Getco Newly Public in Knight Cuts High-Frequency Focus, CEO Says

Getco LLC, publicly traded for the first time as KCG Holdings Inc. after acquiring Knight Capital Group Inc., will see its focus on high-frequency trading reduced by the merger, according to the chief executive officer.

The Chicago-based firm is evolving into a technology provider focused on cutting execution costs for 650 broker-dealer and 2,000 institutional clients, rather than proprietary trading, Daniel Coleman said in an interview with Erik Schatzker and Scarlet Fu on Bloomberg Television’s “Market Makers.”

“What people should look at is what we’re putting together, not what we had,” he said. “We’ve been investing in new businesses, building out new products, trying to get closer to clients, and in fact these investments make the Knight merger that much more attractive. Yes, we were involved in HFT, but for the new firm it’s really not what we’re about.”

Knight Capital agreed in December to be purchased by Getco in a $1.4 billion deal, ending a four-month saga in which it nearly went bankrupt. Closely held Getco, founded in 1999, was among six financial firms that bailed out Knight Capital in August, after a software malfunction caused more than $450 million in trading losses.

The acquisition ended the 17-year independence of Jersey City, New Jersey-based Knight, a company propelled by the explosion in electronic trading in American stock markets. While joining with Getco preserves Knight’s listing and expands its reach, both companies are contending with U.S. stock trading that has contracted for three straight years.

KCG Shares

“There’s enough unexplained about the merger that I think it’s wait and see for a little while,” Richard Repetto, analyst at Sandler O’Neill, said in a July 2 telephone interview. He has a hold rating on the company. In when-issued trading today, KCG Holdings shares jumped 17 percent to $12.62, a price that reflects a 1-for-3 reverse split of Knight’s old stock.

Knight reported a $9.4 million loss in the first quarter as revenue from continuing operations declined 5.7 percent. Getco’s pretax earnings last year were $26.4 million compared to $193.5 million in 2011. Revenue fell 40% to $551.5 million.

Getco had two main units, according to a May 13 filing that outlined the merger. It makes markets in about 6,000 securities on more than 50 exchanges and other venues worldwide, using automated models to capture profits from spreads between prices where stocks are bought and sold. In its execution services division, Getco collects fees for the use of algorithms and order routing systems, and operates a venue known as GETMatched where U.S. and European stocks and bonds trade.

Execution Services

Knight also has market making and execution services units. In contrast to Getco’s proprietary models, Knight operates a more “customer-centric” business, providing liquidity to brokerages with retail clients, according to the filing. Based on publicly available data for the first quarter, the combined company had a 16 percent market share in exchange-traded U.S. cash equities and 4 percent in Europe, the filing said.

“Our merger’s very different to many mergers,” Coleman said. “A lot of mergers in the financial sector will have two people covering a client and you have to decide which person will we keep to cover this client. Getco didn’t have a lot of people covering clients. Knight has a tremendous distribution force. We think we have some really good products, we think Knight has good products, bring them together and we think we can add value immediately.”

The new company will have roughly 1,400 employees, based on estimates it provided in regulatory filings. It will be the largest designated market maker on the New York Stock Exchange and NYSE MKT exchange and the biggest trader in Russell 2000 stocks, according to a company report.

Low Point

Getco and Knight may have seen the natural low point in the equities cycle, which should improve in the next year or two, Larry Tabb, chief executive officer of the Tabb Group in New York, said in a phone interview. Volatility and volume have picked up in the past month, and as the economy improves, flows into stocks should increase, he said. All these trends should help the new company.

“I think that if they can execute on what they need to execute -- reduce the cost of their infrastructure, not upset their retail or institutional clients and successfully merge the two companies -- I think they have a very positive future,” said Tabb.