or avoid future weaknesses or deficiencies."
That statement certainly does not engender a high level of confidence in the quality and accuracy of the financial condition of the firm.
According to the firm, additional help has been brought in to rectify the situation.
All of this calls into question the vetting of potential franchise owners by the NHL. Viola may turn out to be a stellar owner, but this scenario should make one wonder the background work done by the League as it works to stabilize troubled franchises with quality owners.
It also points out the leverage that owners have with the public/private partnerships that exist with a team being the major tenant in a publicly financed arena.
One would think that Viola would have the financial wherewithal to help make up these annual losses. With the request for relief from Broward County, it is apparent that Viola is not willing to inject personal funds to make up the shortfall and the bond payments. And remember, the payment on those bonds was known by Viola when he purchased the team.
Viola has the leverage with Broward County, and I would expect them to cave to his demands. It is troubling, though, to see a new owner claiming poverty so quickly after the purchase of the team.
Especially an owner that seems to mint money in the markets.