Knight profit hurt by trading slump, deal and glitch costs

Thu Jan 24, 2013 2:45pm EST

* Profit 5 cents/shr after items vs Street view 3 cents

* Combines institutional sales and electronic execution units

* Discontinues correspondent clearing services

By John McCrank

Jan 24 (Reuters) - Trading firm Knight Capital Group , which has agreed to be bought for $1.4 billion by Getco Holding Co, said on Thursday its quarterly earnings plunged due to lower equity volumes and costs related to the sale of the company and the Aug. 1 trading glitch that left it vulnerable to a takeover.

Knight reported fourth-quarter earnings of $6.5 million, or 1 cent a share, compared with $40.2 million, or 43 cents a share, a year earlier.

Stripping out one-time items, such as acquisition-related fees, it earned 5 cents a share, topping analysts' average forecast by 2 cents, according to Thomson Reuters I/B/E/S.

The better-than-expected results were largely due to a strong performance by Knight's institutional sales and trading unit and lower-than-expected expenses, said Rich Repetto, an analyst at Sandler O'Neill.

Jersey City, New Jersey-based Knight also said it was combining its institutional sales and trading, and electronic execution services units, and was discontinuing its correspondent clearing services.

"We believe this is just the beginning of modifications to the current Knight stand-alone model as well as coming synergies with acquirer Getco that can be achieved, driving higher profitability for the pro-forma combined company," Repetto said.

Under the reorganization, David Lehmann, head of electronic execution services, will leave the firm, Knight said. The institutional equities sales team will be jointly led by Joseph Mazzella, head of institutional equities, and Albert Maasland, head of international.

Steven Sadoff, head of correspondent clearing services, will leave the firm as of March 31.

POST-GLITCH

The quarter marked Knight's return to profitability following a software problem in August that led to millions of unintentional orders flooding into the market over a 45-minute period, leaving Knight with a huge position it had to unload at a loss of $461.1 million. It also likely marked one of its last quarters as a stand-alone firm.

Following the glitch, Knight secured $400 million in rescue financing - in exchange for a more than 70 percent stake in the company - from a group of investors that included Chicago-based Getco and was led by Jefferies Group Inc.

Jefferies later helped finance Getco's proposed acquisition of Knight, which is expected to close in the first half of 2013.

Getco head Daniel Coleman will be chief executive of the new, publicly traded company, and Knight CEO Tom Joyce will be executive chairman.

Knight said its headcount at the end of the year rose to 1,524 employees from 1,423 a year earlier, mainly due to an acquisition but also from growth in its reverse mortgage origination business and in market making - matching buy and sell orders in stocks and options.

Fourth-quarter revenue fell to $287.7 million from $341.3 million a year earlier.

By year-end, Knight had "fully recaptured" the market share it lost in its main product areas following the August glitch, Joyce said in a statement, and for the full year Knight was the No. 1 market maker in retail U.S. equity volume.

"Nevertheless, the financial results for the quarter were negatively impacted by the steep year-over-year declines in consolidated U.S. equity volume and market volatility as well as the write-down of an investment and heightened professional fees," he said.

Knight's operations outside of market making include foreign exchange and bond trading platforms, as well as a stake of around 20 percent in No. 4 U.S. equities exchange Direct Edge.

Getco also has market making operations and is one of the biggest high-frequency trading firms. Getco is also a big player in the automated trading foreign exchange market and has been building up its agency brokerage operation over the past few years.

Knight shares were little changed at $3.68 in afternoon trading.