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FLASHBACK FRIDAY: Becoming a Superpower-GETCO's Looks to Knight's Wholesale and Retail Businesses as Keys to Growth

Flashback Friday sponsored by Instinet

Traders Magazine Online News, February 16, 2018

John D'Antona Jr.

Every journey begins with a single step.

Back in 2013 market maker GETCO was looking to drive it business forward in a stagnant commission rate and highly competitive market making environment. In exploring its limited options, GETCO opted to purchase Knight. Knight had a profitable business model as a market maker and a very profitable wholesaling and retail facing business. Seemed a like a good match – but was it? 

Spencer Mindlin, capital markets analyst at Aite Group remembered the time and recounted to Traders Magazine just what was going on and what was at stake.

“GETCO picked up Knight in order to diversify its business, which at the time was almost exclusively prop trading, with Knight's customer-facing businesses,” Mindlin began. “GETCO was struggling because of increased competition and the Knight acquisition was very attractive. But the integration was challenging, to say the least.”

Mindlin recalled that the merger required both firms having to navigate through difficult clashes of corporate cultures, key personnel exits, and painful organizational restructuring, technology integration, and perception management with clients abound with concerns about interacting directly with toxic HFT liquidity.

“It's hard to say that it worked out as planned, as the merged company failed to meet performance expectations. But KCG did eventually remain a market-making marker leader, with only Citadel Securities as the larger firm in the space.”

Looking at the current market, Virtu Financial likely found itself in a similar spot as GETCO and picked up KCG in 2017, four years after GETCO acquired Knight. Through the looking glass, Virtu appears to be executing from the same playbook as GETCO, and experiencing the same challenges executing the prior merger.

“Still, market making has effectively become a scale and speed business. The Virtu acquisition of KCG enabled Virtu to enter a complementary business and acquire the second-place competitor, only behind Citadel Securities, in a consolidating market,” Mindlin said. “Both deals had cost synergies beneficial to shareholders.”

And for market maker Virtu, the journey to increased profitability and efficiency, buying KCG and getting its highly-profitable Wholesale and Retail order flow businesses seems a perfect match. But has it been?

So far, things seem to be good for Virtu. It recently reported its fourth quarter earnings and in looking at the details the firm’s market making unit’s adjusted net trading income stood at $204 million, up 50% from the previous quarter.

On its fourth quarter earnings call, Chief Executive Officer Doug Cifu described the union of the firm and KCG as “the ultimate market making firm” after it outperformed in the last three months of 2017.

“Our conviction that the two firms market making styles and cultures are remarkably complementary has been proven correct and we believe that there are ample opportunities in front of us to grow revenue further,” Cifu said.

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