Giant wholesaler Knight Capital Group has taken on the role of providing its institutional customers with access to the management of the companies whose stocks it trades.
The move is unusual, in that providing corporate access is typically the job of a full-service broker that provides research-something that Knight, an execution-only dealer that makes markets or trades in more than 17,000 equities, isn’t.
Knight’s program targets “orphan” companies: those with limited or no sellside coverage within the small- and mid-cap space. Nasdaq has even offered Knight assistance. Nasdaq got involved because it wants to help its companies gain greater exposure to the buyside.
“If Nasdaq had a company in New York for the open, or close, they would contact us, and we would try to get them in front of some institutions while they were in town,” said Christina Ferri, a Knight director who launched the program four years ago. “They found that these companies want to get in front of institutions, so they say: Look, we’re partnering up with Knight here, and Knight will do these road shows for you at no cost.'”
This is a boon to both small companies and money managers, as the buyside commonly rates corporate access the No. 1 service it seeks, according to Sanford Bragg, president and co-chief executive of Integrity Research Associates, an information firm that evaluates research providers. And to Jason Tyler, a senior vice president and portfolio manager of Chicago-based Ariel Capital Management, it’s crucial. “We tend to know the stocks we own pretty well,” Tyler said. “Access to management, particularly in stocks we don’t currently own, is one of the most, if not the most, important thing a sellside firm can do for us.”
Integrity’s Bragg said Knight offering corporate access to companies in which it makes markets is a natural extension of the firm’s core focus. “It makes sense, given Knight’s small-cap focus and its specialty in terms of small-cap trading,” he said.
Knight is the axe in the stocks for about 80 percent of the companies participating in the program, Ferri said. Although Knight doesn’t charge companies for the service, the program is profitable because the little trading volume it generates outweighs its low overhead, she said. But mostly, the brokerage regards the program as a way to diversify its offerings, to add a service the buyside wants at a time when buyside firms are shrinking their broker lists, Ferri added. Knight hasn’t been alone. A prominent agency brokerage experimented with a corporate access program recently as well, but shuttered it after a short time, when it decided the initiative didn’t work with its long-term strategic vision.
The universe for under-covered stocks is large. Probably 40 percent of all securities have two or fewer analysts, estimated Bill McKeown, a director at Knight. And research for small- and mid-cap companies in particular has been decreasing noticeably, Bragg said.
Knight’s program started slowly four years ago by building contacts, Ferri said. Two and a half years passed before Knight decided it was viable. “We no longer have to get on the phones and introduce ourselves,” she said. “A lot of companies are coming to us.” Through mid-October this year, Knight had hosted 350 meetings with 111 different companies, McKeown said. This compares to 400 meetings with 132 different companies in 2006. There’s help from companies such as Nasdaq, but Knight puts together most of the meetings.
The program has helped Guidance Software, a Pasadena, Calif.-based provider of digital forensic investigations solutions. Guidance has about 42 different investors in its stock since going public in December, said Bill Powell, its director of investor relations. Of them, between five and nine investors weren’t previously known to the company until it met them through Knight’s program in five road-show meetings-one of the better results of the program, Ferri said. Throughout October, Guidance’s stock has hovered around its debut open at $13.