Market maker Virtu Financial has announced it has entered into a definitive agreement to acquire KCG Holdings. The deal, worth around $1.4 billion, has been unanimously approved by the directors of each company.
Virtu plans to finance the $1.4bn cash deal with borrowing and equity.
According to Virtu, the firm hopes to leverage KCG’s wholesale market making business and extensive institutional client base to broaden the distribution of its technology and execution services. The deal will increase Virtu’s US equity trading market share to around 20%, putting on par with the current market leader, Citadel Securities.
Douglas A. Cifu, chief operating officer of Virtu, said: “KCG fits perfectly with Virtu’s strategic priorities to apply our market making and technological expertise to customer wholesale order flow and expand Virtu’s growing agency execution business by offering clients a combination of Virtu and KCG’s superior algorithms and proprietary analytical tools. In addition, there is immediate opportunity for revenue growth and significant cost savings,”
Both firms are broker-dealers in the same market but operate in different ways. They make profits from buying and selling securities, either accruing bid-ask spreads when they act as principals or through fees when they execute trades for other financial institutions as agents. Virtu trades primarily for its own account while KCG made a quarter of its revenue from agency fees in the last quarter of 2016, and it is this part of the business that Virtu is keen to get its hands on.
High-frequency trading (HFT) firms thrive in times of high volatility and volume, and the industries profits have been under pressure in recent years due to subdued levels of volatility, increase data costs and increased competition, a situation that has led to a wave of consolidation in the industry.
KCG was formed from the merger of Knight Capital and Getco, two pioneers of high-speed automatic trading, after a trading glitch in 2012 nearly put Knight Capital out of business. In September 2012, Virtu bought Nyenburgh, a European HFT firm specialising in ETFs.
Within two years of the completed transaction, Virtu expects to realise $208 million of net pre-tax expense savings, in addition to $440m of capital synergies. These savings do not including any relevant enhancements that Virtu anticipates to results from the deal.
Virtu intends to fund the transaction with gross borrowing of roughly $1.6bn and the sale of $750m of common stock, priced at $15.60 per share. The deal is expected to close in the 3rd quarter of 2017 after receipt of KCG shareholder approval and required regulatory approval.
In November 2016, Virtu wrote an open letter to the Securities and Exchange Commission pressing them to consider changes to the way ETFs trade at the 4pm close of business on US exchanges. The letter stated: “As a leading market maker in ETFs, we are obliged to make a two-sided market in the ETFs right until the close, while also buying and selling the underlying securities. As such, we cannot control the number of executions as we go into the close nor can we anticipate our 4pm position ahead of time with a great deal of accuracy.”
The SEC is currently preparing for a large-scale review of the ETF industry in the US amid fears that the rapid rise of ETFs might be contributing to market volatility.