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.
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