Knight's Wholesaling Drew Bidders
Traders Magazine Online News, January 24, 2013
Getting more business through wholesale order flow, during a period of sluggish trading volumes.
That's what industry observers say drove the two market-making and electronic trading firms that at the end of 2012 pursued mergers with Knight Capital Group, after it suffered a nearly fatal, self-inflicted technical wound.
The purchase of big liquidity provider Knight Trading by either Global Electronic Trading Company (GETCO) or New York-based Virtu Financial would make sense as a means for either firm to increase trading volume, industry analysts say.
GETCO, which wound up with the winning bid, represents "the perfect combination," said Chris Nagy of KOR Trading. He believes the prize for GETCO is Knight's "vast wholesaling market-making distribution network."
Its distribution network, Nagy added, means more institutional or retail order flow. "These are key if you want to be a global liquidity provider," Nagy said. If GETCO gets Knight, GETCO becomes "the dominant specialist on the NYSE."
Nagy and others agree that trade volume and wholesale flow are the critical issues in the Knight deal. Volume on the 10 major national exchanges in the first 10 months of the year was down 28 percent, according to the Securities Industry and Financial Markets Association.
The Knight deal "really has more to do with acquiring more scale than 'GETCO is good at one thing and Knight is good at something else,'" said Adam Honore, research director for Aite Group. He noted that both Virtu and GETCO are high-frequency market makers and designated market makers on the New York Stock Exchange and NYSE MKT.
Both specialize in electronic market making, which generates wafer-thin profits on individual trades, but piles them up with volume. Both emphasize high-speed algorithmic trading and market making. Chicago-based GETCO, said an industry executive who knows the company but couldn't be quoted by name, has become successful by going completely electronic.
"I don't believe they would be interested in Knight for anything other than the enormous order flow on their wholesale platform. They won't take a chance in getting into the prop or market-making business," he said.
Knight's new owner likely would cut out about 20 percent of the personnel and take "all of that critical mass and all of that order flow, and put it on an electrical platform, and generate fees through an enormous mass of order flow." That's a sentiment shared by a former GETCO owner.
"GETCO sees this as a way to expand their footprint. They want it so they can acquire a lot more flow," explained Keith Ross, a former GETCO partner and now chief executive officer of PDQ, a Chicago-based dark pool operator. He said Knight's systems would improve GETCO's ability to trade.
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