Getco Posts Loss as Merger Partner Knight’s Trading Improves

Getco Holding Co. and Knight Capital Group Inc. lost money last quarter as the trading firms were completing a merger prompted by Knight’s brush with bankruptcy a year ago.

KCG Holdings Inc. (KCG), as the firm formed by the July 1 union is known, said in a statement that Getco’s second-quarter net loss totaled $72.9 million and Knight’s loss was $30.8 million. Getco’s sales fell 16 percent from a year earlier to $118 million, while Knight’s revenue rose 25 percent to $315 million.

Getco said its market-making business in the U.S. and Europe suffered from a decline in equity transaction volume. Results at the company it purchased, Knight, were helped by increased trading among small investors as the Standard & Poor’s 500 Index rose to a record. Excluding $76.5 million of merger fees, a goodwill writedown and a legal reserve, Knight had pretax earnings from continuing operations of $55 million.

Knight was left needing a suitor after bombarding U.S. exchanges with erroneous orders on Aug. 1, 2012, losing more than $450 million in the process. Getco agreed to the merger at a time when dwindling equity volume was pressuring its own business, prompting a 90 percent drop in 2012 net income.

“The second quarter of 2013 was a period of intense activity during which the two firms together built the foundation for KCG,” Chief Executive Officer Daniel Coleman said in today’s statement.

Market Making

Excluding $61 million in expenses related to the merger along with writedowns, restructuring charges and finance commitment fees, Getco’s pretax loss was $8.9 million.

Getco’s market-making unit produced a loss of $2 million on $118 million in revenue, compared with profit of $9.7 million and sales of $136 million a year earlier. The execution-services business, which provides trading services to clients, improved revenue from a year earlier while posting a bigger loss. Sales rose 41 percent to $13 million, and the loss widened to $2.9 million from $1.5 million.

Knight’s market-making profit amounted to $50 million in the second quarter, an increase from $5.9 million a year earlier.

In an interview on July 2, Coleman said the combined company will focus on cutting execution costs for its broker-dealer and institutional clients and less on proprietary trading. In the wake of the merger, Thomas Joyce, who had been CEO of Knight, left the new company.

Getco had 396 full-time employees as of June 30, down from 398 a year earlier, according to today’s statement. Knight’s headcount, when excluding discontinued operations, fell to 1,211 from 1,341.

KCG Holdings’s stock price peaked at $12.24 on July 2 before closing today at $8.54, down 0.8 percent for the day. Analysts have taken a cautious stance on the stock, with six hold ratings and one sell recommendation, according to data compiled by Bloomberg.

To contact the reporter on this story: Sam Mamudi in New York at smamudi@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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