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December 18, 2007

Knight Buys an Algo Presence with EdgeTrade

By James Ramage

Knight Capital Group, which earned its stripes as a dealer, is looking to increase its presence in the agency trading game via algorithms. Last month, the giant trading firm bought agency brokerage and algorithmic provider EdgeTrade for about $59.5 million in cash and unregistered stock. The purchase gives Knight EdgeTrade's suite of algorithms and smart order-routing.

"They've identified a gap in their product arsenal," said Carl Carrie, an electronic trading exec at JPMorgan. "What they don't really have are algo trading and an execution management system as products. So, apparently, with this acquisition they fill those gaps."

Knight plans to offer clients EdgeTrade's algorithms through its DMA application, Knight Direct, early this month, said Bill Cronin, managing director and head of the dealer's electronic product sales. He described Knight's existing algos as mostly "very basic VWAP and TWAP" algos.

Roderick Burns, a Knight exec, said many of Knight's clients are stepping up their algo usage. "We're seeing interest in performance-based algos," and in sector- and cap-specific strategies, he observed. The EdgeTrade acquisition gives Knight new capabilities to design algos geared to those strategies.

Additional flow from algorithms could also enable Knight to increase its internal crossing opportunities for agency flow through Knight Match, its ATS. Cronin said Knight could cross more order flow internally if that "provides faster, more price-improved executions to the end customer." New York-based EdgeTrade will operate as a separate subsidiary of Knight.