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November 21, 2013 10:51 am
KCG Holdings, the high-speed electronic market maker, is looking to take trading business in Europe in coming years that has been outsourced by local banks struggling with rising compliance and IT costs.
The US-based group has been re-evaluating its approach to trading globally since its formation a year ago, when Getco bought rival Knight Capital. The latter had been battling for survival after a trading glitch cost it $460m.
Low volumes and thin margins have crimped profits for some of the high-speed trading companies that grew rapidly as US equity markets became more electronic and automated, prompting industry consolidation.
Getco’s executives are aiming to steer KCG away from its roots as a high-speed proprietary trading company and tap into the institutional and retail clients of Knight. It is aiming to build an agency business, in which it trades on behalf of customers.
“If you look at Europe, we see several opportunities,” Daniel Coleman, chief executive of KCG, told FT Trading Room. “We [Getco] had good market making on exchanges while Knight had built up an agency client trading for 13 years. Together they have critical mass in London.”
However, he said KCG would tailor its approach in Europe to the local market, in which fewer retail investors trade shares through a broker. “But there are also investment banks that trade equities that have retail clients,” he said.
Mr Coleman said he would look at both outsourcing and partnerships with banks which face constantly rising IT costs for upgrading systems, meeting tougher compliance rules and connecting to a plethora of venues.
The opportunity “would not be around in two years”, he added. “A lot of these banks were still looking at being universal investment banks two years ago. That model has changed.”
To date this year most of KCG revenues have come from its traditional market making business. Turnover in the nine months to September 30 has risen from $383.2m to $455.7m, earning KCG pre-tax profits of $55.6m compared with $38m in the same period a year ago.
Revenues from executing trades on behalf of others have soared from $27.2m to $113.7m following the Knight purchase. However pre-tax losses have widened from $3.8m to $21.2m as it incurred $134m of expenses relating to the acquisition.
KCG laid off staff in the US and Europe last month following a review of the business. Mr Coleman added that the group would continue its push beyond equities trading into fixed income securities, derivatives and foreign exchange trading.
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