(Adds financial details, CEO comments from conference call, share price)
By John McCrank
July 27 (Reuters) - Virtu Financial on Friday reported second-quarter earnings that missed Wall Street expectations, largely due to a decline in small investor stock trading, sending the electronic trading and market-making firm's shares down sharply.
Virtu is one of the world's largest market makers, providing a nearly continuous stream of buy and sell quotes for investors to trade against and profiting from the bid-ask spread. Retail market making is a big part of the global firm's U.S. operations and as one of the only public companies of its kind and size, Virtu's results give insight into the broader industry.
Retail participation, especially when it comes to buying and selling over-the-counter stocks, deteriorated sharply in the second half of the quarter along with a lull in market volatility, Doug Cifu, Virtu's chief executive officer, said on a conference call with analysts.
"People tend to like those penny stocks and the marijuana stocks, and whatever the flavor of the month is and certainly, we see a lot of those, but I think that is almost like a proxy for overall retail engagement," he said.
The current quarter started out much like the last ended, he said, but since only one month has passed, it is impossible predict whether the trend will continue.
Shares of the New York-based company were down 15 percent at $21.80 around midday. That is off of a 52-week high of $37.85 on April 17.
Virtu earned $46.6 million, or 24 cents a diluted share, in the quarter ended June 30, versus $4.4 million, or 1 cent a diluted share, a year earlier, when market volatility was at historic lows and the company had just completed its $1.4 billion acquisition of rival KCG Group.
Stripping out one-time expenses, Virtu said it earned 31 cents a share, missing analysts' average expectations by 7 cents, according to Thomson Reuters I/B/E/S.
Virtu reported $328.1 million in revenue, handily topping analysts' expectations of $234.5 million, mainly on lower compensation expenses.
Virtu currently has 519 employees, down from around 1,200 when the company bought KCG, and makes markets in 36 countries in equities, options, fixed income, currencies and commodities.
The company, which also trades for its own account and on behalf of institutional investors, said it would ultimately cut out $340 million in costs, or 44 percent of the combined expense base of Virtu and KCG, prior to the merger. (Reporting by John McCrank; Editing by Dan Grebler)