December 2, 2013

Susquehanna Pounces

By By Peter Chapman

Susquehanna International Group's acquisition of E*Trade's wholesaling operation will allow the big market maker to grab market share immediately from the business's competitors. Currently, E*Trade sends a large chunk of its retail orders to the operation-G1 Execution Services-but also sends more than half its flow to certain of G1's competitors. Much of that portion will now be routed to Susquehanna.

In October, Susquehanna announced it would pay $75 million for G1. The deal includes an agreement by the large discount brokerage to send 70 percent of its order flow to Susquehanna/G1 over the next five years. That will cut into the number of orders E*Trade sends to its main wholesalers KCG Holdings (formerly Knight Capital Group), Citadel Securities and Citigroup/ATD. In the third quarter, E*Trade shipped only about 30 percent of its orders in stocks listed on the New York Stock Exchange to G1, according to a regulatory filing. It shipped only about 22 percent of its Nasdaq-listed orders to G1. The rest went to the wholesalers or stock exchange operator Direct Edge.

"They'll be a strong competitor," KCG chief executive officer Daniel Coleman said of Susquehanna on his firm's most recent earnings call. "But overall, it's not really a new entrant coming in. It's the consolidation of an entrant. So there is still the same number of players as before, although it's slightly more locked up."

In the third quarter, E*Trade sent about 53 percent of its orders in NYSE-listed shares to KCG, Citadel and Citigroup. It shipped about 57 percent of its orders in Nasdaq-listed shares to the three wholesalers.

Wholesalers pay retail brokers for their orders and make markets in the stocks. The business has been dominated by KCG, Citadel, Citi and UBS. E*Trade's G1 unit was a smaller player.

E*Trade itself is one of three big discount brokers-Charles Schwab and TD Ameritrade are the other two-that send most of their orders to wholesalers. All of Schwab's flow is sent to UBS.

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