Careers

12:34 PM
Ivy Schmerken
Ivy Schmerken
Commentary
Connect Directly
Facebook
Google+
Twitter
RSS
E-Mail
50%
50%

Why Are Suitors Vying for Knight Capital?

Rival firms are expected to submit bids this week to acquire Knight Capital Group, which could bring the potential acquirer savings in equity trading technology.

Rival trading firms are vying to acquire Knight Capital Group, the electronic market-making firm, and are expected to submit bids this week, according to various media reports.

The key contenders are likely to be Chicago-based Getco LLC and New York City-based Virtu Financial LLC. Getco is said to be bidding in conjunction with Jefferies, which together owns 40% of Knight.

Knight's market-making and institutional sales units, along with its electronic execution operations, could command $1.4 billion, according to data compiled by Bloomberg, which cites an evaluation by Keefe Bruyette & Woods (KBW).

Both trading rivals, Getco and Virtu, are backed by private equity firms, and are likely to bid for the entire company and not just the market-making divisions, according to the Financial Times. Getco, which is owned by General Atlantic, is said to have amended a 13-D filing with the SEC indicating it was reviewing its Knight investment, which created speculation that it might do an acquisition.

The potential deal is attracting headlines because Knight had a major software glitch on Aug. 1 that nearly toppled the firm and was the latest blow to investor faith in the stability of today's electronic market infrastructure.

In an email circulated to employees over the weekend, Knight's CEO Tom Joyce, who saw the firm through the crisis last summer, assured employees that the firm didn't need a rescue and that it was business as usual, notes the FT. Since then, Knight's market share, client engagement and volume have rebounded. But Joyce may not be steering the decision to sell the company, and his role is uncertain if the company is acquired.

Don't be surprised if a deal is finalized within the next few days and announced next Monday, reports David Faber of CNBC's The Faber Report.

What's not clear is why Knight Capital is being sold at this time, so soon after a consortium of firms injected $400 million in capital. As the Financial Times reports, Knight gave up 70% of itself to a group of six firms, including Blackstone and Jefferies.

With lower trading volumes and pressures on profitability, it's a curious time to be bulking up on electronic market making infrastructure. But Bloomberg recently pointed out that firms like Getco spend a fortune on equity trading technology. The acquisition of Knight, a powerhouse in electronic market making and equity trading, could enable the acquirer to spend less money on equity trading technology.

This could be a major money saving opportunity for potential acquirers, suggests Bloomberg's Stephanie Ruhle. "If you see a Virtu or a Getco partner with Knight, watch out competitors, they're going to be big and strong," she said.

Suitors may also see other aspects of the business spun off to inject capital, such as Knight's Hotspot FX trading unit, which was reportedly dangled during its rescue talks this summer. Citadel was most interested in Hotspot, when they were a potential rescuer, but opted not to participate.

However, any firm that acquires Knight might have to deal with the fallout of its technical glitch on Aug. 1st, which led to $461.1 million in losses within 20 minutes. Regulators are scrutinizing the firm as the software incident raised concerns about Knight's internal controls and risk management practices. Knight experienced a second embarrassing setback last month due to a power outage in its Jersey City headquarters and was forced to shut down trading and send orders elsewhere. The company also hired IBM to conduct an independent investigation of its systems.

But it may be up to Getco or Virtu to sort out these issues.

Check out this video:

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
Is Big Data a Problem or an Opportunity?
When it comes to data, financial services firms are, as a rule, quite circumspect. They fear cyberattacks, data theft, data loss, security breaches, data privacy, and human error.
Data Integrity: A Necessity, Not an Option
Financial institutions that have taken on the data integrity task in the past now have to spend more money on hardware, software, and people just to keep up with the demand.
What Colombia’s New IT Campaign Means for Latin American Tech Investment
Colombia’s campaign is the latest example of how Latin America is trying to edge into the global technology space.
Initial Margin: When Does More Turn Out to Be Less?
Changing margin regulations are set to affect the OTC derivative market, including initial margin risk models for non-cleared OTCs.
The Mainframe Innovation Drag
It may be time for a consortium of firms motivated around the objective of eliminating the mainframe. What if every self-clearing firm decided to participate in building a modern, back-office system as an open-source, cloud-based project?
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.