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January 2, 2014

KCG Chases Big Slice of Algo Business


Peter Chapman

"We don't believe we've penetrated the asset manager and hedge fund as much as we would like to in the U.S. equity algorithm product," Daniel Coleman, chief executive officer of the newly formed brokerage, said in November at an industry conference. "We probably have relationships with them on the high-touch sales trading side. The question is: Can we leverage that to also get our algo product in?"

Coleman was speaking at KBW Securities' Brokerage & Market Structure Conference in New York.

The firm, formed by the merger of Knight Capital Group and Getco in the wake of Knight's near-collapse from trading errors, is best known as a market maker. For the three months ended Sept. 30, 2013, KCG grossed $240 million from its market-making activities. It took in only $91 million from its agency execution business. Officials at the brokerage do not break out the split between high-touch and low-touch agency business.

Daniel Coleman

Most of that $91 million came from executing orders in equities, although KCG does handle trades in fixed-income securities, foreign exchange and futures.

Coleman estimates that execution-only shops like KCG take in about $3 billion per year. The executive sees potential to grab more of those commission dollars. "What is our percent of that number?" he asked. "And what should it be, given the quality of products we have for execution-only? I see some real upside there. Our market share is not where I'd like it to be."

Knight was always a go-to shop for money managers looking to trade small-cap stocks, as the firm made markets in about 8,000 securities. Success in that high-touch business, however, did not translate into similar success in low-touch trades of large-cap stocks.

Knight offered electronic trading services to institutions for several years, following its acquisition of Edge Trade in 2008. That business was not very profitable, however, and some analysts were calling for the firm to sell the business and focus on its profitable market-making activities.

Getco began offering algorithms to the buyside only in the past couple of years, and was not a major player. It too was known mostly as a market maker.

To spearhead an expansion of the business that provides money managers with the tools to conduct their own trading, Coleman made some high-profile hires this year. The onetime UBS equities executive brought on UBS's Charles Susi to run the algo business, and Greg Tusar from Goldman Sachs as co-head of global execution services and platforms.

"They have a great background to help us leverage our institutional clients and grow the algo business," Coleman said at the KBW conference. "They also understand the intricacies of trading venues."

Tusar and Susi both also have experience in building businesses, Coleman noted, which is expected to help KCG going forward. Coleman said that it was Tusar's experience at start-up program trading outfit TLW Securities and Spear, Leeds & Kellogg-and not so much his years at Goldman-that made him valuable. "Once you are at Goldman, most everything is already built," Coleman said.

As for the trading technology inside Susi and UBS, Coleman recalls an almost "green field." "Nothing was built in the late 1990s at UBS," he said. "So some of the people I brought in are the people who helped build that equities business."

Coleman was previously CEO at Getco. He joined that firm in 2010, after spending 24 years at UBS and its predecessor firms. His final role there was as global head of equities.


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