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KCG Retail Order Flow at Stake in Virtu Grab

Traders Magazine Online News, March 16, 2017

John D'Antona Jr.

Virtu Financial’s unsolicited offer to buy KCG Holdings is all about the little guy – retail order flow.

New York-based high-frequency trading firm Virtu has proposed to acquire all the outstanding shares of KCG's common stock for $18.50-$20.00 per share in cash, valuing the company at as much as $1.33 billion. And while the deal looks large, it is really about little things – the mom-and-pop trading orders for securities – that on their own seem insignificant - but when grouped into wholesale lots by firms’ like KCG translate into big business.

David Polen at ‎Fidessa said that the potential acquisition appears to be a grab by the HFT firm for retail order flow, which wholesaler KCG has a solid foot in.

“This will be particularly important in Europe with MiFID II,” Polen said. “Virtu is a dominant quoter on MTFs (multi-lateral trading facilities). They must be looking at bringing this in house under the new MiFID II regime. Mixing in the KCG retail flow would make their SI offering very intriguing and leapfrog them in front of long-standing MTFs and exchanges.”

Spokespeople for Virtu and KCG declined to comment for this story. But a KCG spokesperson did confirm the bid via press release and pointed to it for any information. The quietly issued press release declared that the firm had received an unsolicited proposal from Virtu Financial to acquire all the outstanding shares of KCG's common stock for $18.50-$20.00 per share in cash.

KCH Holdings stock was last quoted around $18.13 or up 7.3% from Wednesday’s close. Virtu’s stock was last quoted at $16.10 or off 3.8% from the Wednesday close.

The release added that KCG's Board of Directors is reviewing, in consultation with its financial and legal advisors, Virtu's proposal in the context of KCG's strategic plans to create shareholder value.

Credit Suisse in its latest trading research noted that profits for market makers, such as Virtu, have slumped in recent years and one trader at a regional broker thought this was the driver for an acquisition. Virtu, could by acquiring KCG and its valuable retail order flow, boost profitability and help it grow.

“Market making is not as profitable as it once was,” said the regional trader. “So, in order to boost profits and tap into some of that rich retail order flow Virtu decides to make a play for KCG. And KCG’s star has been on the rise – making technology and people investments.”

Retail order flow is big business. According to KCG, Bloomberg and RegOne estimates, monthly retail order flow currently runs about net $30 billion in equities. Over the long run, retail order flow has grown from $10 billion in US equities in 2010 to just under $300 billion in 2016.

In January, the most recent available period, KCG had 32.01% of retail volume as measured under rule 605 Eligible Volume requirements. 

Also, KCG has onboarded several of Wall Street’s best and senior people lately, including former Goldman Sachs stars Greg Tusar and Michael Seigne, UBS’ Charles Susi and Credit Suisse’s Phil Mackintosh. It ha also added Ciro Ambrosio from RBC Capital Markets and Instinet alumni Anthony Abenante.

Credit Suisse, in another trading note obtained by Traders Magazine, wrote that a deal for KCG potentially solves Virtu's growth dilemma.

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