Struggles For High Frequency Traders Force Rivals To Merge

jp morgan chase

By Cody Laska,
Money and Investing Writer

In a $1.4 Billion deal, Virtu Financial (NASDAQ: VIRT) will be buying out their rival KCG Holdings (NYSE: KCG); the goal in mind of the merger is to bring together the trading of the two companies into a single platform while bolstering Virtu’s EPS by approximately 25 percent. Virtu will also see savings of $208 million relating to largely to technology expenses.

After closing at $19.75 this past Thursday, seeing a record surge in price of roughly eight percent, the deal sees KCG receiving a 12 percent premium per share based off of their Wednesday market close.

The deal is being jointly financed by private equity firm North Island and Temasek, who will be acquiring $750 million worth of Virtue stock, and JPMorgan Securities (NYSE: JPM) who will be lending $1.65 billion.

According to the Wall Street Journal following this deal, Virtu will be responsible for around one fifth of the volume in US equities, bringing it in line in terms of size to current market leader Citadel Securities.

Beyond raising earnings per share, Virtu will now be exposed to and be responsible for trading for about one-fourth of the retail wholesaler market. The biggest names Virtu will now be trading for are TD Ameritrade and Fidelity Investments.

CEO of Virtu, Douglas Cifu, will remain in charge following the conclusion of the deal and said recently in a press conference that he does not plan to downsize KCG’s operations. “I want to build the premier agency business in the world” Cifu said, “we fight in the all-to-all market.”

The area in concern of being terminated was KCG’s agency brokerage business, in which financial institutions are given access to KCG’s high frequency trading tools.

KCG reported an astronomical fall in first-quarter profits to the tune of 88%. Both firms rely heavily on high frequency trading which is a tactic of making trades at close to light speed based on advanced algorithms. This style of trading accounts for roughly half of the volume in the US stock and treasury market and holds the same share volume in the spot exchange market. By moving so quickly, firms that utilize this tactic attempt to beat the market when large institutions make high volume trades.

However, this decrease in success seems to becoming the new norm for the industry. As a three-headed monster of low volatility and rising costs of both market data and technology, sector revenues have plummeted 85% since their peak in 2009.

The industry is also under continual scrutiny by both regulators and the investing community by the notion that high frequency traders are making money off the small-time investors; as they lack the market wherewithal and skill to submit orders for trades in the split second intervals when a stock is about to move. The jury is still out on the defense offered by these super speed traders who simply say that the practice generates better results for retail investors.

Scrutiny and tumultuous conditions aside, Wall Street seems to be committed to making high frequency trading work. Goldman Sachs and JPMorgan are critical advisers in the deal and have been heavily involved with the companies since their IPOs.

The private equity hydra of North Island and its partners, which include the largest private equity firm in Singapore and PSP Investments of Canada, plus Temasek all being advised by Centerview Partners are a sign of the street’s commitment to success.

Only time can tell if this star studded merger will be enough to jumpstart a flat lining industry; or if it’ll be too little, too late.

A version of this article appeared in the Tuesday, April 25th, 2017 print edition.

Contact Cody at
cody.laska@student.shu.edu

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