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As Profits Plummet 82 Percent Last Year, Getco Still Wants Knight Capital

The high-frequency trading firm is bullish on 2013 as it pursues Knight Capital Trading and unveils plans for a new "mid-frequency" market making system.

Despite a brutal year for Getco, the high-frequency trading specialist still plans to pursue Knight Capital in an effort to be one of the largest traders of stocks in the United States.

In a filing announced on Wednesday of this week, the numbers on Getco's sheets revealed the plunge. As the New York Times' DealBook reports:

It was no surprise to analysts that Getco had struggled in the last few years because of withering trading activity in many financial markets, but the magnitude of the decline was striking. The company's profit in the first nine months of last year was $25 million, down 82 percent from a year earlier, and its trading revenue fell 43 percent, to $414 million, in the same period. That was a much sharper drop than the decline in trading volume on the markets where Getco makes most of its money.

[Check out the Getco Execution Services Trading Floor just a short walk away from the New York Stock Exchange.]

Despite these bad numbers, Getco still plans to pursue Knight Capital, the firm that suffered huge losses on the day it deployed a trading algorithm that went rogue, resulting in losses of more than $400 million. Getco has announced plans to acquire parts of Knight Capital Trading, offering cash and shares at a value of $1.4 billion.

In fact, this was the reason given by Getco officials for its poor performance last year: They were busy buying up new properties that would pay of in the coming year, according to the Times.

Dealbook writes: "Getco said in its filing that many competitors were “making decisions about their long-term ability to compete across asset classes and product types," leading some of them to close or scale back. Knight announced recently that its profit in the fourth quarter of 2012 was $6.5 million, down 84 percent from a year earlier, in part because of costs related to its Aug. 1 programming problem that flooded the market with errant trades, leading to losses of $458 million. Its fourth-quarter revenue fell 16 percent, to $288 million."

Analysts agree. "When economic activities are low and volumes are low and volatility is low, it's a bad recipe," Christopher Allen, an analyst with Evercore Partners told Bloomberg. "You look at trading revenues broadly, they've been challenged."

Bloomberg also reports that Getco is now working on creating a "mid-frequency" market-making business that will depend less on trading volume and involve positions being held for at least several days instead of mere seconds.

Last fall, Advanced Trading visited Getco’s new trading floor in New York as well as its market maker stations on the floor of the New York Stock Exchange. Their new systems seemed impressive enough and the market makers and traders appeared to know what they were doing. Unfortunately, the firm seems to illustrate what can happen in a tough economic climate that is made even more unpredictable by high-speed trading and volatile markets.

[What happened to Knight? Check out Knight Capital Sets the Record Straight on Algo Testing.]

Phil Albinus is editor of FierceFinanceIT, a bi-weekly newsletter for financial CIOs and CTOs. He can be reached at palbinus@gmail.com.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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Phil Albinus
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Phil Albinus,
User Rank: Author
2/21/2013 | 2:34:08 PM
re: As Profits Plummet 82 Percent Last Year, Getco Still Wants Knight Capital
Let's just call it "a building year." Yeah, that's the ticket.

I mean, what broker hasn't had a dismal year?
fstechexec
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fstechexec,
User Rank: Apprentice
2/15/2013 | 8:54:02 PM
re: As Profits Plummet 82 Percent Last Year, Getco Still Wants Knight Capital
Just plain brutal. Getco is paying a lot for some parts of Knight, but I don't know if the sluggish/low volume will be enough to offset the expenditure. Could be a another rough year for Getco.
ischmerken
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ischmerken,
User Rank: Apprentice
2/15/2013 | 7:12:11 PM
re: As Profits Plummet 82 Percent Last Year, Getco Still Wants Knight Capital
Getco is counting on Knight's retail order flow to grow its revenues, while cutting costs from overlapping systems. I wonder if the focus on mid-frequency market-making system is a sign that the costs of competing in HFT no longer warrant the returns?
Ivy Schmerken
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Ivy Schmerken,
User Rank: Apprentice
2/15/2013 | 7:12:11 PM
re: As Profits Plummet 82 Percent Last Year, Getco Still Wants Knight Capital
Getco is counting on Knight's retail order flow to grow its revenues, while cutting costs from overlapping systems. I wonder if the focus on mid-frequency market-making system is a sign that the costs of competing in HFT no longer warrant the returns?
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